Marisa Lojas SA

BOVESPA:AMAR3

Earnings Call Transcript 2020-Q3

[Operator]

Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to Marisa's Third Quarter '20 Earnings Conference Call. We would like to inform you that this event is being recorded and is available on Marisa's IR website. [Operator Instructions]

Before proceeding, let me mention that forward-looking statements made during the call are based on the beliefs and assumptions of Marisa's management and on information currently available to the company. They involve risks, uncertainties and assumptions as they relate to future events and, therefore, depend on circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Marisa and cause results to differ materially from those expressed in such forward-looking statements.

I will now turn the conference over to Mr. Marcelo Pimentel, the company's CEO, who will start the presentation. Mr. Pimentel, you may proceed.

[Marcelo Pimentel, executive]

We got to the end of August with 100% of the network operating, although the restrictions had been maintained. We understand that the performance of our network, considering the characteristics of the different regions, had a very good evolution in the quarter with a special highlight for the North and Northeast. And in the quarter, we obtained a performance very close to pre-pandemic periods.

We obtained 3.5% positive of non-audited figures. Our street stores have a competitive edge with a performance of 3.5% above that of the mall stores. The productivity of the stores continues to evolve with an increase of 15% in the ticket, vis-à-vis the figures of 2019.

Our digital strategy showed an important contribution in the period. Ship from store continues to be something that sets us aside in digital sales.

We once again offered click and withdraw in 100% of our stores and a repurchase index above 43%. Our software has already registered 20,000 people, and our sales in the different marketplaces shows an important evolution month after month.

The Marisa app in a few months reached 1.5 million download and represents 77% of all of the digital sales of the company. And in November, we launched the second phase of the app in mobile-first, the evolution of the digital strategy strengthens our vision in terms of consolidating our presence in the online lingerie sector. We had an increase of 370% in this category, vis-à-vis last year.

We have also expanded in additional categories: children with a growth of 240%; for men, a growth of 160%; and all the other departments, including women's apparel that continue to grow above 100% on our online operation.

In October, we continue to see a fast pace in the e-commerce, even with the impact of ship from store because of the opening of the brick-and-mortar stores. We continue to digitalize our web. Our mobile [ PBV ] already represents 20% of our pilot stores.

Now digitizing the experience in financial services has brought an important reduction in the time of transaction. And when it comes to the digital strategy, I would like to mention that we began the automation strategy in the company that will automate relevant and repetitive roles, such as logistics and others.

From the strategic viewpoint, the company continue to execute the structural adjustment of stock, attaining a reduction of 27%. Once this strategy was concluded, it began to have an impact on gross margin. And in the similar fashion, we accelerated our financial service portfolio, maintaining the company cash at secure levels.

Our financial service area, once again, also presented an exceptional performance. The levels of loss are corrected to the pre-pandemic levels, and the portfolios are being quickly reestablished.

To conclude, I would like to highlight that despite the operating challenges for the opening process, we continue to implement our strategy, once again, with the customer in the center and the woman in the center of all of our decisions. As a result, we have seen an advance in our figures. We have gone from pre-pandemic levels of 59% to 79%, with a highlight to brick-and-mortar stores, a result of 77% and our operations with a very good operation.

We end the third quarter with the conviction that we were able to have a very good turnaround going back to pre-pandemic

[Audio Gap]

with important initiatives for the future of Marisa through the gains that we have obtained in the last 8 months.

I now give the floor to Adalberto Dos Santos, our CFO, so that he can explain the figures for the quarter.

[Adalberto Dos Santos, executive]

Good afternoon. This is Adalberto. Once again, thank you for participating in our call.

I am on Slide #2, and you can see that our net revenue was made up somewhat differently this quarter, and I'm going to analyze the chart above and also show you the dynamic, vis-à-vis the second quarter, when we had the beginning of the pandemic and the evolution as we go towards the fourth quarter. And the figures of the fourth quarter so far have not been audited.

So total revenues, down 18.9%, down to BRL 446 million, an important evolution compared to the second quarter when most of the network was closed, and the network was only fully opened at the end of August, and we still have an impact on our operations that persist up to present up to the month of October, where we ended at 15% at the top line, the same-store sales evolution with a significant recovery, as you can see, a drop of 9.7% in the second quarter.

We have evolved to minus 6.3% in the third quarter that ended and, in October, as mentioned, going into the positive field with 3.5%. Now the digital platform with a growth of 115%, a truly significant growth based on 62.5% in third quarter '19. Now the street stores continue to present a performance slightly higher than those of the shopping malls.

In the following Chart #3, at the top, the gross profit and gross margin evolution, and we should analyze the absolute value of gross profit. And what is important here is the margin that goes from 31.1% in the second quarter to 33.7%, and the new figure, 42.7%, for October once again values that are below the potential of the companies, but that are clearly affected by the accelerated reduction of inventory process implemented by the company of 27% when it comes to apparel.

We see the evolution of SG&A at the bottom, and I go to a more normalized figure, BRL 231 million, with most of the stores open. What is important is the renegotiation, not only of the lease agreement. This negotiation continued in 100% of the contracts with suppliers and all of the services taken by the company, once again, because of Provisional Measure 936.

This is one of the important legacies left by COVID, a significant enhancement in the company's leverage, not only because of the negotiation of contracts, but also because of the automation of most of the repetitive processes. And we have adopted home office as something permanent and, of course, this is one of the legacies of COVID.

We go on to Chart #4, the evolution in the financial products and service areas. The contribution margin, we have a reduction to 47.3% this quarter, the lowest in the retail business this year, and this is due to a reduced economic activity during the period. Despite the drop regarding the second quarter, we have had a significant evolution going from BRL 34.9 million to BRL 49 million of combined contribution in the financial service area.

On Chart #5, at the top, the evolution of our portfolio, losses in the portfolio with a reduction after the peak of 15.2% at the end of the second quarter, reaching an improvement of 6.5%, which is better than the pre-pandemic figure, 7.3% last year and in 2018, 9.7%.

In terms of overdue portfolio figures that are very convergent to the pre-pandemic period, we have a mathematical factor due to the reduction in the portfolio. The prospective indices are already much better than those before the pandemic, an indication that we do not have any problems for loss in the coming quarters.

In Slide #6, once again, the same analysis for the personal loan area. The situation here is somewhat different. Losses on portfolio dropped to a better level, 9.1%.

The number of overdue was very similar to those of the second semester, and we also have a longer aging because the personal loan portfolio takes longer to be reestablished. And this is a mathematic effect of the overdue portfolio, and the effects persists somewhat longer, but you can observe the behavior of the portfolio that does not signal to any future problems because of the portfolio loss.

The consolidated EBITDA of the company, although it is negative in BRL 80 million, a significant evolution, vis-à-vis the second quarter. These minus BRL 80.7 million are due to the retail operations because the operation reached its breakeven in the third quarter. And in October, we are already positive. And in September, the last month of the quarter, we already had positive results.

In the following Chart #8, evolution of net results. Once again, negative results reflecting the impact of the retail operation as well as other operations, but with a positive dynamic, vis-à-vis the second quarter.

Cash flow, to end this part, adjusted EBITDA is significant, and we released working capital. Therefore, the consolidated cash position of the company remains robust, quite higher than the second quarter, approximately BRL 320 million. Presently, this has come closer to BRL 420 million, quite robust. These are the highlights we wanted to share with you.

I will return the floor to Pimentel to remark on this. Thank you very much.

[Operator]

[Operator Instructions] The first question is from Helena Villares from Itaú Bank.

[Helena Villares, analyst]

My question tries to move away from the issue of the pandemic and look at the signs that we have already debated regarding Marisa. For example, the positive results that you have remarked on.

What do you think about your customers, new customers, old customers? And what is happening in terms of the resumption of the Marisa operations?

You did have customers that remained loyal during the entire period, but several new customers have also become loyal. So I would like to see your outlook now that we have a more normal period.

Simply a follow-up, you are 3.5% positive in October. Does this have a readjustment? Or is this growth? Are we aligned to this growth?

[Unknown Executive]

Helena, thank you for your questions. Now regarding the present day behavior, I think that the post pandemic is taking place exactly as we had imagined.

Marisa was going through a turnaround process. It had a significant period in 2019 when our sales became very productive. We had a very productive first quarter until March.

What we observe at present is a behavior of adapting to our planning. Therefore, we still observe an evolution below our historical evolution, but with an increase of apparel per ticket and an average ticket of 15% above 2019. And because of this, we see the positive sales figures in October.

And based on our surveys, we see that the work that was carried out in 2019 persists in 2020. The adaptation of new customers, our customer at present has an average of 5 years, less than the customers we had in 2017 or 2018, which means that we continue to attract younger customers from the labor market and who are more willing to purchase fashion apparel.

Now we have worked ever more with a multichannel and digital vision. This is focused work, and we're focusing on VIP customers, customers that buy both in the brick-and-mortar and digital channels. Their frequency of purchase is greater. Their tickets are greater, and we're working with a great focus on this type of customer.

Now in terms of the same-store sales for October, this is the figure without an adjustment. Obviously, they will undergo adjustment, but this is the consolidated figure.

[Operator]

The next question comes from João Paulo Dias Andrade from Bradesco.

[João Paulo Dias Andrade, analyst]

I have a question that refers to margin. I don't know if you spoke about this in the opening. You are still adjusting your inventory.

Are we going to see a different margin from October going forward? And what can we expect in terms of financial results in the fourth quarter products, services and much more?

[Unknown Executive]

João Paulo, thank you for your questions. Regarding the margin, we're getting to the final stage of our inventory adjustment as we have planned. This process extends until the end of December.

This is our strategy, so that we can enter the first quarter of 2021 with more than 80% of our inventories at less than 180 days. This hasn't happened in Marisa for the last 5 years. And by working this way, we are able to sell the products with healthier margins, to have this return for the company.

And as this process was undertaken, we are nearing the end of the process that is ever more regionalized. We have much lower inventory levels. The return from the pandemic came sooner in these regions.

What happened was there was a cleaning process. We began in the Northeast, went through São Paulo and ended up in the South. This is the process that is being concluded in the South, and it shows that what we will have in our future is the performance that we have in the North and Northeast regions with a growth that is very close to high single, with margins higher than 2019 and with much greater returns, while we finish this process in São Paulo. And in the states of the South, what we expect is that we will have good results. I understand that this question was also about the result of the financial services.

[João Paulo Dias Andrade, analyst]

Exactly.

[Unknown Executive]

Very well. The figures for October are very good when it comes to the behavior of this segment. We, of course, have that compression of receivables. Now this accelerated reduction of inventory has enabled us to recompose our portfolios at a faster pace, and this is positive.

This behavior is positive when it comes to losses for provision for doubtful debts. I would like to remind you that in the pre-COVID period, several companies collection and other companies had this system implemented. Therefore, the system for collection was much more productive, and we're benefiting from this now, having somewhat less revenue, but with less losses.

I don't know if you had the opportunity to see the level of costs and losses for the third quarter 2019, 30% below. The same level we obtained in the second quarter in products and financial services were becoming ever more effective when compared to the retail sector.

Now we have everything to obtain very good results in the fourth quarter, perhaps not reaching the results of the fourth quarter 2019 because of the smaller portfolios. But without a doubt, we will have positive results. If you look at any efficiency index, the percentage of results over the size of portfolio and the revenues generated, you will see that the quality will be better than last year.

[Operator]

[Operator Instructions] The next question is from [ Tomas ] from Bruno Capital.

[Unknown Analyst]

I would like to pose a question referring to your capital thinking, especially about the coming year. What draws attention are the amortizations that are left for 2021. Now how are you going to work with your capital support for the coming year?

Another question in this scenario, which is your vision of investments. How are you going to resume investments at Marisa?

[Adalberto Dos Santos, executive]

This is Adalberto. Thank you for the question. Now this is a simple question.

As I remarked, we ended the quarter with BRL 320 million, and our work has been quite interesting with new fund raising using different products. And nowadays, the cash of the company is BRL 420 million, not considering the balance of third parties that reduce our net debt, BRL 420 million at present, without including credit cards of third parties, which adds up to BRL 530 million approximately, and the amortization for the coming year as -- add up to BRL 400 million.

So we have more than enough cash to cover all the amortizations, even though we do not do another rollover to keep our cash robust and efficient. Now if you want to go beyond, if we think about this balance of third-party credit cards, all of our settlements will be paid until June of 2021, which means that capital is not a reason of concern, as it used to concern us in March, when we define the issue of the lockdown and closed down all of our stores. The situation is much calmer.

When it comes to investments, this is an important point. We remarked our vision with you. We invested a little to maintain a healthy cash position, but, of course, this has a price as the stores end up being somewhat less competitive than the competitors.

This year, we inaugurated a new pilot store with a new model. Now this model should confirm itself as being more productive, and we will begin with the rollout of these innovations in 2021. The expectation is to go back to investing as -- to levels that we did not have in the last 4 years.

Now this cash will not be completely used up for amortization. We always work on this during the period. We do have resources generated and highlight for the ISS, the company still has credit of approximately BRL 500 million linked to this initiative that can be used. But we, on average, have BRL 120 million a year. And what is important in our working capital structure are the inventories.

Our cash conversion cycle with this new structural inventory level can grow significantly. That is why the cash generation of the retail operation of ISS are more efficient once again for investment. And Pimentel reminded you that this is not only in the stores, but the initiatives relating to our digital channel.

[Operator]

The next question is from Marcelo from Cardinal Investments.

[Marcelo Audi, analyst]

I do have some questions for you. First of all, how are you getting ready for the outlook of an exacerbation of sales because of the end of the coronavoucher at the beginning of 2021, and which is the reason for the change in your Commercial Director, which is the mandate of the new director that has come in? And how does it differ from the mandate of the previous director?

The third question regarding your outlook for the sectoral consolidation with that natural death of the smaller stores. Will this really happen? Will it be a benefit for you and the larger companies? Or what happens historically, the renewal rate ends up being high for the smaller stores, one comes in, another comes out? Several are informal, and we end up with a situation where it is the informal companies that end up with a large share of the market, and you cannot capture that.

[Unknown Executive]

Marcelo, thank you for your questions. Let's begin. I think we have 3 or 4 questions.

First of all, the worsening of sales the coming year possibly, we don't think this will be the scenario for 2 reasons. First of all, we have an in-house survey where we checked our base and the number of customers that buy from Marisa. And those that were benefited by the government voucher represent 16%. Our vision is that, of course, this could have an impact, but not a huge impact, the impact that would affect our performance the coming year.

In terms of the change of our Commercial Director, I think it is important to clarify that Marco Muraro had very important years at Marisa. He left a legacy of important product enhancements. And jointly with him, we understood that it was a moment for transition. Now this transition was done in a very calm way with our new Commercial Director who already worked in the company and had commercial experience throughout his 20 years' experience in the market.

We maintain our commercial strategy, but with the decision of the exit of Marco Muraro, we took advantage of this moment to consolidate the structure and to expedite the processes in the commercial area. And in the last month or 2, we have considered this as an opportunity to speed up our internal process.

When it comes to the sectoral consolidation, when we speak about the top side, I think the changes will be minimal. And what could happen, and we observed this during the pandemic, is that in the case of Marisa, we have a certain peculiarity.

Our street stores tend to be larger, and it is in these stores that we see a continuous role for us, with several regional players that will not be able to sustain this. They're closing down, and we will make the most of this market reality to consolidate ourselves in regional areas and in street stores, more specifically. I don't think there will be a significant change in shopping malls, but we do have an opportunity in the street stores.

[Marcelo Audi, analyst]

If you allow me a follow-up question, regarding the first question, 16% of customers that use the government voucher, and potentially, this could be the downside. Could we have a market worsening, perhaps the informal market and a drop in revenue, even though we don't have a worsening in the market?

Well, let's imagine, we will not have a worsening in the first quarter of 2021. If this happens, which is the strategy that you will seek? Any relevant change of mix? Any change of strategy of financial operations? Any change in your store mix of street stores versus small stores? What is it, therefore, that will change in the contingency plan? What is it that you would do?

[Unknown Executive]

Once again, the surveys and, of course, we're in the pre-budgetary process and during this, we have sought out a great deal of consultancy and advice from the banks. And what we have observed is that, yes, we could have a greater risk in the year 2021.

But on the other hand, we see that there is a higher level of savings, and the expectations for level of employment will not change aggressively. As we saw in 2019, there was a slight recovery in that sense.

And when it comes to our contingency plan, it's what we are doing at present, preparing the company to become more agile and to react faster with enhanced stores. By reducing our inventories by 1/3, we're expediting the process of our supply chain, so that the company can react faster. And in the case of need, we can also react our supply model. Marcelo already has a regional focus, and it focuses on local demand.

The price structure, for example, is not a single one for the entire country. It depends on the markets where we are, and we have already made adaptations. If necessary, we can also mix this adaptation.

And in the context of Marisa, and this is one of our strengths, our proposal is to offer fashion and quality products with very good prices. The customer has to have a good cost benefit, but she won't completely ignore the quality factor.

And we have to be careful with possible reactions of not doing what we did in the past where we made the mistake of focusing on a reduction of price without thinking about the quality of the product. This is something that we practiced in the past, and we don't want to embark on the same route. A quality product with a sensible price will respond to the needs of the customers, especially in the present day context.

[Marcelo Pimentel, executive]

Let me take advantage. We have a question here from Carlyle. I think I responded partially to it, and I would like to add, and it refers to the performance of street stores compared to mall stores, and our vision of why this happens and how we would like to consolidate this process.

Now the street stores are a competitive edge for us. During the pandemic, there are the stores that resumed activities sooner. We have a project that we communicated to you in 2019. We have a project for street stores that we once again took up in the resumption process, and we have a financial service structure specific for our customer profile.

We have used the click and withdraw as one of the great mechanisms for flow in the street stores, where the customer does not pay delivery. And our street stores are very well positioned geographically close to transportation, bus, trains and subways. And we have seen a very high flow of click and pickup.

And at the beginning of the call, as I mentioned, this is a very important factor, 43% of the customers that pick up the product at the stores end up buying another product.

And finally, as we saw in Marcelo's last question, they have observed the reality of the local market where, because of the pandemic, we see several regional players closing down and not returning after the pandemic.

[Operator]

[Operator Instructions] We have one more question from Marcelo Audi from Cardinal.

[Marcelo Audi, analyst]

I'm back here again with another question that refers to gross margin. On Slide #3, what draws attention is that in October, you're back to the gross margin of last year. This is a surprise in my opinion because you are still in that promotional environment.

And do you think it will be possible to maintain this gross margin above 40% in a reasonably sustainable way beginning in the fourth quarter '20 and the first quarter 2021?

[Adalberto Dos Santos, executive]

Marcelo, this is Adalberto. Well, in truth, it is a margin of 43%, which is still a compressed margin.

Now if we go back in time, why you will see that in 2016, 2017, the margin of the company was close to 50%. In the first quarter of 2016 and 2017, we reached 53%.

Now a 50 -- a 43% margin is extremely compressed. Recently, we carried out an adjustment in our trade strategy, and we accelerated the inventory reduction. Initially, this will compress our margins this 43% margin. And compared with the adjusted budget that we had in the period, it should have been closer to 50%.

So it is a significant compression in the margin, but it came after this accelerated reduction of inventory and should position the company for a very quick recovery at the end of November, beginning of December and in the first quarter of 2021. And it's a bit difficult to work with products for Black Friday.

This year, once again, we're having difficulties in doing this, and the goal is precisely that, to accelerate the recovery of margins and reminding you that 50% margin is a regular margin for the company. In 2012, 2013, our margins were 52%. When the best players are the ones that have the best margins today, around 56%, we had margins of 52%, 53%, so why not believe that we will be able to return to that level of 50% or higher.

[Marcelo Audi, analyst]

And how much of that improvement comes from reducing that promotional commercial strategy? Or is this an enhancement that comes from a more efficient use of your inventory?

[Unknown Executive]

It's a combination of factors. We always have the margin at the entry that presently is suffering compression because of the dollar rate. I think too much being in contact with other players in the market, and you must have heard about what is happening in our [ input ] base that will bring pressure the coming year.

But this improvement of margin will have 2 different moments. First, a better quality of inventory. And by having this, it's less necessary to use your old inventory. You will depend less and less on the success of promotions. You will be on an equal footing as the other players. And in this case, the margin will increase, and then you will have to sell out normally as you do in fashion.

[Operator]

At this point, we would like to end the question-and-answer session. We will turn the floor back to Mr. Marcelo Pimentel for his closing remarks. Mr. Pimentel, you have the floor.

[Marcelo Pimentel, executive]

I would like to thank all of you for your participation in our results call for the third quarter '20 for Marisa stores. And I continue to convey the message that we're working arduously to recover, not only from this year, but from what was already underway.

We have taken all of the necessary measures and processes to ensure that we will have very good results in the last quarter and the beginning of the coming year. Thank you all very much. Have a good afternoon.

[Operator]

The Marisa conference call ends here. We would like to thank all of you for your participation. Have a good afternoon.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]