Arezzo Industria e Comercio SA

BOVESPA:ARZZ3

Earnings Call Transcript 2020-Q3

[Alexandre Birman, executive]

Good afternoon, everyone. This is Alexandre Birman speaking. Thank you for participating in our call, our results call for Q3 2020. I have here with me our Strategy and M&A Director, Aline Penna; and our CFO, Rafael Sachete.

First of all, I'd like to say that the most important moment for this call is to hear your ideas, your views. The external views that you add to our business has always been very helpful and useful for our guidance. So please feel free to interact with us at the end of the call.

So after our opening, we are going to talk about the digital. We're going to talk about the sellout recovery and including results from October. We're going to share our marketing investments for Q4. We will also take a deep dive into our North American market operations. And then I will pass the floor to Rafael Sachete, who will then share our financial highlights. And we will close out with our detailed results for October. And Aline Penna will then give you a bit more details about the incorporation process of the Reserva Group. And then we will be totally open and available and eager to chat with you during our Q&A session.

2020 was certainly, not only for Arezzo&Co, but for the whole planet Earth, has been very, very important. And for us, thankfully, due to our highly committed team, we will -- we're almost closing the year with a sense of victory. So I'm going -- I'm not going to go over the -- all the details of the steps that we went through because I know that you were with us during this journey. And you know all the steps that have been taken with much energy, with everything we do and with a very structured cadence.

On the left side of the page, we have here a summary of the playbook that was actually -- while Aline is sharing the presentation with you, I'm going to talk a little bit about the playbook that was developed during the midmonth of March. And this was our guide. So we had, as a primary objective, to protect our employees and clients, to prepare ourselves for the stress and liquidity and recover -- go back to our sales results.

Just a minute, please. We will share the presentation with you so you can better understand what we are talking about. Just one moment, please.

So going back to our presentation. After adapting our operation for this new normal, we will talk about all of our different actions while adjusting our expenses to this new reality. And we will then start to begin our sixth chapter from the last few months, which is play offense.

It's worth highlighting that during all this time, Arezzo&Co had an average market share gain of up to 30.9% of share throughout the last 9 months of 2020.

I'd like to take this moment to once again share with you our strategic map, our guide, our compass that was presented to you initially during our Investors Day in December 2019. And it was absolutely paramount for this year to have a very clear guide and a very clear north to guide us. So highlighted in blue was everything that had already been planned in 2019, and that has already become a reality in 2020.

So starting with the strengthening our omnichannel experience, these are the results. On the right side, we're going to share the launch of our marketplace that was going to be in 2020, and we anticipated it in 2 years. And the commercial and own brands sales, we will also have lots of content and services. And something that I cannot forget but we are investing greatly, and we'll soon share with you the great investments in terms of circular economy to accelerate e-commerce.

Now going into our arm -- our ZZ digital arm, led brilliantly by Maurício Bastos. I'm going to share 2 basic points of information with you for ZZ digital. So this is divided up in 3 pillars: like I said, omnichannel and future of retail; all our big data and analytics; and building our fashion platform. And it's worth highlighting that we've been recognized not only in the financial market, but the clients, but also by important communication vehicles in terms of digital. So Arezzo&Co was elected the most innovative company for IT in 2020. We also have a very strong work based on internal construction, and our leader for data is a franchisee who started working extremely focused on the client 4 years ago and today is part of our leadership team.

So talking about these great pillars for digital transformation, starting with this tool that was essential for our sales. The action, which is how we manage communication from salespeople with our customers. Today, our salespeople are communicating 24/7, talking to our consumers, reminding them that we have more than 4 million in sales in the last 2 months. And we have a very relevant percentage for sales with products delivered by our infinite shelf from our e-commerce platform. We also have a very updated way, an online way, to check our inventory for the whole network; and obviously, the virtual window, which is very relevant to deliver our e-commerce sales.

So in terms of total sales, it's worth highlighting that in addition to a percentage growth -- a very high percentage growth, we're talking about an absolute number during the 9 months of 2020, BRL 364 million sold. So this places us as the largest e-commerce brand in Brazil, and this makes us very proud. And this image illustrates where we want to go.

So going on about the results throughout these last few months. It's worth highlighting on the right side of the page that basically 100% of our stores are already activated with all of our tools. We still have a good opportunity for improvement to -- or the percentage of the stores that are delivered by these tools. I am sure that we still have an opportunity to maintain this spiked growth that we've seen during 2020.

So now I'd like to talk about our third pillar that I mentioned, which is consolidating Arezzo&Co as a fashion platform. So I'd like to officially invite you all to be with us to come join us on November 19, next Thursday, for the Wired Conference opening, which is a Condé Nast group event, taking place throughout different countries around the world with large numbers, important numbers in retail and one of the great partners of McKinsey to provide a very holistic view of the reality of the retail market currently. And we will be efficiently launching ZZMALL. This was a very relevant investment throughout 2020 and with very strong investment in marketing and communication for us.

I was -- I really want and I was eager to share with you all these images. But let's wait until the 19th, and I hope you can all join us because we will also announce a very important investment from our company to consolidate the platform not only as a marketing vehicle but also as a service providing vehicle for our consumers.

So this is a summary. Like I mentioned, this is the first view of our ZZMALL. This is our app, still in beta test mode, with more than 25,000 downloaded. It's still a very low number, but it already shows the capacity -- the potential capacity for sales. And if you can download this, please do it, so that we can understand the capacity for Arezzo&Co, for curatorship and bringing relevant brands that are focused on the A/B class, from -- moving from the women's fashion apparel market moving into men's apparel. So I'm sure that this is ready. And on November 19, it will be officially on the air. So this is a IP -- 3P platform focusing on A/B classes in Brazil.

So now I'd like to talk about -- go back to our physical world here. Of course, these results are from our omni sales, but I want to talk a little bit about the expanding -- the expansion of our sell-out throughout the network. On the left side of the page, you can see the consolidated results, omni, for our brands in the last 5 months, so showing you very transparently at the results for all the different brands. You can see that there's great equivalents throughout these months and the recovery of the brands, which proves our ability and capacity to be a multibrand company and also a multichannel company. So Sachete is going to talk about these relevant data about our presence and participation in the multibrand channel.

But here, I'm talking about mono brands only. In November, we are basically -- we have basically 95% of our revenues already realized when compared to November 2019, and not only in terms of percentage, but look at the volumes of sell-out. In October, it was at BRL 161 million, 82% of our year -- prior year. In November, we had already sold BRL 51 million throughout the network. We also highlight once again very openly the same percentage only for the physical stores. And what's interesting is to see this great leap for November only, with BRL 39 million sold and -- compared to the same prior period of 2019. So this is just the projection. And in the second half of November or until December, we can understand and try to see where we are going.

Now going back about -- talking about our footprint, distribution and the numbers of physical stores. Arezzo&Co, throughout these years, had a positive growth, and this is something that for us is a more than basic premise. It's absolutely essential. So we will have 30-plus stores -- 30 more stores comparing to 2019. It looks a Boeing reference. It's a 767. I'm sure that this is going to touch the -- without mention, going into the Reserva Group basis. If we touch that, we will reach almost 900 physical stores. So Arezzo&Co is actually proving its capacity of omnichannel distribution.

I would like to thank our team in public, to our leadership that worked very strongly. And one of the consequences is a huge investment in marketing, we're highlighting right now, for the past -- for the next 2 months in 2020. So as I said, we're going on the offense at a moment that we are more than tripling our investments in marketing. And I would like to highlight these 3 key investments in our 3 key brands.

So you all followed, I hope so, last Sunday, we were officially starting Arezzo brand at prime-time TV, at Fantástico TV show, the first national-wide TV commercial with hard investments, with a 360-degree view much beyond the product. These are the early stages under the Arezzo umbrella launching another brand. It still is a sub-label of Arezzo. But our goal, and you will understand throughout our presentation, is to unplug BriZZa, making it a stand-alone brand focusing on flip flops and injectable handbags.

Three pillars made us to invest in this segment: First, strengthening the Arezzo brand that, by itself, already brings elegance, confidence. It's a very contemporaneous brand aligned to a new product segment from the BriZZa brand and having us a star not just for this campaign, but she will be with us until the end of 2021. And she can renew for even longer. We will have Bruna Marquezine, having not only her image but all her social media with more than 40 million followers on Instagram that will support us in communicating and creating the BriZZa brand.

As I mentioned, BriZZa is much beyond just a line of flip flops for Arezzo. It already is born as a multichannel brand. We will be opening between pop-ups and kiosks, about 35 points of sale, with highlight for a BriZZa flagship at Rua Garcia D'Ávila, which, by coincidence, is neighbor to our well-established Schutz store that's been there since 2010. And we're also opening, this is first-hand news, the first VANS flagship on the same block at Garcia D'Ávila. So Arezzo&Co is taking over Ipanema and also the store-in-stores in our Arezzo brand stores. It's a huge category. As you all know, large companies practically only exist with relevant earnings just selling this category of products. And now it will also be one new category for Arezzo&Co, increasing our addressable market in about BRL 5 billion.

And the figures are very exciting. And firstly, I would like to share with you the results already achieved of the BriZZa brand. 55,000 pairs sold in less than 7 days in the sell-out. The volume already sold between multibrand and franchise, more than 550,000 pairs, much more than what we expected, replenishing of already 300,000 pairs. This is public information. It shows several highlights that we had throughout these last 7 days of our investments in media.

And here, a summary. If we were to show all the clippings, all the recall of this investment, we would have at least 10 pages in this presentation. So here, highlighting those publications focused on the financial market, BriZZa already bringing very good wins.

Now I'm going to jump to Schutz brand, sharing an investment that was very important. I would like to mention, and I think most of you don't know Ginger, it's a 100% native digital brand. Ginger is the result of the entrepreneur's spirit of one of the best celebrities and actresses in Brazil. Despite her young age, she's only 25 years old, she's always had this entrepreneurship spirit, and she was always very in tune with fashion. Marina Ruy Barbosa launched in May 2020 her brand, Ginger, with extraordinary sales results. When we noticed this huge success, we decided gradually, step-by-step, to tighten the ties of Arezzo&Co through Schutz with Ginger.

So yesterday, we launched the first episode of a reality show that shows the backstage of how this brand was developed. And the launching will be in the first week of December of this collab. And with her almost 40 million followers, Schutz and Ginger will have a huge success. Their clothes are very well targeted. It already has expressive figures in sales. And now indirectly, it's part of our portfolio in this partnership with Schutz.

So this collab, Marina was part of the entire creative process. She's highly engaged. It's worth mentioning that this goes more -- much more beyond a collab. She's one of the best actresses in Brazil and has huge audience. And she has a 100% digital native brand, which is part of Arezzo&Co through this partnership and collab with Schutz.

And last but not least, I would like to highlight that Anacapri, very much in tune in its easygoing way of being, noticed a huge success that Manu Gavassi, who is part of the last Big Brother reality show, gaining 12 million followers in just a few months, with young and easygoing communication like the brand Anacapri, and the start of Anacapri now with a contract in the long term that will last until December 2021. So the results shown until now are not results of this investment, but it shows how Arezzo&Co really went to play offense. And all these investments will mean even more expressive results than those that we presented in the third quarter for 2020.

Now I would like to open a new chapter in our presentation and highlight what makes us some relief. So we can bring out that after many years being sure of the capacity of Schutz brand and Alexandre Birman brand in the U.S., we invested. We made mistakes. We corrected it. And now we were able to have a clear north. We're able to go in a clear direction with the leadership of Fernando [indiscernible] and our international brands, which we have [ the leadership of ] Caligaris with us for many years, responsible with a great team with this famous international operation in the United States. And these aren't the numbers. They don't need many explanation, more than $1 million in EBITDA.

And I'm going to show in the next slide an acknowledgment that the Schutz brand is having in the American market. On the right side, with the magazine Vogue showing this new strategy that was well done and had a billboard on Broadway on Times Square. So Schutz is actually going into a price point, bringing a product with high value-added. So the results are very encouraging, not only what we achieved in EBITDA, because we're still in a growth path. And now you will see the distribution of the department stores with Nordstrom. That many retailers will also make our earnings even more expressive in the U.S.

Now I would like to invite Rafael Sachete, who will talk about the financial highlights for the third quarter of 2020.

[Rafael Sachete, executive]

Thank you, Alexandre. Good morning. I hope you're all well.

Now the next page, we're going to talk about the revenues. But first, to go into the numbers, it's important to point out the business model of Arezzo&Co. It's a multibrand and multichannel showing very strong resilience in revenue, even in moments in which some channels can't perform so well.

So when we look isolately at franchise and owned stores, which were the ones that were more affected during the pandemic, they will set off by the multibrand and web commerce channels. So that growth was very strong. It's performing well with 72% growth year-over-year, achieving BRL 151 million of revenue. These figures we have VANS supporting, especially the multibrand channel. But even excluding VANS from the multibrand, it dropped half of what the franchise and multibrand dropped in the period. So it's a very important recognition by the customers that is performing well in sell-in. And the information we have from our October and November is that it will grow even more, even if we exclude VANS from the comparison base. So it's a channel we're betting on, and we're being seen as our customers as a company that is ahead with new products, new collections, seasonal collections of all brands. And the performance shows that.

It's also important to highlight that in November, we see the continuous evolution of our monobrand stores performing 85% on compared to 2019. It's an upwards curve that is growing near month-over-month, and it will have a great performance in November. And we estimate a very strong December, achieving our goals. We had a drop of 2.4% in gross revenue.

Now our gross profit. We achieved, in the third quarter, a drop of 0.7 percentage points. Here, we have 2 key effects: one, in the web commerce with greater representativeness and in this representativeness, in a period of sales that were a little bit more aggressive. So we had positive result since it's a consumer channel, but negative because it has lower margins when we compare it. And we also have an effect of the North American operation, the restructuring we did, and that affected the margin. So we believe it's adequate to the moments that we experienced in the third quarter.

Now on the right side, we have our EBITDA that achieved BRL 63.1 million in the third quarter. It's an 18% drop year-over-year, 2.3 percentage points. And here, it's worth mentioning the mix of channels. So when I have more expenses or greater sales to consumer, the expenses increased with freight and other issues compared to the sell-in revenue. And we also have expenses with VANS. We can't compare it to last year. So that's why there was a drop in EBITDA period-over-period.

On the next slide, we have here the financial indicators. It's important to point out what Alexandre said about the strengthening of the costs, administrative costs we had and, as Alexandre mentioned, maintaining all the investments in marketing with very similar numbers or even higher than last year. So the company is caring for its brand. And this drop in expenses came from the administrative expenses, which was very important for this profitability of the period.

[Alexandre Birman, executive]

If I could add, Rafael, this savings is that we do what the customers don't see. And what they see was the opposite. We've increase our investments than what they do see.

[Rafael Sachete, executive]

That's exactly it. And here, very strict diligence in the U.S. operations, which helped us to achieve this result in EBITDA for the second -- third quarter in 2020.

Now some highlights on our cash and increasing our cash position. We closed with BRL 19 million of free cash -- net cash. During the pandemic, there was a concern, we reported that in the second quarter. We captured debt in the market. It was our safety cushion. It's a debt that we didn't want to use. We accessed it a little bit in this period, but now we resume cash generation for operations. And this debt is part of this gross cash, but we have positive cash again.

It's important to highlight the resilience and solidity of our multibrand channel. We are very strong in our payment of the new sales that we had after the pandemic or after the -- resumed after the pandemic are going well. So this cash generation will continue to go -- grow with our revenue. And the cost of this that we captured at the beginning, so it does have a cost below the average of the market. So this is what we have.

So about our October highlights, we've already released this information to you. It was -- we had a very strong October. We reached 126% of the revenue compared to last year, e-commerce growing basically with a 3-digit growth, very strong, and stores -- the physical stores also operating at very high levels of revenue. What we've seen and we expect November to be very similar with a revenue -- total revenue growth for the company with cash generation and also performing very well.

[Alexandre Birman, executive]

And the physical stores are also almost 85% compared to 2019.

[Rafael Sachete, executive]

That's right, Alexandre. So we are very excited for our Q4, maintaining very good solidity with a lot of care -- with much care with our business.

[Alexandre Birman, executive]

Now we're going to pass the floor to Aline Penna to give you basically -- to thank you all, where some of you who have been with us since the very first call about this incorporation. And next time, we are going to talk about the 2020 results for Q4, and we will have been celebrating 10 years as an IPO company. So we will have had 40 calls with you. This is our track record throughout these 40 calls, 10 years of our IPO. And now we have -- as a bridge, we will, for the first time -- for our next call, we will present a new growth front for our company. So the figures will -- they're very well represented and showed here by Rafael Sachete. If all goes to plan, we will have another company with almost 120 sales points. And more than that, bringing our company to the greatest assets that a company could have, which is human capital. So we were going to -- our Q4 2020, we will be able to present the consolidated results for the group -- for the Reserva Group and to reinforce what you saw on October 23.

[Aline Penna, executive]

Good morning, good afternoon, actually, to everyone. The idea here is to talk a little bit about what we already mentioned during our previous call for the Reserva Group. To give you some background since we presented this to the market, we were trying to get ready to go into the apparel market and become a house of brands. These were all organic brands.

So our first step was to understand and be comfortable to have the best performance in terms of -- during the pandemic.

[Alexandre Birman, executive]

And this is not only the numbers -- the performance of the numbers, but qualitative performance as well. What was presented here, we were able to find space to invest in the VANS brand. And as I said, on November -- on 19th November, at 12, we will be launching and inauguring the first 3-story flagship stores in South America with all kinds of VANS products, some entertainment to bring this new retail philosophy that goes well beyond just marketing products. It's all about experience.

So we can say that after 12 months that we announced the VANS incorporation, I'm sure that in December 2021, we will be here presenting excellent results for the Reserva Group as well.

[Aline Penna, executive]

That's right. After this organization, this operation with VANS, we felt very comfortable to bring in new brands. And during the pandemic, we had to take a break. But since the end of July, we are now -- we are working -- we've been working with Reserva. We launched the collection on October 23, and we also -- we have no plans on stopping there.

[Alexandre Birman, executive]

We have our sales and purchase agreements that was signed on August 6.

[Aline Penna, executive]

So we've been working on this with the shareholders from the Reserva Group to incorporate the alignment of Arezzo Group -- Arezzo&Co group. And just as a little spoiler here, we will present to you, we don't have anything similar with -- to Reserva at the moment. But it's been a great integration effort. And we are going to add complementary products, technology, services, et cetera. So soon, we will be able to talk about these new things that are coming to the market.

Just -- this is a brief overview about Reserva. Today, Reserva is -- the Reserva brand, representing 80% of their revenue, but they also have 5 other brands. And since the beginning, when we launched this operation with Reserva, we made it very clear that this is not just going to be cost and expenses. Of course, there are costs and expenses. But one of the revenue channels is the shoes.

[Alexandre Birman, executive]

And I think [ Pamela ] is open here. We -- I'm going to show you here today, just a little spoiler. Let me just take this so I can show you. This is a new product from Reserva shoes, as you mentioned.

[Aline Penna, executive]

So there's a lot of synergy. Shoes is 37% of our revenue. You know that this can be higher. When we have a potential margin gain that is very, very strong.

[Alexandre Birman, executive]

And this was a license that [indiscernible] ever had for shoes. And now we have incorporated these results. And in itself, we see the results from 2019, where this adds around BRL 55 million to our total revenue.

[Aline Penna, executive]

And that's why when we showed the Reserva figures, we said that it's possible to reach great synergy with the shoes.

So about the other 5 brands, we have the masculine Oficina for men's, kids, and we -- boys, but we want to have girls' fashion, girls' apparel as well, EVA, for women's apparel as well.

Can we just go back a little bit? And it's important to say that Reserva has a percentage of owned stores that is higher than Arezzo&Co. They have their revenue -- around 70% of their revenue from owned stores, but our idea is to increase, to grow the multibrand channel and franchises as well.

[Alexandre Birman, executive]

In addition to the synergies, the numbers and growth synergies, there are many other synergies between cultures and people. And the fact that you just presented the highest percentage from Reserva and coming from owned stores, this means that they have a retail culture at the top. And this -- and all the experience from Arezzo&Co in terms of managing a network with more than 600 franchise operations and the multibrands, we will quickly migrate all of this to all our expertise of B2B management to the Reserva Group. So we can't really know the numbers exactly right now.

But in terms of know-how and experience from Arezzo&Co, know-how, we -- know-how is knowing how to do things. And this, Reserva has and Arezzo has in terms of B2B. And these, we're going to be very complementary to each other.

[Aline Penna, executive]

And now the novel -- the new tool from Reserva means 37% of their sales through omnichannel as of September 2020. So it's important to bring all the expertise from Reserva to -- as we showed you in the beginning of the presentation.

And then there's the presence. Today, Reserva has a national presence, especially in Rio de Janeiro, that's where they were born, and in São Paulo. So our idea is also to open more franchises and expand the presence throughout Brazil in different regions.

We already showed you this slide as well. Then through the brands and the different categories for each brand, we want to increase our addressable market by 3.5x in terms of the shoes and women's bags market. And now with this 3.5 growth with the addressable market, we have a much higher potential for growth, and we will be able to leverage our presence in all of these categories shown in the slide, so apparel, accessories, children's apparel, women's and, of course, men's apparel. And lastly, on the side here, we will continue looking at new markets, secondhand. This is totally connected to sustainability and also the connection with start-ups that we will start developing next year.

Well, here are the details of the transaction, just recapping. We acquired 100% of all the shares from the Reserva Group. The amount is BRL 715 million, and the shares represent 8.7% of the shares of Arezzo&Co. The partners from Reserva will continue working with us with a noncompete agreement, and the next steps are highlighted here.

We are planning the integration process. We are just waiting for the final approval that should be -- should be here end of the month, maybe December. We will need the strategy to support us during the process. And as of November, as of Wednesday, we will have the AGE to be realized on November 27. And the budget process for 2021 will be developed together in December.

[Alexandre Birman, executive]

Actually, 6 hands, because we will also have a consulting company supporting Arezzo&Co's, and they've been supporting us since 2014. Falconi is the consulting firm for these budget process -- budget planning process.

[Aline Penna, executive]

And Reserva has a very strong relevance in terms of strategy with a very important talent pool, ESG capabilities that we will still present to you.

[Alexandre Birman, executive]

This is the company that was borne from the essence with their [ WMS ] automated water supply to all of their stores. And like I said, we will add even more value to Arezzo&Co with all of this expertise.

[Aline Penna, executive]

And then our Investors Day is going to be in the beginning of December. This has already been approved, and we will be able to open and talk about the strategies for Reserva with all the founders from Reserva. Today, our partner and friend, Rony Meisler, and I'm sure that this is going to be a great and memorable Investors Day.

[Alexandre Birman, executive]

So great. Now we would like to open our Q&A session. It's going to be a pleasure to interact with you. Aline is here to mediate -- to moderate the chat, and Aline is going to read a question. And I or Rafael will answer your questions.

[Aline Penna, executive]

This question is from [indiscernible]. What is your expectation for the fourth quarter of 2020 and 2021, resuming the marketing campaigns like the BriZZa line and which seems to be a great success from the start?

[Alexandre Birman, executive]

[ Daniela ], thank you very much for your question. Our expectation are extremely positive. As we showed here, 1 month of the 3 of the fourth quarter showed very impressive results. We're almost in the middle of November, and we already also had very positive results. We have 45 days to end the year. We're in the half of the fourth quarter with results -- we're not going to give figures, but they will be very encouraging showing our resilience. And if CADE rules will include Reserva's results, so it will be very strong.

[Aline Penna, executive]

The next question from [ Daniela ] is, what is the gross margin trend from now on by channel with the increase of e-commerce and the strategy that will be adopted by sales?

[Rafael Sachete, executive]

Thank you, [ Daniela ]. The gross margin looking forward and the impacts that we saw in the web margin, a little bit lower, tend to adjust the curve, bringing it to a level closer to what we saw in 2019. Possibly the month of November, we will still have the effects of Black Friday. So it's important to acknowledge that, and the mix of the web channel with the comparison base tends to be higher. So we will have an increase there for 2021. For the fourth quarter, it's flat.

[Alexandre Birman, executive]

If we could include the results of Reserve, which has a huge percentage of sales from owned stores, we will have a significant gain in gross margin. And it's worth mentioning that the pandemic, although it's still there, we understand that the moment of lockdown was the only time that could have adjusted EBITDA, which was the second quarter of 2020. Since July, which is part of the third quarter, the results showed here, although all of you read, just another disclaimer, it doesn't have any kind of adjustment in our inventory and gross margin. EBITDA is 100% actual.

[Rafael Sachete, executive]

Yes, Alexandre. And looking forward, this gross margin, slightly lower in the U.S., should be recurrent because of the effect of the restructuring. If the exchange rate continues at the same level or up to fourth, maybe we can adjust that and not have this negative effect forward in terms of what -- building and in terms of product and in proving our position.

In the U.S., there's a huge growth in B2B. Our wholesale in the U.S. operations for the second quarter, our strategy is to reduce our exposure with owned stores so that also -- in terms of mix of channels, we're not going to open the -- per channel, the figures. But there's also this effect that has a higher percentage in the total sales. So that also consolidates, and the gross margin reduces. It's not that we reduced our initial margin. We just reduced the owned stores.

[Aline Penna, executive]

The next question is from Olivia Petronilho from JPMorgan. If we look at the operations in the U.S., the margin reduction was very relevant. How much of that is structural? Can we consider that a new starting point for the next quarters?

[Alexandre Birman, executive]

Thank you for your question. It's a pleasure to be here talking to you on this important topic. I'm happy for having here in Brazil -- during this week, have Fernando Caligaris, leader of our U.S. operations, to say that, yes, these are the basis that we will have as the new level of the profitability in the U.S. operations. The greatest cause for this change, this turnaround in the results, was closing of our brick-and-mortar stores, which we're in a maturing curve. But we understand that due to this new normal, it didn't make sense to have that channel. And also, we readjusted our fixed costs to a much different level, including taking important actions.

One of the reasons of Caligaris being here is that we put the entire back office of the operation that in the past were on Madison Avenue with expenses in U.S. dollars to [indiscernible] with salaries in BRLs. So this migration in technology and management was important for the U.S. operation, and now it's being done from Brazil. This helped this new level of expenses. And from now on, the results that we will have with the growth in revenue will be almost converted to improve profitability.

[Aline Penna, executive]

Another question from Olivia is about Brazil. We know that it's still early to talk about economic -- the ZZMALL. But what is your strategy for this platform in terms of profitability? Will it be similar to other marketplaces? And if you could talk about investments?

[Alexandre Birman, executive]

First, it's worth mentioning that our e-commerce is considered the e-commerce operation with the best bottom line that there is. We have a level of expenses in marketing and logistics over revenue that is very low. I'd like to -- a full margin makes us to have a very good profitability from the web commerce, which will help us to increase our ZZMALL. So it will be similar to what we have today with a great marketplace that operate -- focusing on B/C social classes. And this is agreed with our partners. And the kickoff of our 3P that already has dozens of brands, you will be able to see this on the 19th. It doesn't have the presence of brick-and-mortar stores. So it's not a marketplace of small retailers using our platform, this first initial step. Our brands, some are still small, others that are well established, the app is there for you to download. So it's a 3P operations that has brands being sold at -- it's different from putting a small multibrand and open to new sellers.

So our goal here, I'm going to talk about that before talking about the financials, has been a completely different experience for the consumers with the brand partnership. And also about the investment, the technology part, the beginning of the technology part, because it's not that you invest in technology like you invest in a building and it's there. Technology is an ongoing investment. But the first part, to make it operate, in effect, the investments in technology will continue and obviously will show in our financial statements as CapEx. And the expenses today, we have a team to be hired, but it's still small. At the beginning, that is dedicated fully to the operation of ZZMALL, and it will be -- the highest investment that we will have will be that, and our profitability will be directly proportional to our increase of traffic and marketing.

So the greatest expense investments that we have on ZZMALL is marketing. And I don't want to talk about the novelty of the ZZMALL. But on the 19th, we will start, and I invite you all to be at the conference, and we will have a very strong communication strategy, bringing not just the brands, 3P and 1P to ZZMALL, but also the full operation of a new segment of the economy that will already be there on the 19th. So it's an investment in marketing.

And in terms of profitability, we will be aiming at breakeven, so we can invest all the margin in marketing. That's our goal with -- in a broad way. And Aline will go deeper in numbers.

[Aline Penna, executive]

The next question is from Irma. The first one is, when you look at 2021, what are your 2 top priorities?

[Alexandre Birman, executive]

Perfect, Irma. Thank you very much for your question. That's why I said at the beginning of our call that the best part of our earnings release is this communication with you guys. So my key priority is integrating Reserva Group and consolidating with Rony our AR&Co as the best company. It has the best team, so it's the best fashion brand in Brazil. And obviously, continuing the process of digitalization of Arezzo&Co, including AR&Co, focusing on ZZMALL. Those are the 2 top priorities for 2021.

[Aline Penna, executive]

The second question from Irma is, what is your vision about the difference of the recent reforms, makeovers of Schutz and Arezzo?

[Alexandre Birman, executive]

Thank you for your question, Irma. I would like to highlight something that was not 100% explored in the presentation, but I would like to make clear. May 15 marked the milestone of launching one. And when we told our franchise network that we would break down our launchings in 11 launchings every 2 weeks, and if I show you the chart, the bar chart, 60,000 pairs, this was a ramp-up throughout the collections that were launched due obviously to the opening of the stores, but also because of the growth and with bestseller products, icons, that became a reality throughout this journey, this vulcanized sneakers that are called ZZ Play and several other highlights.

And why am I mentioning this ramp-up, gradual ramp-up to talk about timing? We delivered until collection 7 almost 100%. Collection 8, 9 and 10, we're delivering now during November and beginning of December. So why am I saying this? Arezzo brand has most of its revenue, about 65%, coming from the sell-in conducted to the franchisees. So Arezzo, in terms of e-commerce and brick-and-mortar stores, with previous inventory, result very similar to Schutz. However, their revenue, the chart that we show, is highly impacted, but not having a percentage like we had before for the sell-in to the franchisee, which is adjusted with the revenues that we are having in October, as we've shown, and November, so rebalancing this percentage of growth for Arezzo brand.

I'm sorry if I went too deep, but it's important to make clear why the Arezzo brand has that difference. The numbers there don't translate the reality of the brands because we have this timing issue of the sell-in to the franchises.

[Aline Penna, executive]

We don't have any further questions.

[Alexandre Birman, executive]

So I would like to thank everyone for participating.

And now, next slide, with our closing comments, looking back at these past 60 minutes with a very positive performance of the third quarter and even better expectation for the fourth quarter. And I would deeply like to thank our team for the passion and commitment; for the American operations of positive EBITDA with a very assertive strategy, the launching of ZZMALL at November 19, at the live mall, we have celebrities, I'm not going to give any more tips; the launching of BriZZa as a new category and almost a new brand of Arezzo&Co; and a message that we -- in a market we didn't have a presence yet that has a very expressive market in Brazil; at the beginning or the great start of consolidating the fashion -- A/B fashion market by incorporating not the Reserva Group, but the Reserva spirit that brings, in addition to its tangible assets, also a very valuable intangible asset, which are people, Reserva team that we received with open arms here at Arezzo&Co.

Thank you very much. We close our last call of 2020, and we hope you all be part of our Arezzo Day. And it will be the first for Reserva and our tenth year of being a listed company. And let's go to 2154. So let's do this. Thank you.