Arezzo Industria e Comercio SA

BOVESPA:ARZZ3

Earnings Call Transcript 2024-Q1

[Alexandre Birman, executive]

Good morning, everyone. Welcome to our conference called for the results of 1Q '24. Also I like to take this opportunity to update you on the process of the merger with the Soma Group. I have with us, our Director of IR, Bianca Faim; and our CFO, Rafael Sachete.Before we begin the call, I'd like to ask everyone to offer a minute of silence for the moments that we're going through in Rio Grande do Sul here in Campo Bom. We are going through very difficult times. Thank you.[Audio gap]strength to all of them needed.So before we go into the results and strategy, I'd like to share with you how Arezzo&Co is facing this moment. That's motto solidarity, the floods in Rio Grande do Sul. So this is an aerial view of our main headquarters. As you can see, think on, all of our industrial facilities have not been affected. We are in a preserved area. Our employees haven't had any major impacts. Yesterday, we created a structured relief program. Over 1,000 employees have been affected and we'd like to maintain the dignity and continuity of life was rescued quickly here at Arezzo&Co.Here are some of the initiatives. So together to resume the footwear chain in Rio Grande do Sul, so we want to protect our employees, the company and direct shareholders, and also the chain here with that for over 100 years, we produce footwear down in Rio Grande do Sul. And we have the main aspects of our business and the production sector.I won't go into the details, just go over this quickly. The presentation, as always, is available to everyone. So first of all, we wanted to give the people that are homeless a safe home, not that many people, and we're offering them support as of today so that they can live well and work.We've had minimum impact. Yesterday, the production of all our suppliers achieved almost 95% of the historical average. Our product development center, which is the center of everything, next week, we'll have the launch that is integral and the collections are amazing.Immediate financial relief for the most severe cases, focus on our suppliers, emergency support to suppliers and our franchisees, multibrand, store owners through extending their payment terms and supporting them.Rio Grande do Sul accounts for 4% of our revenues only. So the region affected by that is less than half of that. So in the third quarter, when we close the second quarter, you won't hear us saying that our results were affected by this natural calamity. And I've talked to the President of Abicalcados. We're offering solidarity with the main people in this industry, making lemonade out of lemons. And together, we will be stronger.If you would like to help here on the right, as I mentioned, this presentation is available on the site. Here are all the different channels for donations, if you wish. And next week, during the Itau conference and the other celebrations, as you may know, I was recognized to represent Brazil as the person of the year. So I'll be personally there and support this moment that Rio Grande do Sul is going through right now.I'd like to give you an important -- well, that was the important update about this moment and thank God the stability of our business and to show you that we're dedicated to our social work in supporting our ecosystem. This is the agenda for the call, start off with message from the management, the highlights, and then I'll hand over to Rafael Sachete to talk about the financial highlights.And I believe that number 4 is the most important topic. So for the first time, I'll give you some well-structured updates of the process of the integration with the Soma Group and then we'll begin the Q&A session.So the first quarter is marked by the transition of the end of the summer collection, beginning of winter collection. This year, which is not typical, the Carnival holiday was more towards the beginning of the year. We usually launch winter right after Carnival. This year it was too early to launch that. So the first 2 months of the year, the calendar was a bit complex, and we were able to launch the winter collection in March as planned.And in general, I'm reasonably satisfied with the company results. The results in some of the cases could have been better. You'll never hear a justification regarding political instability or the climate or even catastrophic cases such as what is happening. There's always an opportunity in-house to create a product that will awaken desire and be a dear brand in the process -- processes in the stores.So the threats and opportunities in retail are always being focused on. So the results are reasonable coming from strong track record. And the second quarter will begin -- has begun much better. April was exceptional. It's the best month so far. Next week, we're ready for that. And I don't see many changes in our budget for 2024. So we had satisfactory results in 1Q '24, which is part of a company like ours.Translating that into figures, revenues of BRL 1.4 billion, 5.6% growth. It's worth noting that we had grown in 1Q '23, 30% year-over-year. So the CAGR is still very high compared to our historical data. And when we look at last 12 months growth versus 1Q '23 of 12.5% and compared to 1Q '22 is 52%. So we're at a strong growth rate.Today, we are victims of our efficiency. In one year -- we've advanced our business plan in one year. We didn't have to have many markdowns. The exit or the end of the summer collection was according to plan. The conversion of revenues to EBITDA is in line and net income with some of the works through the tax benefits and a lot of interesting work done by Sachete, Adriano who is the Tax Director and has the best practices to streamline what we can do in terms of taxes according to the law.ROIC is extremely satisfactory. You can compare that to other retailers that have 11% to 13%. Our ROIC is recurring at 25% in here, the domestic market with stable gross margin and in the foreign market, which was our strategic assumption. And at the end of the last year, we wanted to focus on profitability in the U.S. operations. You've probably seen the results close to the breakeven. Second quarter will be almost there. And in the second half, we will have positive results in the U.S. operations, even with the slowdown in sales by focusing on gross margin and lowering our expenses.About the brands specifically, we have a very positive CAGR when you look at 23% growth, 1Q compared -- 1Q '24 compared to 1Q '23. On the right, we have our share that shows that we are definitely a multibrand, multichannel company. Arezzo brand is a leading brand. And it's worth noting that the highest percentage is in the sell-in of Arezzo. So sell-out total the company, it accounts for over 50%. So it's same thing, sell-in percentage, very high, especially in multibrand.AR&Co very interesting growth. It's worth noting that the percentage is mainly coming from B2C, especially owned stores and e-commerce. And on the bottom chart, you can see that 4 equal pieces, so the revenue from the main channels. And so we have B2C 50% part franchise part multibrand.Now about our brands. Since 2021, Arezzo is on a growing trend. It's a sinonimo footwear in Brazil. I did a road show last week in the main capital cities in the northeast and people love the brand, generation to generation. Mother's Day, it's amazing to see the volume of 3 generations buying at Arezzo: grandmother, mother and grandchild. So historical moments they experienced with the brand. It's becoming younger and younger.We just inaugurated last week a new architectural model at the Iguatemi Shopping Mall, 30% growth on top of a base of 30% growth last year. It will be our #1 store. Alone, it will account for BRL 30 million in revenues this year.E-commerce for Arezzo, even from the franchises growing 28% this quarter with a very well structured communication and marketing plan. And this went to counting on the best sellers. One of them are the Mother's Day campaign spearheaded by Silvia Braz. And before that, it was already stocked out. So the Amelia pump has over 10,000 pairs and now 22,000 pairs with 54% of turnover and slowdown all channels.Schutz is constantly advancing and reformulating the brand strategy. Last week we delivered the final project of the Italian consulting firm that we hired, great path that we're going to be on. We've already seen some signs. We decided to adopt the concept of the Island of excellence and put all the strength of the brand in the Iguatemi Mall. And we even have the dressing room. So apparel in this store, even though it's a pop at, it already accounts for 13% of the revenues and same-store sales is already at 15%.So this is a medium to long-term process. The road map is very clear. And internally, this project is called Schutz 30. So let me explain the name. In July 2025, we will celebrate 30 years of existence of Schutz. And by then, all the pillars that we will implement for branding, in-store style and product mix will be 100% executed. And I'm absolutely sure that Schutz will offer even more pride to our brands.So Anacapri, very strong in e-commerce, 52%, focusing on the consolidated under our expectations. Here, we have a lot of interference of the franchisees and the difference from one quarter to the other quarter, but I don't want to explain that through seasonal issues. We did make 2 mistakes in the winter collection. We're already correcting that. One of them is that there was too much of a fashion appeal than this brand can carry and that increased the average price to a level that the Anacapri customer is not willing to pay for. That's being corrected.And we also brought in communication that was too young. We brought in influencer Virgina Fonseca that has capillarity and huge influence in Brazil, but she doesn't talk much to the Anacapri audience. So that was a mistake. And obviously it's not a positive result, but I can guarantee that this is part of our day-to-day work.The important thing is to recognize when we did something wrong and correct the path. So we still have the plan to open 40 stores this year. We have the franchise with a very affordable and good value for money for new stores. So these corrections aren't major adjustments like Schutz. It's all about the fashion. And I'm absolutely sure that Anacapri will bring a lot of positive results for our brand.Alexandre Birman, solid growth. It's icon brand. If you go to an event, if you go to a party, half of the women are wearing Alexandre Birman. It's a very strong brand in Brazil. We left the process in the U.S. in standby and focusing less internationally, so we can focus on other avenues for growth. And we're absolutely sure that we'll have great positive results with this brand.AR&Co has already delivered what the plan, now going into a more stable pace. We delivered 11% growth in the first quarter, mainly affected B2B, especially multibrand channel. When you look at B2C, the growth is very strong, approximately 18%, and should continue until the rest of the year.The good news is that the summer -- for this summer collection, we've already sold that in April and May. We've already ended that with an amazing showroom. I was there on Friday personally, and we already grew over 20% for the summer sell-in of 2024 versus 2023. So in the second half, we should correct the deficit of B2B and the brand should go back to the levels that we've estimated at 15%.And Vans is doing very well. It grew 1Q '23 versus '22, 56%. That's why the base was very high. And now for 2Q, the growth is going back to a relevant level of 25%. So no concerns there.Our smaller brands in the portfolio, Vicenza, strong growth in e-commerce, solid, profitable and with higher growth in B2C, which was our plan growing 15% in e-commerce. The brand is going through difficulties in B2B. The international department stores still have a challenge but Massimo and Anna Maria, the founders of the brand, are doing excellent work. So we're not concerned about that.Carol Bassi still delivering solid growth, especially in Cidade Jardim Mall and done very interesting work.Those are the updates about the brand. So that's the end of the first part, showing the consolidated figures of our results in sell-out. So we grew sell-out, 9.4%. That's considering the entire D2C, sell-out of franchisees and e-commerce achieving BRL 1.36 billion, a growth of 9.4% year-over-year.So about e-commerce. Everybody was mentioning that after stores had regular footfall, how would we maintain our e-commerce. So our team has the great ability of using the investment in performance media, servicing customers. We're hugely focused on NPS. That's part of the entire management's focus. So we achieved NPS of 82%, and that's very positive. The apps have a high percentage of revenues, you can see 20%, 20% year-over-year and total traffic, 20.5%. So sell-out is still very strong, be it in brick-and-mortar stores or online.Now about the owned stores in a more detailed manner. Today, we have a lot of work dedicated especially to Arezzo. So replicating that for our franchisees, we grew 14% in owned stores and sell-in in franchisees to balance that out, sell-in and sell-out. This has been fundamental indicator and we had deliberately lower growth. But when you look at LTM, it's in line with the average growth of 7%. For 2Q, that should go back to normal, especially for the second half of the year.In multibrand, that was a channel that dropped. This is mainly because of the Reserva brand, and it was delivered to preserve the brand because we don't want the brand in thousands of points of sale. As I mentioned this before, this was reviewed. And for summer 2025, we will have growth of 25%.About our e-commerce. Total revenues for the quarter BRL 332 million, strong growth, 19% year-over-year, in footfall, BRL 92 million, in access -- or traffic, excuse me, BRL 92 million and growth in the app of 20.5%. It already accounts for 30% in online sales and performance, and consequently more profitable. So now we really trust our omni strategy being the start in that. Those were the highlights of brands and channels.Now I'm going to hand over to Rafael Sachete, who will give you the details of the financial aspects.

[Rafael Sachete, executive]

Thank you, Alexandre. Good morning, everyone. Welcome to our conference call about our financial statements. I want to highlight our revenue growth, especially in our own stores and e-commerce with an excellent performance in the quarter.In addition to that, our gross margin were able to leverage in 80 basis points with a mix of channels more focused on direct-to-consumer sales and with a significant performance with smaller sales campaigns. About our expenses, our commercial expenses with stores are growing more than the total expenses of the company because these channels have greater growth.And our EBITDA, we have reached a leverage of 20 basis points year-over-year. And the company net profit had a positive impact, boosted by greater tax efficiency compared to the same quarter last year. So we have BRL 78 million of net profit at the company, accounting for 7.3% of our net revenue.About the adjustments that we explained in our earnings release, we have 3 notes about these adjustments. The first one is the nonrecurring effect of stock goodwill on the Vicenza brands. We had BRL 3.6 million of goodwill of inventory in that brand, and this amount needs to be amortized in the CMV at the company. This has no cash effect, only accounting effect.Now for the expenses line, we have BRL 1.7 million which is a recurring amount that we have every quarter about the earn-out payment for the acquisition of Carol Bassi. Our auditors say that we need to recognize the value in SG&A, but this is related to the acquisition. And finally, the other amounts that we see here are values paid to attorneys related to the merger with the Soma Group.Now moving on to next slide. You can see our ROIC breakdown. I want to highlight our ROIC performance, which has been very solid, 16.7%. And in terms of recurring ROIC, 25% excluding nonrecurring items and acquisitions.Our working capital on net revenue has been capped at historical sound levels of 20% in spite of a mild increase in accounts receivable, which has been very well controlled and managed with an important management KPI that we have here at the company.CapEx is worth highlighting as well. As compared to last year, we saw greater concentration of corporate CapEx because of the buildings of our distribution centers. And now the CapEx is already decreasing significantly year-over-year and also when we look at recent quarters.Now moving on to the next slide. You can see the total debt position of the company. We got to BRL 506 million in net debt. Our first quarter historically speaking has some cash burn, and that's due to the financing of sales during the quarter and also the supplier payment cycle.Our net debt over EBITDA achieved 0.8x and 0.6x over EBITDA, looking at pre and post IFRS. So looking at the pre and post IFRS. We're breaking these numbers down into the pre and post to give you further visibility on this number.And now I turn the floor over to Alexandre, who will give you an update on the M&A process with the Soma Group.

[Alexandre Birman, executive]

Thank you. And I want to congratulate everyone for the results and the great financial management of our businesses. So now I'm going to give you some color on the merger.The foundation of this work, a work that has been done with a lot of diligence, dedication and investment because we believe this is the time to make the investments, to make things work. Fata bene or fata [Foreign language], that's what my father used to say in Italian.So we have executives here like Luciana, Mauricio on our side, and Marcelo and Katia on Soma side, all the brand founders as well, all of this team providing support to this process and Roberto and I, of course, full dedication right now. So you'll see how we have structured the next steps and what has been completed so far.This slide would be enough to show you how we've been structured. However, I've added some other slides to give you lots of color and nuance about the process. So here on the left-hand side, we have highlighted the main work fronts. There are 7 in total. First, operating model, leadership and culture. Two shareholders reorganization. Implementation of the project and change management. The generating value fronts and the enabling fronts for the company to operate. Positioning and branding of the holding company. Structuring of the Board and governance.So for each one of those fronts, we have things ongoing, which I will read them out loud for you. And then the presentation is going to be made available to all of you. So when it comes to the operating model, leadership and culture, starting with the premises, we have defined our culture and MO between the holding and the business units to find the necessary balance between autonomy and synergy. That's our basic premise.Now in reorganizing the shareholder structure, we are restructuring Arezzo&Co with Vicenza, Carol Bassi and the Soma Group with Hering. When it comes to the project and change management deployment, the goal is to structure and manage the preparation of the integration of Arezzo&Co and the Soma Group, coordinating the integration activities and the management of the work fronts, always being careful with change management.Now when it comes to value generation and enabling front, we want to detail the synergies and we want to break down integration targets and devise a macro synergy capture plan. What are the deliverables? Quantification of the value potential, targets and capture plans, and team mobilization, plan and manage the enabling front activities.Now about the Board structure and governance. We want to define the new members of the Board and design governance plans with meetings, frequencies, onboarding process. The company hired for that was Egon Zehnder.And another very important part, which is positioning and branding of the holding, this goes way beyond branding. We are creating a new identity to the group and we have concrete positioning initiatives. We have hired Tatil here to help us with that and we're learning on a daily basis. We're learning from all of these consultants. They are fully dedicated and passionate about this process. We really want to build a global case here.When it comes to technology and systems, we want to align plans and strategic views to make this integration feasible. NTT is a Japanese company that has been investing a lot in Brazil, and we trust their work so much.Now here on the left-hand side, you can see the fronts are the same, but we have also broken this down into the phases of the process. So diagnosis, blueprint and follow-up. So you have here the stages of design, implementation and technical validation.So on the left, you see that the same work fronts are capped. However, now for each one of these 3 stages, we have broken them down into sub stages. So let me give you an example. Definition of strategy and diagnosis, I showed you this in the earlier slide. So we have the paths that are chosen. And after that, you can see the implementation plan.I'm not going to read everything here. But for each one of the fronts, we have a consultancy firm that was hired with their own design, implementation and technical validation processes. You'll see that this is all supported by great governance. And of course, that will suggest a schedule.Right here in the center, we see that we have not mentioned the names. But what we want to convey to you with this slide is that we have the different work fronts. And for each one of them, we have a working group with Soma and Arezzo&Co executives as members and then the consultancy firm that is heading each one of the work fronts. And here on the bottom, you can see the enabling fronts in bold that are key for us, so financial, fiscal, accounting, FP&A, legal, people, IT, internal audit and IR.And in gray here on the right, you can see other fronts that will be implemented with the combined company. I'm not going to read this for you, but the slide decks will be made available to you later, as I said.Now you can see the IMO governance. We have the shareholders committee here at the top, and then we have the steering committee. We have the committee defining the strategies and then we have the tactical committee, the leader of the integration and the focal points by business unit. And then at the bottom, this is split into the IMO and the CMO. And Paulo is supporting us in those fronts because, of course, this requires a lot of time and dedication. And we are leaders of our business. We have a lot of results to deliver. So of course, we will rely on these people to deliver a work of excellence.Now on the next slide, you can see the main scope agenda and the owners of those actions. So here you can already see some names, and the frequency and duration of those activities. So for each one of the groups that I showed you in the previous slide, starting with the shareholder committee, you can see the scope, the agenda and the participants.So the scope is to define the source code. This is a guide for the way we work, including speed and culture. The agenda is the source code and the guide for the acting framework. And the owners or participants are Alexandre Birman and Roberto Jatahy. Frequency duration, weekly 3-hour long weekly meetings during 14 weeks, alternating between Sao Paulo and Rio.So then after the shareholders committee, you can see the steering committee and detailing of the scope, agenda, participants, frequency and duration. In that case, one hour long weekly meetings. I'm not going to read everything to you, but you can see how well structured this is, all the governance, the scope, the agenda, the owners, frequency and duration for each one of them.We held many, many meetings to get this far, to get to this point, and we are now very confident about this well-devised and well-structured road map that has been defined.So here, you can see the work fronts on the left exactly like you saw from the first slide I shared with you, but now you can see the time line or the schedule. These are all micro actions that need to be taken so that one after the other, we can get to our final goal, which is, of course, the closing and then to connect and advance. And this is all very well designed for each one of the 7 work fronts. Let me take a sip of water.Now moving on to the next slide. I'm going through -- now this is about the bank company process and sharing with you what was defined, what's -- it's already in place. We have some slides for the work. And here, we have 3 waves to generate value in the next 9 months and up to the beginning of 2025.So wave 1, expanding footwear and accessories for the brand, especially for Hering, Farm and mainly focused on owned stores in e-commerce and NV and Cris Barros, and Animale is not here. So collection models, Hering and Farm, those are the only ones that are B2B. And GTM multi-brand for Hering, not just for the footwear, but it's also a channel that has had more frequent revenues in multibrands in last quarters. And so there's methodology, diagnosis and deep work.This group has already started, I'll give you some detail on that, to ensure the constant growth of Hering and multi brand that has the growth of -- in multi-brand of pretty much 35% for the revenues.Wave 2, so the optimization of Hering, not just for Reserva, but that's the main focus. And logistics and tax matters, streamlining investment in marketing, so we have an opportunity to group everything spent in performance, media -- out-of-home media, for magazines, influencers. So that process will be integrated and gives us a unique vision, and we'll have a lot of savings in negotiation, not reducing the scope of the negotiation. And where we really know that it's not the main assumption of the deal, but we do have a huge opportunity to streamline our G&A.So all of that is launching, so defining the targets and the plan to capture synergies, the who, how and when. And here, in Wave 5, the end of the process that should end in October, November this year, is giving all the inputs for the 2025 budget.Assumptions of the integration. This is something very important. I'd say this is our mantra. So I'll read the first thing. So armor the business, not bringing any distractions and have as less friction as possible, taking care of people and the brands. I'm not going to read all the slides. I'll just read the first one because it says it all, but then you can take a look at this later.Each company is unique. The must-have is ensure alignment, financial consolidation and visibility of performance. So the practical application is using the financial reports that are the standards of Arezzo&Co and develop necessary interfaces, processes and systems. And the Financial Director of the business units is the guardian of NewCo directives.So I'll read the second one. And the interdependent group, a minimum management system structured interactions and to encourage the best practices, a management system that's common with the deck of indicators that represent commitments, rituals of monitoring and signaling that you have an action plan when necessary, ensuring best practices.You can see that it's a lot of work. I really want to read everything. It's very interesting, strengthening NewCo, preserving the identity and reputation of the brands as well as their platforms and group. We don't have a one-size-fits-all. Each business unit will have an architect that will ensure the level of autonomy interaction with the holding company. The holding is comprised of a CFO, COO, CTO and CHRO, capturing priority synergies, a communication plan caring for the impact of the merger of the brands and the NewCo.So now I'm going to share with you just a start of the main initiatives of the synergy, synergies that are already in place or even some synergies that we will still capture in 2024. About the first front, as I mentioned, expanding footwear and accessories to Farm and Hering. There's a lot of information here. It's very busy. I'm not going to go into everything.So I want to show you what's in red as the core assumption of this. Support NewCo to have a well successful launch of a new collection, Hering and Farm, footwear and the Pulsar event that takes place on May 14. So many initiatives.So these numbers are days. This is an in-depth agenda. So all the different days. The triangles on the bottom are the main milestones that will take place. You can see an update here in my case, in 7 days from now. This schedule is updated on a daily basis. A strong team is behind this. And you can see how it's structured. It's not just guesstimates. It's actually something that's done with the process, method, investment, resources, and that gives us the confidence in all the synergies that will come from this.So this is to understand the opportunity that Hering has in multibrand to become more solid and have a constant process in growing its revenues. And then 2 fronts, applied to Hering and Farm. So I'm running out of time here. I want to listen to your questions. So I won't go into these details. I'll just talk about the deliverables here.So reducing the lead time and the activities. We also have the program of essentials and reducing the volume lead time here. And defining the commercial replenishment here, especially when we're talking about Hering.So to go into the Q&A, I'd like to invite all of you to be a part of this at the biennial event of the Pulsar event, May 14 and 15. We're going to -- these are actually the booths that we will have, FARM Rio. We're going to create 191 SKUs, were already created. 13 people in the direct structure. And here this is already the 3D for the Hering booth. We have 155 SKUs created, 10 people working there, 17 representatives. Both brands will have the fashion show, and we'll have Katia and Luciana participating. So it's going to be a show. I invite all of you to take part in that.Well, that's what I had to say for the opening remarks. Thank you for your attention. And now we are open for the Q&A session.

[Unknown Executive]

So Alexandre first question from Luiz Guanais from BTG about Reserva multibrand. Do you believe that the adjustments that you made in the last quarter are done? What about the price transfer to all the brands in the group? 2 questions there.

[Alexandre Birman, executive]

So Luiz, thank you for your question. I'll start off with the second one. And at the Brazil level, we haven't been able to lower the interest rates because of inflation. So in our industry, we don't see that happening any more. The aspects are much more controlled. We don't see price increases for suppliers. We've closed -- so we don't see that as an issue there.And about our first question, the sell-in, that is pretty much 80% of the revenues in 2024. For the Reserva multibrand was already done. So a volume of 20% year-over-year.

[Unknown Executive]

Next question is from Vinicius from UBS. The first part is about multibranding co and then I'll skip that and go to the second part of the question, which is about Soma. The question is, could you mention it was structured in terms of the potential development of the product together with Soma? And additionally, what's the overlap between the customer bases versus Soma? And the main initiatives to increase that overlap? And the second question --

[Unknown Executive]

Wait a second, let me answer that first. Thank you very much for your question, Vinicius. I tried to give you a thorough view being very educational sharing with you all of our internal work papers. This is part of the capture front for 2025. We have defined this. This has been analyzed. There is a great potential. NewCo, although it's not a product brand, it's a service brand and we have 11 million active customers there from the A/B classes here in Brazil. And the overlap is small. Less than 15% of the customers buy both from Soma and Arezzo brands, and those that buy from both groups by 30% more. So that's one of our projects that was expected to start in 2024. But because of prioritization issues and investment times, this is going to be done in 2025. Your next question?

[Unknown Executive]

Yes. Next question is about internalized apparel categories. What is the ideal level of internalization after the utilization of Hering plant? And what's going to be the impact on gross margins?

[Unknown Executive]

Well, I can just share some premises with you. We have just had the cotton shirts launched with the Brezza model that accounts for almost 15% of Reserva brand sales. That's our focus, to reach a quality standard that meets the demands of Reserva customers. We know this is an important work that needs to be done, and it's not impossible. This is going to be done starting in Q2 2024. And we're talking about 4 billion T-shirts and reducing each T-shirt price in BRL 12 to BRL 14 with the same quality standard. That's what I can tell you.

[Unknown Executive]

Okay. Next question by Maria Carla with Itau Bank. Can you tell us about the gross margin trends that you expect from now on? Can we say that the B2C channel will continue to gain share? So can we expect a continuation of the gross margin expansion throughout the year?

[Unknown Executive]

Yes. Well, although there are other e-commerce retailers facing a slowdown, both groups, Soma, Arezzo and within Arezzo, our brands, we have a great relationship management practice with our customers generating online sales, and we also have our teams in brick-and-mortar stores. Soma has an amazing differential that we're -- and we're learning from them to implement at Arezzo&Co to enable the multibrand salesperson to become an e-commerce salesperson as well. So the mix of revenue will change. And yes, we expect to see growth in gross margins as well coming from B2C.

[Unknown Executive]

Next question by [ Eva ]. Your owned stores grew very well. Do you have any concerns of cannibalization of brick-and-mortar stores vis-a-vis the multi-brand stores?

[Unknown Executive]

Eva, thank you for your question. We're working hard with our owned stores, not only to refurbish the stores, but also with better working capital capacities. And we are taking this premise to our franchisees first. And starting in April, we are giving them an open grid resupply system that is helping our franchisees a lot. In Hering, we also have a lot to learn when it comes to the supply process, but they have a great pricing sales with markdowns and great engagement work. I had the honor of participating with Tiago with in the first sell-ins of franchisees with our top 25 franchisees in April in Sao Paulo. And the sell-in of the summer collection at Hering is already up 30% to deliveries in July, August and September. So yes, we can do that.Now about the cannibalization of multibrand stores, I think that doesn't apply because in the main capital cities, it's a given that the sales happen more in monobrands, especially in the Arezzo brand. In Hering, Anacapri and Schutz, we still have the multibrand distribution, but it's more distributed with thousands of sales points, points of sale. So we don't see cannibalization between our own stores and multibrand stores.

[Unknown Executive]

Next question by Irma as well. What were the efficiencies in the variable expenses line? Reducing marketing investments in the U.S. is helping this line? And then what can we expect from now on? And the G&A expenses, you mentioned with some integrations. Are there any synergies in some of the brands in the future?

[Unknown Executive]

Yes, about variable marketing expenses, there has been a dramatic reduction of investments in the U.S., but this is only for now. After we get more revenue, we'll invest again. The initial premise was to focus on profitability. Of course, first, we had to reduce expenses. And significant investments in the Alexandre Birman brand have not been made in the first quarter. And that was a choice that was needed for the growth of the brand because this is a brand that has a high low effect. It can be strong in the U.S. and Europe, and then Brazilians will want to buy the brand. And this brand has -- we see a domination of the AAA class here in Brazil, but we have structured a branding plan and starting in 2025, the investments will come back.

[Unknown Executive]

Now the other question is about G&A. You said that you have integration between Vicenza and Paris Texas. Are there any synergies from now on?

[Unknown Executive]

Well, we have expenses as compared to the same quarter last year. And yes, the synergies will come, especially because of the revenue growth. They are outgrowing the other brands of Arezzo&Co and they still have a lot of room to grow. Vicenza is already delivering growth. In the second half of the year, this is going to have a great representativeness in e-commerce and multibrand.Paris Texas has an excellent e-commerce performance, but it's facing a bit more challenge this quarter because of this great restructuring. The profitability is not that well and it's really hard for us to attack everything. So when we saw that we would not generate as much return on our business there, we decided to focus on this integration. Of course, this is not being left aside. The founders of Paris Texas are working really hard, but this has not been placed as a top priority in our list.

[Unknown Executive]

And third question by Irma, the merger with Soma. Is this going to improve the GTM in the multibrand indicators of the Hering store? And can you leverage Arezzo's expertise to improve the performance of Hering in that channel?

[Unknown Executive]

Well, I can go back to the slide that I shared with you earlier, showing the GTM of the Hering brand in the multibrand store. This is not a low-hanging fruit. This is actually a longer process. We're still here in the diagnosis phase, mapping the market and the market share of the brand, segmentation of the customer base, diagnosis and performance and benchmarking of commercial policies. We have Priscilla, the Commercial Director of Arezzo, and other members in this group working really hard to better understand the dynamics of this B2B and the multibrand channel, the footwear market. But the sell-in is really strong for the summer collection. But of course, this requires greater structuring and the results will come for sure.Just take a look at the slide. This is very well structured. I just want to tell you that when it comes to Hering, we thought about separating the performance between women's, men's and kids because one of the inhibitors of the growth there is kids apparel, but women's and men's, they have had amazing growth in B2B and B2C, and we can see that in the summer collection. But the kids business has been impacted and Tiago is working hard to understand this better because this is a complex business. There are many, many generations. You have toddlers to teenagers there. So this is the only business that is not growing at Hering. But it has a great share in the multibrand channel.So from now on, I believe we're going to have one single call starting in the second quarter or third quarter tops. But Hering kids is actually impacting the multibrand results, but women's and men's apparel are doing really well.

[Unknown Executive]

Okay. A question by Eric from Santander. With the launch of footwear in Hering and Farm, what is the expectations of launches of footwear in other brands of the Soma Group?

[Unknown Executive]

Okay. Our premise is to test, adjust, react, correct and growth. So we are doing the go-to-market with a lot of engagement, dedication and efforts from everyone, Farm, Hering and our internal product team, Luciana heading all of that. It's wonderful to see this positive chain of work. The booths look amazing. The collections are just beautiful. But this is still an MVP. We're going to test the reaction of the multibrand customer. The engagement is high. I think this is going to be very positive. But after we get it right in these 2 main stores, we'll think about a rollout.Now for our owned stores and e-commerce, we have a beautiful collection being prepared with a smaller level of SKUs, 191 SKUs or 150 at Hering. So not to Rosa and Cris Barros, 5 to 10 SKUs just to complement the store. So of course, that will depend on the results that we get now. If we get it right with Hering and Farm, we're going to move on to the other brands to more real volumes. But because of brand capillarity, we're going to focus more on Farm and Hering.

[Unknown Executive]

Now Gustavo from XP is asking first about multibrand. You answered that already. Now he's asking about Casa Reserva, if you are planning to scale this model.

[Unknown Executive]

Excellent question, Gustavo. I want to congratulate Rony and the Reserva team. Rony, I don't know if you're there or if you're traveling because since the deal in 2020, we had this dream, but we waited for the right time to get the best point at the best cost and the results are huge, double the sales of the other store. And now of course, we're just trying to find the right location at the right size. We talked last week about how to speed up and boost Casa Reserva because the growth has been exponential, and we see space for 10 to 15 Casa Reservas in Brazil. Now the acceleration time and the go-to-market, we still don't know for sure, but the results have been exceptional.

[Unknown Executive]

Okay. We have a question by Joao from Citi. Can we expect sell-out acceleration? Looking at the chart on Page 20, we see that the performance was from 15% to 20%. Now do you think that we can go back to 15% to 20% when it comes to the sell-out performance by the end of the year?

[Unknown Executive]

Well, that's unpredictable. The month of April was on that range. The month of May, I mean, with this terrible heat and the weather conditions that affected the morale of the whole country, with this disaster in the south, this has had some impact on sales. So we're fighting to have reasonable sales for Mother's Day that will close on Saturday the 11th. So I think that the second half of the year, we're going to be more in line. I mean, the second quarter.For the second quarter, the summer collections are just delightful. We're making a lot of -- under a lot of pressure. But if we deliver a low single digit or rather a high single digit from 8% to 10%, we'll be very happy, to be honest with you. That's for in B2C.In e-commerce, the numbers are different. They are at around 19%, and that's the trend considering the all-store consolidated numbers with the B2C channel, we are thinking about numbers close to 12%.

[Unknown Executive]

Now about the preliminary diagnosis of Hering, what is a reasonable medium-term growth rate?

[Unknown Executive]

We're thinking about 9% to 10%, but today, we saw closer to 25%. No, Tiago, you can stay with the 9% to 10%. Considering footwear and everything else that we're doing, our goal is to stay at around 9% to 10%.Okay. Due to time constraints, we're going to answer the other questions later by e-mail. We know that this is a busy day for everyone. So thank you all for your time.

[Unknown Executive]

Thank you, everyone. I just wanted to give you a preview of the material that we have just shared with you, 10% of the documentation that we have, just so we have an idea of the due diligence, the efforts and dedication that we have been given to this merger. And the results will come. We're very encouraged, motivated and excited. It's just about gaining momentum. And throughout the year of 2024, we want to create a wonderful company. We think that 2025, we can see new effects in product categories.So now let's focus on Mother's Day. May you all make excellent purchases at our brands to give us presents to all your mothers. And of course, I would like to see you in our event and in the Itau conference in New York. And I am very glad for all the hard work of our team and the support of everyone. I was recognized as a person of the year for the first time. So I'm very excited. If you investors can come to support our team to encourage us and boost our sales, we'll be very happy. So thank you.

[Unknown Executive]

Congratulations on the results. Let's do it, guys.

[Unknown Executive]

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