Marisa Lojas SA

BOVESPA:AMAR3

Earnings Call Transcript 2022-Q3

[Aline Frutuoso, executive]

Our beliefs and assumptions of the company's management and are based on information available. Forward-looking statements are not guarantee of performance.

Here, we have our CEO, Adalberto Dos Santos and our Commercial VP; and also Rodrigo Poço, VP of Technology and Digital.

I would like to give the conference over to Adalberto, who's going to start the presentation.

[Adalberto Dos Santos, executive]

Thank you, Aline. Welcome again to the conference call of Marisa Lojas on the third quarter of 2022. Today, here with me, as Aline announced, we have our colleagues Rene Santos, the first call, our IRO and CFO; Alberto Kohn, Commercial VP; and Rodrigo Poço, Technology and Digital VP.

This quarter, we had a challenge because it's been cold all over Brazil. And despite the impact on retail top line, the operation is evolving in a very positive way. And a highlight is the consistent growth in the gross margin with many projects implemented and implementation of our commercial area, and the strict inventory management. We have had a slowdown in the growth and the growth in the physical channel. And then we have had an interesting performance, and we have had a time of high provisions for losses with a reversal for the following months that was confirmed at the closing of the month of October.

We should also highlight that during this period, we kept on working beyond the initiatives mentioned in products in the store environment where we have reached more than 80 interventions along the year. There have been significant changes in our logistics. We have completed the operations in our distribution centers, both for physical and digital operations, and this will definitely translate into higher operational efficiency.

We are also preparing for the beginning of tests one in Rio and one in Port Alegre to optimize our distribution strategy. Despite the challenges, the company continues its operational performance with the whole team, very engaged and optimistic.

Now I would like to give the conference over to our CFO, Rene Santos, who's going to talk about the highlights of the quarter.

[Rene Santos, executive]

Thank you, Adalberto. Thank you very much for everyone here. So on the first slide, our Same-store sales for physical stores flat, slightly negative on the digital and significant gain in margin, 7.2 percentage points. And this is very good for the company with inventory levels in line with the company's target and operating expenses practically flat as compared to 3Q '21 as it's been over the past few years. Our consolidated adjusted EBITDA showed a lower dilution of retail expenses and also we also had NPL impact on Mbank and NPS at 76.6%, reinforcing the consistency of this indicator how strong our brand is.

On the next slide, you can see sales and same-store sales, minus 4.9%. This is the SSS evolution in total retail sales. This was impacted by -- because the cold temperatures went longer than expected, and this had an impact on sales. However, we noted that on days when we had higher temperatures when it was warmer, the new collections was very well accepted.

So physical stores, same-store sales flat and digital same-store sales impacted by a strong comparison base that we had in 2021 as compared to 2022 in the digital especially, also lower promotional efforts due to the excellent condition of our stocks, and this is very good news in profitability for the company, for the product and for our inventory with an excellent growth and which already demonstrates a perception that is different than is positive.

On the next slide, you can see the digital channel with a drop of 43% -- and a drop of 43.8% versus the Q3 '21. As we have said, the comparison basis grew almost 100% in a year before. However, it demonstrates the company's discipline in making this channel profitable at the decrement of the growth in top line. So our participation in digital sales stabilized at the level of 60-something percent when we have exceeded 17.5 million downloads at the end of the third quarter, which demonstrates how strong our digital strategy is.

Here, the highlight is a very important gain in margin of 1.2 percentage points versus the same quarter in 2021. This is a result of the company's commercial strategy, focusing on product improvement inventory management, a significant reduction of 20% in markdown as compared to 3Q '21 and our inventories are flat at around 20 million units in the quarter with a slight increase in September already getting ready for Q4.

In retail operating expenses, we are flat in nominal terms. The company's has been optimizing more and more its expense structure in actual terms, we can see a drop of 6.5% and 6.2%, both in real terms and sales, selling expenses and also G&A.

Now going to our financial branch. So the Mbank has demonstrated a reduction, showing 46% in its contribution margin, and this refers both for co-branded and private label and personal loan, Marisa's products. This is consequence because we are very conservative and grading credit, and we are still recovering in terms of our flow and maybe and especially because of the increase in NPL, both for private label and personal loans, although we can see a significant improvement as compared to the peak that we had in Q2 '22.

Now looking at our private label portfolio, we have reached 7.7 percentage points of losses on the net portfolio for the private label. However, we are seeing that our provision for losses are normal, considering new seasons, and we are very conservative, as I said before, in granting credit and also our default rate at our -- at the chart here at the bottom of the slide. So net losses reached 8.7% and also our default indicator converging to the company's historical levels.

Lastly, consolidated EBITDA. So the adjusted consolidated EBITDA, which was impacted by the still weak retail results and higher NPL volumes at Mbank and the results are BRL 34 million losses in the period.

In this manner, on the next slide, you can see that our net income -- the consolidated net income is BRL 97 million negative. As a result of what you saw in the previous slide, combined with the impact of higher financial costs.

In terms of cash flow, we ended the quarter with BRL 182 million, a reduction of BRL 70 million as compared to the previous quarter. We were able to present a certain level of deleverage in the retail and with the release of the working capital of BRL 90 million, driven by the improvement in the supplies accounts. This was very positive for us.

As to our net debt, we closed the quarter with BRL 560 million, 7.9% above 3Q '21. However, our consolidated gross debt is 4.9% lower due to a significant deleveraging in retail. So Mbank's higher leverage was due to lower funding costs compared to retail operations. And also, we were able to demonstrate an improvement in the debt profiling at Mbank.

Now we are ending our comments about our financial performance, I would like to give now the conference over to Adalberto.

[Adalberto Dos Santos, executive]

So we have already ended our presentation, and now we are available to answer any questions and answers you may have.

[Aline Frutuoso, executive]

[Operator Instructions] Now we have a question by Vitor Fuziharo.

[Vitor Fuziharo, analyst]

Well, in talking to the industry, we can see that this quarter started in a very challenging way. Can you talk about that for Marisa? And the second, regards inventory. In the third quarter, the company had an inventory volume level that was lower than that of '19 and '21. So should we expect the company to prioritize margins over growth in Q4?

[Unknown Executive]

Vitor, I'm going to answer your question. The dynamics in the beginning of Q4 is already better than the end of the third quarter. So we have weather stabilities impacting so much until this week in São Paulo, we had a few chilly days, which is very atypical. But as compared to the previous period, the numbers are positive. The level is reasonable. It's not very fast, but it's not too bad. It's positive. We have had a positive beginning of the fourth quarter once we are past the first month.

As to inventory, this is a new reality. So we can't compare to what we had in 2019, 2020, 2021. So we have levels that are much more appropriate to our reality in terms of sales. And in '21, we were at the pace of reduction and adjusting to get to the levels that we have today. So I think it's neither one thing nor the other, it's not just prioritizing profitability over sales. We want to have sales growth levels next year, and we are very optimistic about that. We want to grow in an optimistic way, considering the space that we have in our market, considering the comparison basis that are kind of low, but keeping inventory well balanced. It's basically that. It's not either one or the other. It's both. We want to grow a lot, but with more optimized inventory levels.

[Aline Frutuoso, executive]

Our next question comes from Clara Lustosa from Itau BBA.

[Clara Lustosa, analyst]

And so I would like to ask you about the prospects. If you could tell us a little bit what you're thinking towards the end of the year. We know that this Friday and Christmas, and there's World Cup. So how do you see the sales dynamics in the fourth quarter?

[Unknown Executive]

Well, Clara, I think that the fourth quarter is one of the most atypical in the last few years were a combination of factors. We had Elections, World Cup, Black Friday was a part already, but it's different. The company prepared itself for this moment. We have campaigns for customers and these campaigns are quite interesting because we want to keep the operation very active in the activities in our stores, in our digital channel.

So our prospect is that sales will flow well supported both by the product that is excellent and also by the campaigns that have been designed precisely aiming at that. We know that when then matches there are people on the street and we want to sell more on the day before and day after. So we have many positive strategies for our stores, both in the stores and in the website.

[Aline Frutuoso, executive]

Our next question comes from João Andrade from Bradesco BBI.

[João Paulo Andrade, analyst]

I have two questions. As to digital, what will be the growth dynamic in clothing in the upcoming quarters? And how do you see the competition in this arena? Would this be one of the reasons to grow more in line with physical versus accelerating the channel? So considering the profitability. So you take out a little bit from the competition in terms of market prospects.

And on Mbank, considering the macro dynamics of the economy, interest rates, indebtedness of families. How do you expect Mbank to go back to a positive EBITDA?

[Adalberto Dos Santos, executive]

So I'm first going to answer the first item, just expanding a little bit the scope of your question. I think that we shouldn't remember in the digital that we have been gaining significant space. And this makes us think about the strategy that we adopt for the channel. Their players that maybe we shouldn't fight directly, and that's why we are redesigning our strategy.

[Unknown Executive]

Thank you, Adalberto. In reality to the sales strategy and what we see in the next few quarters is a segment or the continuation of what we have been doing in the last 2 quarters. We want to make the channel more profitable. And this implies having higher product margins closer and closer to physical retail and also being more assertive in some important expenses, more efficient in significant expenses for example, marketing performance and also in free freight policies to be more stringent with that.

So we want to balance it better with our profitability abilities. As to the competition at Adalberto gave the spoiler. We see -- yes, we do see a competitive environment as compared to previous years, that's slightly more difficult, especially because of one player because we think that our offer and our proposal is quite consistent when we look at digital strategy.

So physical and digital, and then we can build an offer that is quite consistent and that is winning for our customers. including all the logic of our offers in Brazil. So considering that today, we think that we have the weapons in hand in order to be able to compete with those competitors and also to reach our sales prospects.

Now I'm going to talk about Mbank again. So your question is, when is it going to become profitable again? Well, the operation of Mbank is affected by two very strong factors. One is the provision for bad debts, which according to our -- to what you see, it's getting better. So we have the provision for bad debt is very similar to pre-COVID. So it went down, it was better than the current -- and this is -- and we're not so concerned about that. It's operating at a level that is very close. It's slightly higher than what we consider normal but way better than the Q1.

But there is the funding cost too, and then it's going to remain high until the middle of next year. And these two components are the main vectors for the generation of results at Mbank. So our concern with the operation in terms of going better profitability in a gradual and well balanced way and not do anything that might be inappropriate because our customers' leverage capacity is quite compromised. So in a nutshell, we believe that in the middle of next year, second half of next year, this operation will be fully back to what it used to be.

[Aline Frutuoso, executive]

[Operator Instructions] Our next question comes from Thomas Gravis.

[Unknown Analyst]

Well, my question is about the subscription bonus. Since you are not going to exercise it, what about your cash situation considering that you were not going to exercise your subscription bonus?

[Unknown Executive]

Thomas, thank you very much for your question. The company has always worked with the possibility of not executing this subscription bonus on the second quarter. It would be great to have an additional BRL 250 million in our cash at the end of the year. But we are seeking alternatives to subscribe shares that in order to assure liquidity and support our operations. And we are considering all stress scenarios that we could have, and we are very confident that we are going to end the year with an appropriate cash level for our operations.

[Aline Frutuoso, executive]

We are now ending our questions-and-answer session. I would like to give the conference back over to Adalberto for his closing remarks.

[Adalberto Dos Santos, executive]

We would like to thank everyone very much. The team and our colleagues here on the room, Marisa team, in a day-to-day build the results, our investors who trust in us and all investors and everyone who has been attending this conference call. Thank you all very much, and please come to our stores. I'm sure you're going to be surprised with the quality and the presence of our products. Thank you very much.

[Aline Frutuoso, executive]

Marisa's conference call has now ended. We thank you all for your participation, and we wish you a very good day. Thank you.

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