Arezzo Industria e Comercio SA

BOVESPA:ARZZ3

Earnings Call Analysis

Solid Growth and Improved EBITDA Margins

The company reported robust earnings with revenues growing 12.7% in 3Q '23, consistent with a 47% base in 2022. Notably, Arezzo brand grew over 10%, while AR&Co and Anacapri expanded by 25%, 23%, and 21%, respectively. Growth was fueled by a 22% increase in owned stores and 18% in web commerce. Despite not accruing PIS and COFINS on ICMS, gross margin performance remained strong. Expense control was effective, with costs rising only 2.7% against inflation of 4%, contributing to a 230 basis points EBITDA margin improvement to 17.8%. Continuing the trend, working capital efficiencies are expected, with a 25% capex cut and an objective to enhance ROIC, which showed a robust 25.8% recurring rate. Debt stands at BRL 644 million, but the outlook for cash flow remains optimistic due to increases in EBITDA and net income.

Strategic Achievements and Future Readiness

The company has shown robust results in the third quarter of 2023, underpinned by strategic objectives such as operating efficiency and full price sales focus. By successfully managing inventories and working capital over 50 years, the brand portfolio, comprising both famous local and international names, has furnished the company with strong top-of-mind awareness and an ability to surpass quarterly expectations consistently.

Promising Revenue Growth and Operational Leverage

A revenue jump of 12.7% over a strong comparison base from the previous year and a total of BRL 1.6 billion for the quarter reflect the company's stable revenue level. Looking forward, the expectation is to maintain this momentum with double-digit growth projected for the early months of 2024. This growth is further bolstered by excellent operating performance across the production and distribution chain, leading to high sales efficiency and operating leverage.

Brand Performance Breakdown

Diverse brand performances include Arezzo's revenue of BRL 419 million for the quarter, the Schutz brand's BRL 301 million global revenue with a marked improvement in full price sales, the Anacapri brand's rebound with over 20% growth, and the Alexandre Birman brand, which is set to exceed BRL 300 million in 2023, showcasing an impressive fourfold growth over the past three years.

Digital Sales and Channel Dynamics

Digital sales continue to be a high-profitability arena with effective marketing expense management and logistics efficiencies. The company's robust network of over 750 franchise stores, dedicates efforts to maintain a close relationship with franchisees. The multibrand channel also contributed positively based on a healthy basis. Growth was supported by an active customer base focus, reflecting efficient cost of acquisition and churn management.

Financial Highlights and Expense Management

The company achieved a growth of 12.7% with a gross margin increase despite no crediting of certain taxes. Fixed expenses grew by just 2.7% against inflation of 4%. EBITDA showed substantial growth, achieving 17.8% on a recurring basis, contributing to a robust 230 basis point increase in EBITDA margin. Working capital management showed a trend of improvement with inventory days and accounts payable efficiency highlighted. Recurring ROIC reached 25.8%, and a decrease in CapEx by 25% was noted year-over-year. Total debt stands at BRL 644 million for the quarter.

Healthy Volume Growth and Pricing Strategy

The volume recovery stands tall as the company sees healthy growth in sales at full price, countering concerns about decreased volume. With transparency in reporting average ticket and value, confidence in the company's pricing strategy and customer-centric approach is affirmed. Both Arezzo and Schutz brands are performing well, with each catering to distinct audiences and maintaining their respective market positions without negatively impacting each other.

Earnings Call Transcript 2023-Q3

[Alexandre Birman, executive]

Good morning. Thank you for participating in our conference call for the results for 3Q '23. I have with me Rafael Sachete, our CFO; and our Investor Relations Manager, Vicky Machado.

This is our 52nd call that I have the pleasure of spearheading, and I'm going to give you the highlights of the 52 calls, and 49 with growth. So this is always a very important moment for us being able to interact with all of you. It's very rich. So thank you once again for participating, and we are at your disposal for this interaction.

In 3Q '23, highlights the results that are a result of our strategic objectives and focusing on operating efficiency, having healthy growth, especially with a lot of attention to full price sales, lowering our inventory, and consequently improving our working capital that we do still have to evolve. And the foundation of all our work is our sell-in and sell-out calendar.

So it's that locomotive that we have executed precisely for the past 20 years, showing us the agility in market trends, adapting our products, making the best decisions, and consequently growing our sales.

Our brands are our major strength. They are top of mind in their market niches. These brands currently have high awareness all over Brazil and even internationally. And that's what makes this company being able to exceed every single quarter in its results during these 50 years. And what really makes that happen is our culture. So our culture comes from our passion, our engagement and agility, even in the most difficult times, as it's put into practice and bringing on fast changes in our paths and always finding the best path.

We're very much ready for that final stretch of 2023, a very challenging year for everyone. We've already started the launch for high summer. It's our biggest, and exceptional results these last couple of days. So now we're going to focus on the calendar. We're going to take the foot off the gas in Black Friday. We'll have lower promotional events, and just make it very close to the end of November. And then completely focusing on Christmas sales, and we know that's going to be a hit.

Moving on to our presentation. One moment, please. So we'll talk about the highlights. Among the highlights, we're going to talk about performance of brands and channels. Rafael Sachete will talk about the financial highlights. And we'll leave a lot of time today for Q&A. I can see that we're already seeing these questions coming in. That's very important for us.

I'm not going to talk about the attachments for the brands. I recommend you look into that later. We're giving you a lot of explanations about each brand and main activities and the marketing plans. So you'll really enjoy that content.

So we had growth of 12.7% based on the 47.3% compared to 3Q '21. So very organic. And most of our results in 2023 is based on the 2022 growth, solid growth, achieving the mark of BRL 1.6 billion in the quarter. That is equal to approximately BRL 530 million per month. Shows that the company is stable in that revenue level, and the company has consistently led to operating leverage. And that's where the company has excellent efficiency in managing its expenses as well as operating performance of the entire production and distribution chain and sales at the end that is very healthy.

We hadn't -- we're excellent in coming out of the winter collection. So in July, August, September, July is transition. Leaving winter and going into cruise collection, we had full price sales in July, much higher than what was ascertained in July 2022. And the summer collection, August, September, up to the end of October.

As of that point, in August, we intensely launched -- it even seems like it was a year ago, but it was actually on August 7, we had the pleasure of having a major event for the Arezzo brand with the presence of Gisele Bundchen. So they're awareness events that at the end lead into sales results.

About the 9 months of '23, we achieved BRL 4 billion in revenues, so year-to-date, 19%. And we can say that based on LTM, we reached the mark of BRL 6 billion in revenue. As I mentioned, the BRL 530 million per month on average, that's what we expect in growth, greater than 2 digits for the beginning of 2024.

So here are some of the highlights of our brands. I'll go in deeper into them now. So about the revenue breakdown. We had a recurring base of customers and a growth of 9% in total transactions of taxpayer numbers that bought our -- from our brands this quarter, very high, 5.5 million people. Full price sales much higher than markdown sales, that led to efficiency in gross margin. And that has reflected in an improvement in our performance of our EBITDA. That was BRL 218 million on a recurring basis, and with a very healthy increase.

Net income, BRL 107 million. And given some accounting aspects, it was reported as BRL 114 million, and Rafael will go into that. As a result of that, since our [indiscernible] like to look at our ROIC internally. As the variable compensation of our executives, ROIC is as important as the net income. Now into our brands and channels. Arezzo brand to date is a synonym of women's shoes and bags in Brazil. So our share in growth in Arezzo, when you see BRL 419 million in the quarter, which is growth based on a very strong number from 2022.

The Schutz brand with its global revenues of BRL 301 million. The Schutz brand is going through a moment where it's improving its full price performance even more, especially in the e-commerce channel. In 2022, Schutz was affected by off-price sales, a large volume of that. And that was the strategy of the company. So we have efficiency of gross margin and consequently reducing markdown sales. And the e-commerce for Schutz had the highest impact in that small sales reduction that the brand had in Brazil.

Anacapri brand, since mid-2022 when we quickly adapted to a new trend of -- even though it's only flat, being more premium and a little bit highs or heels and flat forms, we talked a lot about that in 2022 where Anacapri was the only one that had a lower pace of growth compared to the other shoe brands. And now it's been consequently growing over 20%.

Alexandre Birman brand had a very expressive growth. It's going to exceed its BRL 300 million in 2023. And our Apparel business, we'd like to congratulate all the leaders that do beautiful work with high market share in men's apparel with consistent growth. A company in a business that will be close to BRL 1.5 billion in growth, pretty much 4-fold compared to the past 3 years.

A little more details of our digital sales. So as I mentioned, e-commerce sales for us, it's not an outflow channel. It's about high profitability where our marketing expenses are very well managed, the logistics efficiencies constantly growing the number of sales that are generated by e-commerce and delivered or picked up at our brick-and-mortar stores lowering the shipping costs. So we have a very high volume in e-commerce.

In addition to the growth of same-store store sales in brick-and-mortar stores led to strong sales results in sell-out of the monobrand channel.

Now about the franchises. We have a solid network of franchises, over 750 stores. A franchise channel that was pretty much invented back in the '90s for the Fashion segment, we have the resilience, and we are very close to our franchisees. On November 21 -- on the week of November 21, we'll welcome our biggest franchisees to launch our 2024 winter collection. So we're very happy with their performance in general.

And the multibrand channel, which is pretty much the origin of our business when it was created back by Arezzo in the '70s and then improved in the '90s, we also have a close relationship with them even though it's more spread out. We had growth results also based on a healthy basis.

And about our tools, our digital tools and the continuous process of evolution, especially regarding the connection that sales people have with the customer -- with our customers that was created during the pandemic, and our concern during all the years in growing the normal traffic in stores is that we didn't want to forget these tools or abandon these tools. So there was a lot of work from the team to continue to use these digital tools. And you can see here the results that we're reaping in that. It's been very efficient in that connection -- in omnichannel connection in our customers' experience.

About the active customer base. This is a KPI that we really analyze. We always want efficiency in the cost of acquisition. So we want to lower our churn. Our share in terms of taxpayer number is very encompassing, and we have a dedicated team that does excellent work in this journey with our customers. Those are the main highlights about the overall performance of the company, about our main brands and channels.

Now I'd like to ask Rafael Sachete to talk about our financial highlights. Over to you, Rafael.

[Rafael Sachete, executive]

Alexandre, thank you. Good morning to everyone. Thank you for being here with us during our earnings call. I'll start off with revenues and on the left of the slide.

So consistency of growth in 3Q '23 with a relevant base of comparison in 2022. So 47% base, and we achieved 12.7% growth. And here in the highlight, the consistency of the Arezzo brand, over 10% growth. I'd like to remind you, in the second quarter, the growth was over 20%. And also relevant highlight for AR&Co brand and Anacapri that achieved 25%, 23% and 21% growth. So these brands are very solid and consistent in the past quarters.

Now moving on to the channels mix. I'd like to highlight owned stores with 18% growth and -- actually 22% growth, and web commerce was 18% actually. So owned stores, it's worth noting that we've hired coming from the franchise group. So in that case, if we rule that out, it would be 18% growth in owned stores.

Highlight also for our chart on the right side, our pizza chart that breaks down each channel, reiterating our capacity of distribution, one of [indiscernible] and its model of distributing channel with a very well-divided pizza, and owned stores.

Now our financial statement. 12.7% growth, with gross margin and not accrediting of PIS and COFINS on ICMS in April for our companies, we still had excellent performance to impact positively a higher mix of owned brands channels with relevance to our markdown and more sales in full price.

Our expenses. From the beginning of the year, we've been commenting and informing our shareholders about review in our portfolio, reducing expenses, streamlining structures. And we delivered an important reduction of -- as in this semester, which reduces even more our fixed expenses. They only grew 2.7%, compared with the inflation of 4% and 12.7% growth. Our conversion for EBITDA had an important growth of 230 basis points, achieving 17.8% of EBITDA recurring in the period consolidated, as you can see.

Our ROIC and working capital, there's an important message here. That is a report for our working capital. Bringing a bit of the past history, from the beginning of the year, we had 8 additional days in inventory compared to last year. Second quarter already with some improvement with an increase of 4 days. And we reduced 2 inventory days compared year-over-year. Here, it's worth to mention our operations and taxes that increase. If we reduce that, we will have even more days of inventory.

And also accounts payable, in the past 2 quarters, we had a reduction in 19 days month over month. This quarter, we have efficiency of 5 days, so minus 14 days. And in the fourth quarter, we will have an important gain of resuming accounts payable days year-over-year. As to accounts receivable, we had a growth of 5 days due to policies, business policies, so we could reach our sell-in targets, which is important for our high summer sales. And we're now delivering to our stores.

About ROIC, we achieved 25.8% in recurring ROIC. And our vision for 2023 is new improvement in the index for the fourth quarter, and also in 2024, that will gain more efficiency in working capital, and also CapEx that had a 25% reduction this quarter year-over-year. Our indebtedness and cash position. Our debt is BRL 644 million this quarter. We had important payment in the fourth quarter -- third quarter. And our vision for the quarter is very significant. And we will generate operating cash impacted by EBITDA, net income, and important advances in our days of accounts payable. So these are main highlights finance.

Now we're going to open for Q&A. Thank you.

[Alexandre Birman, executive]

Thank you, Sachete, for your presentation, and congratulations for conducting our company so well in finance. Congratulations to your team.

Vicky, it would be great to have everyone here live. Since we have 300 participants in our video conference, you will tell us the questions and I will have the pleasure of having them from you.

[Victoria Machado, executive]

We're going to start with Luiz Guanais from BTG.

[Luiz Guanais, analyst]

I want to understand the recovery of volumes in shoes and handbags, how you see the space of repassing price at an average ticket?

[Unknown Executive]

Thank you, Luiz, for your question. First, I want to make a disclaimer that, in our earnings release, we discontinue the brand My Shoes. Only in the third quarter of 2023 had a sale of 255,000 pairs of shoes, and 0 in this quarter. So a reduction of 246,000 pairs in My Shoes alone. This is the strategy we announced in March, that we were going to focus on the AB class. We did this test that started at the end of 2020 of trying to penetrate in by minus-C class, and in that fight for price, it's not something that we decided to go into because it doesn't offer good gross margins.

So excluding the effect of our brands, we wouldn't have any drop in volume. I think that answers all the questions about volume. It's worth mentioning also that, as mentioned, we had a target of reducing our inventory. So reducing leftover and reduce sales and markdown. Our sales and markdown are the ones that generate more volume. For you to have an idea, we had growth in units on full price sales in the third quarter of 2023. So this concern that you are all expressing, and they're always very welcome, is not part of the company's concerns because we're having a very healthy growth and selling more at full price in our core brands.

About this topic also, I would like to thank all the comments about our results. I have to benchmark a luxury brand in the international segment. We don't intend to compare to large groups. They don't even report volumes. And other companies that are comparable to Arezzo&Co in Brazil don't disclose data on average ticket and value. But we always decided to be very transparent in our results, and I thank you again for your concern and say that we're very confident with our strategy, and we are gaining volume and sales at full price, which is our main goal.

[Victoria Machado, executive]

The next question is [indiscernible] from BBI. He says in this quarter we saw a gap between outperformance and that's the adjustment you did in pricing of Arezzo. I want to understand how you have seen the elasticity of the brand and how Arezzo is impacting the negative growth of Schutz?

[Unknown Executive]

Thank you for your question. When we presented results of our brands, we show the consolidated of the brand. We don't open brand per channel. As I mentioned in my opening comments, the decrease in Schutz was e-commerce, and it was deliberate, to reduce the promotion activity on that channel and increase sales at full price. And also due to the monobrand store calendar.

So comparing Schutz and Arezzo, there was a strategic movement already happening at Schutz for some time, that is going through this improvement in filtering the customer profile online. And that's a very important process in the long term, to maintain the desirability of Schutz.

As of price, both brands have very healthy coefficient among them. So an average ticket, Arezzo operates at BRL 309, and Schutz BRL 590. Arezzo went from BRL 290 to BRL 349. So I still have a very important distance between the 2 price points. And there was a third part of the question.

[Victoria Machado, executive]

Is Arezzo impacting Schutz negatively?

[Unknown Executive]

No, it's different audiences, different legacies. We have Vicenza now, which we acquired 4 large market share and increased even more our penetration in the multi-brand channel. It's a very desired brand with low penetration. The growth has been impressive, and also Anacapri. Arezzo&Co is a platform of brands, and we have to look at the consolidated and how much we gained in market share. That's our business model, which is the efficient management of these brands and also managing the channels leading the sales to multi-brand channel and in mono-brand, be it brick-and-mortar or digital, Arezzo&Co had an exceptional performance as well in all channels.

[Victoria Machado, executive]

He said, about working capital. Could you comment what is the dynamic? And in the second half, if there will be a normalization? Do you still see the suppliers fragile? And how should we have an improvement in that dynamic? And also accounts payable?

[Unknown Executive]

Thank you for the question. Excellent point.

And just reiterating the message, in the first quarter, it was deliberate and supporting -- we supported some of our supplies at the beginning of the year when we had a much more complex landscape, both inside and outside of Brazil with very high interest rates.

So the answer to your question, we would go back to the accounts payables time in the third and fourth quarter. So rate have already went back to normal in the third quarter. You will see this in the fourth quarter as well. And you will see this in the results of next year, but they already are in our balance sheet, compared to 2021 and 2022. So we will have an important cash generation coming from that channel.

About account receivable, as I mentioned, we had an increase of 5 days compared to last year due to negotiation with our brands, supporting the franchisees with a very important sell-in in our summer collection, in which we supply our stores, both monobrand and multibrand, for Christmas sales.

And we were very aggressive with important cash control to understand limits of managing our working capital to bring these days and have an excellent Christmas both in our owned stores and also franchisees and multi-brand, achieving excellent sell-out. So the expectations for the end of the year is to balance accounts receivable and get it very close to the -- what we had in 2022.

[Victoria Machado, executive]

Next question is from [indiscernible] from Safra.

[Unknown Analyst]

So the number of multi-brands for reserve is increasing year-over-year -- is dropping year-over-year. And the company has -- increasing the number of channels in the Arezzo brand. Would that be an effect of the maturity of new customers? And would you have space to increase share of wallet? Or have they been buying less?

[Unknown Executive]

Thank you, for your question. So about the second part. In 2020, with the change in how we sell in the multibrand channel, with having digital with a huge relevance, we were able to achieve impact many more points of sale than what we did in the past, because the sales were in person, in regional showrooms. So that was one of the things that we gained from the pandemic, and we changed the Arezzo&Co dynamic.

So about the number of points of sale, we did grow a lot in the past 2 years. And we believe that to preserve the brand desire, that distribution is already at a healthy level. And we're not planning on opening new points of sale for growth. So about performance in terms of share of wallet, so selling to the same customer, same-store sell-in in the multi-brand channel, we don't -- didn't see Arezzo, right? It was 0 distribution. And if we sold 1,000 -- but obviously, if I go 10%, it's going to be 1,100. So my base is higher in same-store sell-in because they already have a very high distribution level. So that should go to the level of what we have in the franchise channel for same-store sell-in.

And it's worth noting that during the quarters, there's a seasonality in delivering the orders. We launched a number of different collections per year, and occasionally, like high sales, summer, for instance, may be stronger in September, changing the dynamics in October. And we always have to look at same-store sell-in based on the LTM.

So about the Reserva brand. The Reserva brand had very strong growth, as you can see. The growth is very healthy compared to products -- or about their products. A lot of care always so that we don't have excess use of the brand. Always bringing in very noble products for the Reserva brands.

And we've seen this phenomenon in the past with brands with very much capital distribution in multi-brand and they lose brand desire. So these are deliberate and proactive decisions of Arezzo&Co leadership to preserve the brand desire for Reserva. But even so, we had 3% growth in this quarter.

And it's not a channel that we just exist here today. It's a space for distribution. So I can say that we have a sales management system in multi-brand that's very much advanced. We have the digitization of the channel that really makes the difference. And consequently, we make decisions based on what's best for the business in the long term. So brand, we had expressive growth of 20% to 25% that's recurring in the past 2 years. And now going into high single-digit levels, and that should be what the channel will operate in the future, in a very healthy way for our company.

[Victoria Machado, executive]

Next question is from Joao from Citi. He says, sell-in is much lower than sell-out. In my opinion, that's a way to improve sell-in and customers buy more. Is that correct? How should we consider that?

[Unknown Executive]

Well, perfect. In 2022, we had much higher growth than expected, and the supply chain dating back to end of 2021 had to be adjusted. So the base for comparison, if we look at 3Q and 4Q of 2022, is coming from very strong growth from 2021, and also because of the backstock from 2021 delivery. And we always have to look at the growth for the last 12 months, Joao. So we expect always a balance in the sell-out and sell-in sales.

So since October, we had a growth that was greater than 2 digits in sell-out. And sell-in has been following that pace. We have strong deliveries in November. It's the highest sell-in month for the company. And we expect to conclude all the Christmas deliveries by the first week of December.

So it's not about looking at each quarter. You have to look at LTM to understand that. And the purchases are done -- are made in advance. Even though the lead time is 60 days, all sales that will be built in 4Q '23 were sold in August and September actually. So we shouldn't have any big surprises in that channel. And we'll end December 31 of '23 in an annualized base of a difference between sell-in and sell-out same-store sales close to 0.

[Victoria Machado, executive]

Thank you, Alexandre. Next question is from Danni from XP. So Danni is asking, about the Schutz performance in Brazil, how can we consider that? We've seen some changes after Milena left and [indiscernible] took over?

[Unknown Executive]

Thank you for your question, Danni. I'd like to publicly thank Milena for her work during these years that she was a part of our group of employees. In 2022, we had very strong growth of Schutz, especially with the distribution in multi-brand and e-commerce. In 2023, we focused on operating efficiency, and that's what we informed. And it's worth noting, just on a side bar, the excellent performance of increasing gross margin and operating leverage of our EBITDA. And that should remain consistent not only for the fourth quarter but also for 2024.

Within that agenda, we've seen an opportunity, regardless of how hard it would be when we have high-performance culture, is to unify the executives with an agenda of operating efficiency. And internal benchmarks are always great to have. We've always used the basis of comparisons between brands, channels and distribution, and distribution of each brand in each channel. And here, we saw an opportunity of using that internal knowledge to maintain healthy growth of Schutz in the long term.

In the short term, that trend should be closer to lower growth than Arezzo may have been. But in the fourth quarter, the brand has started well for October and November. We'll have growth in 4Q, so -- for the brand. Therefore, I don't see that as a point of attention. But instead, it's a result of decisions and deliberations of the company for the 2023 planning.

[Victoria Machado, executive]

Still from Danni. She'd like an explanation about the volumes in Reserva?

[Unknown Executive]

Well, when we look at AR&Co, the way we look at the results, or break down the results, is a result of all the brands in there. So Reserva is the main one. But there's a high growth for the Oficina brand. And even though in the initial stages we already have the growth in terms of price points [indiscernible] brands. So it's hard to calculate what a Reserva brand is when you look at the total for AR&Co.

But about the Reserva brand data, it has high price stability across 2023, even considering the inflation that we've had in all sectors of the economy. So what we have for 2024, and the -- we've already sold for winter, products are being produced. And obviously, when you look at a brand price, you have to compare like for like, right, in terms of product. So main products of Reserva that are T-shirts and polo shirt, they don't have a price increase. But in some point, like in winter, like jackets, they've been highlighted, we can highlight them, that was the case in 2023, where the average ticket price would increase. But it does have huge price diversity. And our assumption is that prices can't scare off customers. So Reserva delivers an exceptional value for money equation and the work that we do -- that's where you see all the work we do.

[Victoria Machado, executive]

Next question is from Pedro from Bradesco. Pedro is asking about gross margin. So there's a positive highlight for the quarter. It would be nice if we can understand better what has leveraged that in the channel? And also about full price, what about the fourth quarter? Is the appetite at the end still healthy? And if markdowns are low.

[Unknown Executive]

Pedro, thank you for your question. I'll start off with the second part of it. We started the month of October and that equation is better than what was found in 3Q '22. Last year, we had a pretty hectic period with the presidential elections, World Cup, a moment that was completely different from history. And that [indiscernible] has sales, more markdowns than what we wanted. And now on 2023, that's stable full price, strong growth. And today, I was even thinking that we should have same-store sales full price open because the numbers are very positive. And that trend should continue, while we continue to work in the assertiveness of collections and new inventories and lowering the markdowns -- less markdowns.

And as I mentioned, in November, you see many companies that are going into Black Friday already. And we've seen promotions. We're going to do ours in the last month of November. In the first days of the month, we already -- we still have much higher full price sales than what we found in 2022. And what else?

[Victoria Machado, executive]

About gross margin?

[Unknown Executive]

Our gross margin regarding sell-in, it's pretty much the same. So we know that our pricing system comes from products. And we consider the best value perceived per product. And then we do reverse engineering. So that product to be sold at BRL 349, what are the raw materials that it should be made from? What's the production process? And in sewing, that's where we have more -- higher labor costs. And the markup from B2B is the same.

So the gross margin variations are a lot about sell-out. And obviously, the channels mix that could interfere in the consolidated margin of Arezzo&Co. So the 54% level -- sorry, I was taking my kids to school, she loves finance. And she's like 58.3% from our figures, is that good? But I'm like 55% is ideal. So I was telling my daughter about that. And achieving that in Brazil, and that's the range that we're going to operate on. We can always improve that. So 5 percentage points to improve our range and our channel. And it's going to be 53.8%, 60% and -- or the consolidated for the company.

[Victoria Machado, executive]

So Pedro has another one about store openings. So he says, the company has reinforced openings for 2023. That suggests a fourth quarter with an increase in sales space. Could you give us more information about that agenda and the brands that are priority?

[Unknown Executive]

You're right. When you look at the snapshot of the 9 months, it's really hard to believe that we'll achieve guidance. And that situation is a result of the tense beginning of the year with a lot of uncertainties regarding interest rates. And franchisees need capital to open operations, right, be it own capital or third-party capital. So that was very difficult in the beginning of the year. And a lot of work from our team and being part of the ABF trade show that was in July this year, so we could increase the number of leads.

And based on that, it was really face-to-face work. So you see the difference than what we saw in '21, '22 was through the franchise channel. And most of that we grew in the past years were owned stores, where we can actually deliver having the capital for that -- if we have the capital for that, and opening where we believe has a good -- would have a good return on employed capital. For 2023, most openings will be through franchises and mainly in the fourth quarter. And that shows the -- all the processes for the stores are ongoing, and we [indiscernible] change the range in guidance.

[Victoria Machado, executive]

The next question is from Vinicius from UBS. Can you comment about the financial health of the franchisee network, and the expectation of growing these channels?

[Unknown Executive]

Excellent point. In our performance of the franchisees, our indicators are very relevant that they are controlled every day per brand and business area by Luciana, which is our indicators of the sell-out and sell-in. And it has had a very good performance in the past 12 months -- past 24 months. And the last quarter, that comparison of sell-in, sell-out, is one of the indicators that we communicate with the performance of gross margin with less markdown and more full price, also happens in our franchisees. So they were -- had excellent performance.

The cycle of '21, '22 was very hard on all retailers. And the performance has been improving, the sales volume increased, and we started -- we're going to start the year of 2024 with controlled inventory, excellent sell-out performance, and a very solid network. And I think it's going to be a year of relevant growth achievement for all our channels.

[Victoria Machado, executive]

The next question is from Irma from Goldman Sachs. We would like to understand a bit better the growth in the United States of Schutz in the third quarter, and how are the outlook for 2024? So how are you thinking about the outlook for the international business going forward?

[Alexandre Birman, executive]

Good morning, Irma. Thank you for your question. Let's start talking about Schutz third quarter of 2023. It didn't show growth in sales, due especially to retraction in department store sales, which is a current reality. And I also believe that we'll continue in 2024 to the balance sheets communicated by the retailers and department stores, and also because of the inventory volumes they show.

So Schutz has excellent performance inside the stores where it is sold, especially at Nordstrom, with strong growth of online sales. And it has had a great performance, and other department stores. So the distributor channel and department stores and online commerce is lower than it was in the past, and this trend should continue.

E-commerce sales, which accounts for an important share of the Schutz, it was reduced in its markdown prices, with a strong impact on gross margin. And brick-and-mortar stores of Schutz, except for the store on Broadway, in May, has had a flat performance.

About profitability, I would like to highlight the Arezzo brand's performance that was launched officially in September at Macy's. And it shows the best financial performance, as we showed. And Arezzo has had exceptional performance. It's much higher than expected. The sales for the summer collection 2024 were beyond our expectations. So we're very happy with the performance of the Arezzo brand in the United States.

About profitability, we had a very challenging year for that brand, a side bar. We opened not only our international revenues, but also our financial performance of results of the last line of international operations. That's an important side bar that we always try to show. And in 2024, this number will get better, but that will be due to some of our decisions in the future and some locations in the U.S. that are ongoing.

And also distribution on monobrand stores, because they have been showing consistent negative performance. And we think that some locations don't make sense for premium awareness. And these decisions will be taken at the beginning of 2024, and they will be very positive for the results of our U.S. operations for next year. So we want to reduce local expenses, more work in the back office in Brazil, and reducing expenses, especially with the few monobrand stores.

[Victoria Machado, executive]

Thank you, Alexandre. Our next question is from Ruben from Santander. How do you see this beginning of the fourth quarter in terms of revenue? Can we consider something similar to what we had before?

[Unknown Executive]

Thank you, Ruben, for your question. Yes, October closed very much in line with what we had in the third quarter. The first days of November are very healthy. Full price sales and our expectation for the next days of the month, the way of sell-out in our revenue in November and December is very relevant. And we're very confident with all the strategies and also the supply that we did in those channels that we manage; the sales, owned stores and e-commerce, but also the purchases made by our franchisees and multi-brand partners. We believe we will have an excellent Christmas season in line with the growth that we had in the third quarter.We started well with our summer collections, providing excellent results.

[Victoria Machado, executive]

Thank you. The next question is from Vinicius. After another quarter of growth -- of strong growth of AR&Co, how do you see growth to be able to maintain that high level in the next months? And how is the competitiveness of Reserva & Co?

[Unknown Executive]

The competitive landscape puts us in a privileged position due to our hard work and what we were able to achieve in terms of brand awareness of growth brands and experience in monobrand channels, digital experience. To date, we do master the preference either for casual sneakers and Reserva in men's apparel.

About maintaining growth. We are much beyond what our business plan was expecting. It's very accretive for our business since 2019. So we're very confident that the help -- the growth of our AR growth goes beyond the numbers. It's a long-term strategy. So the number of stores opened, multi-brand of being chosen carefully. We have Reserva, also Oficina, and Vans. We have a base of about BRL 1.5 billion in 2023.

So in terms of percentage, the growth will be lower, but it will generate a good financial volume to increase our revenues and we did communicate that at every quarter. We know the full potential of Reserva. We acquired them in 2020, it was BRL 800,000 to BRL 1 billion. Now we already are beyond BRL 1.5 billion.

So the product categories that the brand offers, we're going to open in November. This is very important. It's not in our materials. I would like to invite you all to go to the first Reserva megastore at [indiscernible] Shopping. It's going to have 180 square meters with all the core labels distributed in the store. This might be the new format for the future of Reserva. So every year, we improve product category. As we speak, we're going to start our sunglasses line. So I can't define a percentage, around 2. We should maintain high teens for 2024, generating hundreds of growth of AR&Co.

[Victoria Machado, executive]

Here's another one. After a few months from these acquisitions of Paris Texas and Vicenza, how is your vision about new licenses agreements?

[Alexandre Birman, executive]

I'm going to start with the second part of your question. About licenses, we have in an open agenda. We have a team that is dedicated to the many offers of international brands that have Arezzo&Co as a good business for them to operate in a healthy way in Brazil. We have many analyses, but they have to follow some criteria that I mentioned. A brand that has to have very strong awareness all around the country and a business that can source in Brazil. We don't want to depend on long-term cycles of imports. And it has to have full potential, between BRL 300 million and BRL 500 million, to justify investing our time. It's a very open agenda. We have a lot of learnings with international groups. And we're always negotiating.

As about acquisitions. As we mentioned very explicitly in the second quarter 2023, I had the opportunity to attend some conferences, and we've put a lot of things in the parking lot and standby to focus on braiding efficiency. And with the results in the third and fourth quarters, this is what we're going to continue doing. We're going to wait for 2024 to start, and all the tax changes that Brazil will go through in the next month. So we have to focus internally on our efficiency.

About our learnings. We constantly learn. We have a very active PMI department. We have the capacity of do the right corrections in our systems and master our back-office operations, and taking the owners of the brands with creative freedom to position their brands.

Specific learnings, I could say, it's a business that penetrates categories that are close to our core. They require learnings in the supply chain. We also have a team dedicated to that. We have the opportunity of replicating the model of our core business in shoes, and verticalizing R&D and several other learnings. But I think that all the acquisitions that were done were very accretive. Baw already is showing excellent results in the third quarter, not only in revenue but also in profitability.

[Victoria Machado, executive]

Thanks, Alexandre. I have a last question for Sachete. I think you read all of them, yes. I have another topic to discuss with Sachete about indebtedness. What is your expectation of the company for the next quarters? if you could talk a little bit more about that?

[Rafael Sachete, executive]

Thank you for the question. About that, we really have to think about the company's balance sheet capability and our strong cash generation and confidence that we have for 4Q '24 -- no, '23 -- actually '23 and '24. But more relevant aspect in debt is 2024. So in that scenario, we have high confidence level in capability of paying those amounts.

We are, though, redefining that profile to extend part of that to 2025. But we'd like to reiterate our capacity and solidness of our balance sheet and building consistent results and cash generation in the next 4 quarters, where we should see that beginning in 4Q '23 and all of '24.

Easily explained by lowering inventory, increasing accounts payable from suppliers, and stabilization of accounts receivable, and lowering CapEx coefficient on top of the EBITDA percentage. We've always generated a lot of cash. That's our history. And the negative cash currently is the result of a number of acquisitions, and many were paid lump sum. So we're very confident of maintaining that level that we had in the third quarter, given absolute figures or as a coefficient of net debt over EBITDA, which we believe are healthy levels for the company.

[Victoria Machado, executive]

Those are your questions.

[Unknown Executive]

So I'd like to take this opportunity to, first of all, thank everyone, but also to invite you [indiscernible] at the end. It's pretty much almost a personal invitation, but I do -- it does have a strong connection to Alexandre Birman and Arezzo&Co. The day after tomorrow, our founder, Anderson Birman, my dear father, will launch his book of learnings, [indiscernible], and things about the 50 years since the foundation of Arezzo&Co. It's going to be a pleasure to have you there with us, at the [Travessa] Bookstore at the Iguatemi Mall, as of 5:00 p.m. So there we will have an area reserved for that, and I'm sure Anderson will be very happy to see you there.

And soon, in less than 30 days, on December 7, in the afternoon, we'll have our Investor Day, an annual agenda that we have since 2011. We're really counting on your presence. It's an excellent opportunity for us to present even more details of our planning for 2024, and the solid and mature way that we've been managing our business.

Thank you for participating. Have a great afternoon.

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