C&A Modas SA

BOVESPA:CEAB3

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon, and thank you for waiting. Welcome to C&A earnings conference call to announce the results of quarter 3 2022. We have here today with us Mr. Paulo Correa, CEO; and Mr. Milton Lucato, CFO; and Investor Relations team. We would like to inform that this call is being recorded and all participants will be in a listen-only mode during the company's presentation. [Operator Instructions]

Feel free to flip through the slides during the company's presentation. The replay will be available right after the call. Before proceeding, let me mention that any forward-looking statements that may be made during this conference call relative to the company's business prospects, projections, operating and financial targets are based on beliefs and premises of the company's management as well as information currently available to C&A. These forward-looking statements are no guarantee of performance, and they involve risks, uncertainties and premises since they refer to future events and therefore, depend on circumstances that may or may not occur.

Investors and analysts should understand that general conditions, industry conditions and other operating factors may affect the future results of C&A and may lead to results that differ materially from those expressed in said forward-looking statements. Now I would like to turn the conference over to Mr. Paulo Correa, CEO of C&A to start his presentation. Mr. Correa, you may proceed.

[Paulo Correa, executive]

Thank you. Good afternoon, everyone. I would like to start our call today with a brief recap of the first 3 years. We just completed 3 years since our IPO. We completed 3 years in October, that our IPO was in the end of October 2019. So we just completed 3 years. So I'd like to give you a brief recap of this journey and to put this into the current context, that we are living and the evolutions that we have seen so far.

So let's start with this context that we call the Fashion Tech strategy, which was about how we could use the existing C&A platform in terms of its brand customer base and store portfolio and also the retail management know-how that we had. This all combined with a group of professionals in different fields of expertise with a lot of experience and knowledge about the C&A business and the retail and fashion business.

So we understood that there was a very clear value construction, a very clear value proposition based on some elements that we named as our strategic levers. So our levers were expanding our brick-and-mortar stores. So increasing the number of stores, C&A has in Brazil. Also, the company's digital evolution was another lever.

The modernization and upgrade of our distribution models and supply chain and also recovering our capacity to offer credit to our customers and expanding our customer base by offering credit. These 4 levers demanded and still demand investments and concrete and consistent execution capacity. And unfortunately, in 2020 and 2021, so in the first 2 years after our IPO, there was an evident impact on our -- on the fashion business and the retail business due to COVID, and this led to several consequences in our operations.

And over that period, we validated our strategy. After all these modifications and all the external impacts we validated that, that strategy still made sense. And we came to a very clear conclusion that more than ever we needed to really focus on those 4 levers. We really invest and pursue those 4 levers in order to create value for the business. In the end of 2021 and during 2022, in the start of 2022, we were still seeing the impact of COVID and what we are seeing since the end of last year and the beginning of this year 2022, we saw some very relevant macroeconomic impacts regarding global liquidity high inflation and particularly as a consequence, an increase in the cost of capital and higher interest rates.

So considering our new capital structure, which was built after our IPO and was developed with the investments that we made along this journey. And of course, with the recent higher cost of money. Of course, this brought some impact to our operations, particularly when it comes to our financial expenses. And right now, we are at a moment that we have a lot of confidence, a lot of confidence in our strategy, in our execution capacity, our capacity to execute the strategy along this journey.

We're very confident about this capacity, but we're also being cautious in the short term because the short term requires higher cash protection so that in the near future, very near future, I would say, we can go back to accelerating the implementation of our growth plan considering the clear potential that it has.

So what has been guiding our actions are these 2 dimensions. First, the dimension of our execution and our capacity to capture the impact of the investments that we made in the past 2 years. And at the same time, we are aware of our strong management capacity in terms of our financial resources so that we can go through this journey in the best way possible, go through this moment of high interest rates that we're going through right now, but we can come back as quick as possible and very strongly after this passes.

So this search for better returns on investments has been one of our greatest focuses for our execution in the first half of 2022. And all the cash management measures that I talked about are also very present in the way we are operating in the past few quarters. And I would just like to give you some more clarity about what this is precisely. And the results that we are announcing today, they already demonstrate the first signs of these actions that were implemented and these transformations that we are seeing.

The first dimension is our profitability. Our gross margin is at a different level compared with what we had pre-IPO despite all the impacts despite all the macroeconomic effects that we said, this is the second consecutive quarter where we show a lot of strength in the increase in our gross margin at levels above those of 2019 prepandemic, and this tends to continue. We are seeing these changes happen due to the foundations and the investments that we made during this period.

For example, we have artificial intelligence tools supporting us in our pricing strategy, pricing management, our push-and-pull distribution model, which is now being implemented in part of our products. So these are capacities that we didn't have before in the past. So this dimension of the business profitability is starting to flourish. And we are starting to see C&A changing its level of profitability starting from when we started to capture the results of these investments.

At the same time, there's also the dimension of productivity optimization, optimizing our productivity. So we're seeing an increase in our sales per square meter. And at the same time, we are evolving in digital, particularly in our WhatsApp sales. And WhatsApp now is integrated in our brick-and-mortar store experience and this is what is allowing this productivity per square meter to increase in the 2 dimensions using these 2 distinct channels, our physical and our digital channels.

We really strive this year seeking better cost and expense efficiency. And this allowed us to reduce our structure, increase the efficiency and reduce the size of our structure including, for example, third-party services. This also ensures alignment with the projects that we have ongoing, making sure that these projects will truly generate the impact that we were planning for these projects when we define the investments for them.

If we consider that -- well, if we compare the numbers of our expenses last year, so the number of additional stores with the ramp-up that we are seeing with the start of this new credit business, C&A Pay, our expenses are going really well. So this is a very important third element in this equation that we're talking about building value for the company. We have implemented several initiatives to improve our working capital within this context that we're living right now.

So we have negotiated with our direct and indirect suppliers in terms of the payment terms, increasing the cash cycle, not just extending the payment terms but also working with our suppliers to optimize the receipt. For example, the minimum value for payment installments, we adopted a minimum value for payments installments in our brick-and-mortar stores. And right now, that trade-off between that extra 1% sales versus our capacity to bring this cash faster to the business.

This is a trade-off that we have been discussing, and we have actually seen a lot of evolution in the efficiency of our working capital. And the cash generation volume in this period also showed this really clearly. Also, we revisited our investment plan for this year. We reduced the number of openings planned for this year, and we redefined the scope of some projects as a whole to be executed by the end of the year.

Here also focusing on capturing all the impacts and projects and investments that we made in the past 2 years. This correction of our speed, which is something that we are executing really well and at a fairly good speed considering the quality of the team that we have and the level of experience of our team this reinforces our ambition for growth.

And this is just a one-off, a focal adjustment due to the macroeconomic scenario that we are going through right now. We continue with our fashion tax strategy close to the customer faster, more relevant, more personalized and more joyful, providing a better and better experience to our customers. We are reinforcing our cash positions, aiming not just to fulfill our obligations and the maturation in the first half of next year, but also continuing our strategic development, building value regardless and despite all the macroeconomic uncertainties that we are facing.

And we understand that despite all these setbacks, we are still able to execute both in terms of the dimension of implementing our initiatives and also capturing the impact at a very fast and consistent pace. On the next chart, we have some concrete evidence of this execution of our strategy. First, the gross margin, BRL 49.3 million nearly 5 points up since quarter 3 last year.

We know that a 5 bp increase is a very strong movement. And if we compare this with the pre-pandemic period, we are talking about 2 percentage points. So here, as I said, these are concrete captures of the projects and initiatives that we started in 2020 and now we're starting to reap the first results of this journey. The gross margin for merchandise and important driver for our total margin is 2 percentage points up year-over-year and 3.5% -- actually 3.5% year-over-year and 2.5% compared with 2019.

And this evolution in our margin allowed us to have an EBITDA 61% higher year-over-year. And with this increased EBITDA and with all these initiatives to optimize our expenses, our working capital and manage our investments this allowed for a cash generation of BRL 115 million in quarter 3. As I said before, I think this is a very concrete evidence of the evolution of our financial health.

And in the long term, we can foresee a very solid company with a lot of potential for growth and value creation through the strategic levers that we just described and on which we have been working on the past -- for the past 2 years. However, besides these financial results, we are also very happy and we're very proud for the recognition of our strategy in terms of building a sustainable path looking forward for the fashion business.

We are working to deliver our ESG 2030 goals. And last quarter, we had a clear evolution in our objective to promote circularity with several initiatives. One of them, for example, was awarded by MGM. Among all the industries, we had companies from all the industries, and we were awarded because we were able to bring items that were donated by our customers. These items were recycled together with leftover fabric, and they were turning to 20,000 new items that were shown and redisplayed in our physical stores.

So this is true circularity in our DNA, and we are turning this into a routine practice so this puts us ahead of any other competitor in the national fashion market. It's also important to talk about this element, which was the launch of a collab that we made, which was called identidades or identities in English. This was an initiative that made us so proud because we were able to combine our capacity and our entrepreneurship and development initiatives that are led by C&A institute and we combine that with our business.

In this collab, here, we have some images on the right side of this chart. These stylists that are on this chart -- they were accelerated by the institute. They developed products for our collection specifically. So once again, this shows how we understand and how we really in practice turn fashion into a force for the good. These initiatives also contribute for the development of national talent and allow us to promote a better diversity of propositions for our public.

And speaking of engagement, as we can see here on this chart, I would also like to show you on the next chart, we have our relationship program, [indiscernible] this has been one of the most relevant assets that we have in the past 3 years. because much more than just a relationship program, it is a platform, a platform that accelerates and develops channels, products and services. It's the concept of a platform per se.

Today, we have a growing customer base. You see that in the past 3 years, we more than doubled our base of customers with this relationship program. Today, we have more than 22 million registered customers in our loyalty program. And this concept of a platform starts to be applied as soon as you launch a program such as C&A Pay and you see the strength of your relation -- use the strength of your relationship program to preapprove customers for your new platforms C&A Pay to relate to these customers and to build a customer base very quickly.

So in less than one year, we already have 2 million people already with our new product, C&A Pay. So this is what makes this possible. another concrete event of this lever, and this is the beauty of having -- of being a true platform that you can truly accelerate and add strength to your channels, products and services, starting from your capacity to have to establish a relationship with so many customers in a very assertive and concrete manner.

This also serves as an infinite source of information and data. And this means to us that we have the possibility to build more personalized experiences and more relevant experiences for our customers. And this, of course, feeds back into our channels and all our products and services, generating even more relevance and this creates this virtual cycle.

Our ambition for this program is very high, and we know how valuable it is to engage and to let us know our customers better. The next chart, I want to once again highlight like we always do every quarter, we talk about the highlights and our advancements in terms of our growth levers. So first, let's talk of the expansion I mentioned. We opened 4 more stores in this quarter.

We also terminated 2 stores according to our portfolio management strategy, very consistent to what we have been doing. So we finished quarter 3 at 331 stores in total. And in quarter 4, we will focus more on the format that we call double door for the ACE brand. This has been a very interesting growth platform for our stores. We will open 10 more double door stores in quarter 4 for the ACE brand.

And the feedback and recognition that we're getting with our sports category, ACE, makes us really confident that we still have room to advance further in our double door concept. In digital, we continue to have the same share -- the same strength of our digital business within C&A as a whole. But as I said in our last conference call, now we're focusing more on the profitability of the digital channel.

This channel is seeing a higher and higher share of WhatsApp sales which generates a better, more assertive level of relationship with our customers. But we were also able to evolve greatly in our capacity to generate a higher level of efficiency in the cost of acquisition of our customers, the CAC. And we have also been able to optimize our shipping efficiency.

So our digital channel is now much healthier. Although the growth level this quarter was not that high, it is consistently contributing to our gross margin more and more significantly than it used to contribute in the past. And now we can say we have a healthier and stronger growth platform for the coming quarters.

The third lever is our supply chain model. We are already at 26% of our sales already under the push and pull model. Which clearly gives us better capacity and assertiveness in terms of our distribution, which, of course, ends up leading to better margins due to the lower pressure of markdowns, the lower need for markdowns, having the right place at the right time, having the right product at the right place at the right time, we have -- our stores that already have these technologies, 100% implemented.

And also in our dimension, distributing to our customers are D+2 deliveries are already covering 50% of our orders, and the same day or next day delivery in Sao Paulo and Rio is already over 1/3 of our orders. And this all also contemplates the optimization of our shipping costs. And last but not least, we are increasing our credit offer. As I said, we closed the quarter at nearly 2 million cards issued.

Right now, we are over BRL 2 million in October. And this also allows us increase the offer of other services, including insurance for the smartphone devices sold by C&A, which is a service that is very popular among our customers. So we are now expanding our portfolio of added products and related products related with this credit offer. So we are also expanding our product offer in this sense.

And I would like to finish my part of the presentation. Before I hand it over to Milton, I want to talk about foundations. Irrespective of the levers, we also continue to advance in some very important foundations of our business, particularly the products and collections. Our capacity to bring very relevant fashion trends to our customers at a very high speed is very consistent when we compare ourselves with the rest of the market.

This means that we are bringing a lot of freshness and energy and everything that we do and the collections that we offer and now we are advancing more and more in the mini collabs, collabs with smaller volumes so over this period, we have some of them illustrated here on this chart. We had a very unique collab, which was the [indiscernible] Portuguese we had some black artists pictured here in this campaign, some classic characters of Marvel.

We also had Children's Day a collab that we did with [indiscernible], very beautiful, truly unique. We had a very positive response from our customers. We also had a collection with Duda Beat. This was together with our launch for Rock in Rio. So this was an attempt to bring the dimension of fashion together with music very correlated. We also had the collection Sertão Encantado, which allowed us to add some regionality and resilient diversity, bringing assets from the Northeast with a lot of color, a lot of joy in our items in our collection.

We also had our traditional Denims week. We had Father's Day, and we had our compact stores in Rock in Rio. This jacket here that you see on the picture became an icon of Rock in Rio this year, and it was developed and sold by our team and sold at C&A stores also inside the festival. So in other words, we continue to advance in the foundations of our business, always striving to bring the best of fashion, the most relevant fashion at a very high speed to our customers.

Now I'll stop here and I hand it over to Milton and Milton is going to share with you more information about our numbers for quarter 3.

[Milton Lucato Filho, executive]

Thank you, Paulo. Good morning. Good morning, everyone. Paulo, when I hear your enthusiasm, it's really nice to hear how you talked about the first part of the presentation. And I hope to have the same level of enthusiasm now that I start talking about our numbers, giving not only color but also sense to everything that's happening because we're very excited with the evolution that we're seeing in the company, and we're very excited about the future as well.

So let's start with our revenue. The financial services revenue performance with the evolution of C&A Pay showed an important increase of 44.7% as you can see here, in the blue bar. We also saw an increase in apparel, 4.5% year-over-year. This was due to the good acceptance of our collections and these collabs that you were talking about, but we were also negatively impacted by the anticipation of the winter sales, which occurred in quarter 2 this year.

And we had talked about this in our last call that we were seeing an anticipation of the sales of the winter collection and also this, combined with the atypical colder weather that we had in the end of this quarter. So this caused the transition, we had to slow down the transition to the summer collection. So that's why we saw a lower impact of the summer collection in quarter 3.

In fashiontronics and beauty, there was a drop year-over-year due to the weak demand that we saw for smartphone devices, particularly in the consumer week because last year, consumer week was a success. And also more aggressiveness from the competition this year. So there's a trade-off between sales and margin, which is very clear to us here. And on the other hand, this lower performance of fashiontronics was partly compensated by the positive performance of our beauty segment, which is advancing.

This was a request from our consumers, demand from our consumers, and we see a clear evolution in the rollout and implementation of beauty -- the beauty department in our stores. Now on the next chart, Here, we have a very important highlight that Paulo already talked about in our gross margin. We saw an improvement in all categories in our gross margin and we are already above pre-pandemic levels, the 2019 levels.

All charts show the same thing. So both for apparel and also fashiontronics and beauty, our margins increased compared with quarter 3 last year and quarter 3 2019. In apparel, projects such as the push and pull distribution and dynamic pricing, which starts to yield some results and which includes the technology and artificial intelligence dimension.

So we're starting to see the results of that and also the transfer of the cost of inflation to our products. We estimate that 0.5 percentage point of this improvement is a consequence of these projects combined, a combination of technology and modernization of our platforms. In fashiontronics and beauty. Beauty products were -- had played the most important role here in the improvement of our margins.

Now on the next chart, financial services. The great highlight here is C&A Pay. In quarter 3, we reached nearly 2 million cards issued and now we are at over 2 million and this was only -- so on September 30, it completed 30 months the C&A Pay operation. So in 10 months of existence -- we are nearly -- being at nearly 2 million cards issued shows the strength of the C&A brand and how C&A Pay is an important asset that allows us to see all the advancements that we are seeing and we are seeing great evolution in our store production.

So at the right conditions, we are seeing a very significant evolution in our credit dimension. On credit, compared with total sales was at 22%. So we are recovering the levels of 2019. And we are already 15% higher than quarter 3 last year. And the financial services net revenue, as I said, was up 48% year-over-year due to the performance of C&A Pay. So this was also an important evolution.

And finally, over 90 wallet is at 11.3% are over 90. It is still under construction and under evolution. It is evolving with the business, and it is below the level that we expected after our operations normalize. But we understand that as this operation normalizes, looking forward, it will also go back to the market levels.

Now moving on to operational expenses. As a consequence of our stricter discipline and our search for profitability. Operating expenses, when we exclude the line other, and this is something that we do to avoid any distortions in our analysis. So excluding the line for other expenses, our operating expenses were up 4.2%, which is well below the inflation for the period.

In sales, the main reason was the drop in our marketing expenses, particularly performance marketing for our online business. In G&A, the main factor was the decrease in our third-party materials and services line and other things. And there was also an efficiency gain in our distribution center for the e-commerce because this operation is now much more automated and requires much less human intervention.

Also, when we look at the evolution of our G&A and sales expenses over the total net revenue, it was practically stable year-over-year, but it was still up 4.7 bps compared with the levels of 2019. So here, just as a reminder, in 2019, we had a different governance model and the structure of the company was not the appropriate structure for a private company.

Today, the requirements are different than what we had, they are higher actually than what we had in 2019. Now when we look at our EBITDA. Here on this chart, we see the evolution of our EBITDA. And we see that we are already recovering our operating results post COVID but there is still relevant pressure in some of our lines due to the higher inflation rate. So we have not gone back to the levels of 2019 yet.

We are working towards that goal but this is the reality right now. So our EBITDA margin was at 10.5%. As for our net income, the comparison year-over-year was impacted by different factors, and we are showing this in this chart, as you can see. First, we need to exclude the nonrecurring impact of a tax credit that we had last year. So this will equalize our comparison basis. So the BRL 54.4 million compared with BRL 61.4 million that we also see here.

So the chart shows the evolution that we had in C&A Pay. So there's -- this is something that we didn't have last year, the provisions for C&A Pay. Also, there was a negative impact due to our financial results. So the higher interest rates -- higher standard interest rate this year compared with the previous year. And this should keep pressuring our profits for a few more quarters.

And we are now working -- and I'm going to talk more about this later, but we're working to reduce our debt. And as we reduce our debt and as we see the interest rates coming down in the near future, we believe that we will go back to generating profit at levels that are reasonable for the business.

Now about our investments. We invested BRL 93 million this quarter. And the main lever for the investments was digital and technology. We accumulate -- the year-to-date accumulated investments is at BRL 263 million and you heard this from Paulo, we have revised the investment levels of the company to protect our cash due to the more complex macroeconomic scenario that we're going through right now and because of our short-term commitments.

Another important element here was cash generation. The cash generation in the quarter we generated EUR 115 million. And here, you see the origin of this cash, particularly in the green level here, the operating level, we are reducing investments as we already explained, and the cash consumed was due to the service of the debt. So in the end of quarter 3, we closed the quarter with a cash of BRL 1.2 billion.

And as the CFO of the company, I'm very conscious about our short-term commitments that we have in 2023, and the current adjustments that we made in the management of our working capital, also the adjustments that we made in our expense structure in the second half of this year. Combined with the relevant cash generation that occurs seasonally in Q4, we have sufficient resources to face and meet all the short-term commitments that we have established. I'll stop here.

And now we can open the floor for questions.

[Operator]

[Operator Instructions] The first question is from [indiscernible] go ahead, Daniella, you can ask your question now.

[Unknown Analyst]

I have a few questions. My first question is about your prospects both in the short term for quarter 4 and also for next year. I want to understand, I know there are a lot of uncertainties. We hear you talking about your concerns about some possible negative impact from the World Cup. So considering this first 1.5 months that you have in quarter 4 and from your conversations with your consumers in your loyalty program, I want to know how you're seeing quarter 4? Or what are your prospects for quarter 4 and for next year?

And my second question is about the competitive environment. I want to understand how you see the competitive environment for ACE, for your sports category because we are seeing other brands, other companies also focusing on the sports category due to the very good performance that sports products are having recently and also on the side of e-commerce.

We're seeing Shein. For example, the Chinese company which is they're talking about physical stores in Sao Paulo and Rio in Brazil now and also [indiscernible] which is now more dedicated to fashion. So how are you seeing these 2 movements in the market for the sports category and e-commerce? And I have a third question. My third question about C&A Pay you said that it is evolving above your expectation.

So can you please give us more color about the main indicators and maybe if you can anticipate what will be the share target of C&A Pay in your business? So an update of the indicators for C&A Pay you.

[Paulo Correa, executive]

Hello, Dan. Thank you for your questions. I'll take the first 2 and Milton will answer your third question. Our prospects for Q4 I think that everybody has been reading about this in the end of the day, what we are seeing is not only this turmoil because of the elections but also, we are still going through -- maybe it will end this week, but we are still going through a very atypical weather situation.

Just like we had that atypical weather situation in May, which was very favorable. Now we also had a very typical weather situation. We had a very atypical period and unfavorable in terms of the colder temperatures, which do not help us at this point. in the consumption I mentioned, particularly for the collection that we have planned for this moment in time, which is the spring and summer collection.

So what we see is reasonably similar to what happened in -- well, in terms of the evolution of our sales, what we saw in Q3 but the prospects for the next 50 days, I think we have some mixed feelings about the next 50 days because there will be an impact from the World Cup, as we know, and there are some ways we can calculate this based on the history, particularly due to the loss of traffic of people in our stores, particularly on the days where there is a match in which Brazil will take part.

And there's also a compression of this demand for summer and high summer products. So the hot weather will come. My personal view, and this is something we are working on a lot, but there will be -- the weather will improve. It will be hotter, people -- there will come on time when people will go to the beach. People will go on vacations, go to the pool. So the consumption of the -- our summer products was compressed in the past few weeks, and there will be a compensation looking forward.

So we have a few reasons to be optimistic on one hand, due to this demand bottleneck that we had because of the colder weather. And -- but the context is still difficult as you said, the first 40 days of quarter 4 have not been very favorable to the sales of the spring and summer collections. Now looking into 2023, and considering all this planning that we are considering for next year.

We are cautiously optimistic, we are optimistic because we're stronger, we're better. We're much better prepared as a company, but we are still cautious because of everything related with the higher interest rates that will continue to be high during 2023. So we are paying attention to all this. And from everything that we are reading, we see the deterioration of the consumers' purchasing power, in some classes more than others, some economic classes more than others.

So that's why we're calling this moment, cautiously optimistic moment. We will be better the environment not so much. And your second question was about the competitive scenario. You talked about 2 fronts as examples. You talked about the sports category and e-commerce specifically. And I would add a third element here, which is the end of the year and the context of the end of the year season.

For ACE, specifically, I think that the sports category clearly has a higher demand right now. This is something that was caused by COVID. COVID caused people to be more focused on taking care of themselves and exercising and practicing more healthier activities so today, we have a very good capacity to develop products and to develop our assortment.

That's why I think that we are standing out so much in sports because we have a fashion and joy element that we add to sports products. And this is something unique to us. I think that this is something that is more difficult for our competition. So we have an interesting way ahead of us in terms of pricing, positioning and fashion positioning for our products.

I'm very optimistic about our ACE brand. And now in respect to e-commerce, specifically, you talked about some competitors, some online players, particularly and I was saying during my explanation, I was talking about the strength of our digital channel, particularly when we think of the omnichannel strategy. So using our customer base and our customer relationship base to providing more omnichannel experience to our customers.

And our customers will start their contact with the brand in the digital channel, but this could end in physical or could end in digital or that could be physical in the middle of the way. We are betting more on this omnichannel dimension than just the purely online format, where indeed the entry of these competitors will bring inflation to our CAC, will increase our CAC and will also create a very promotional context, which goes in the opposite direction that we want to follow right now in terms of profitability.

So I'm less bullish when it comes to the e-commerce purely e-commerce dimension, as a super growth lever. I think that our growth will be more omnichannel with very concrete capacity and which is something that we are seeing in this omnichannel dimension here. Milton, would you like to answer the third question.

[Milton Lucato Filho, executive]

Yes, thank you for your questions. So one of the indicators for C&A Pay, one of the important indicators, we are at 22% share of our own credit in our total sales, 14% comes from C&A Pay. So this is clearly an important evolution and what happened with the customers that are under this category is that they have a higher frequency in our stores. And by frequenting more we convert more, and we see that the spending of these customers is 80% more than the spending of a regular customer.

So it's an important vector and also an important indicator. And this gives us a lot of clarity on how we're closing this gap in the share of credit sales and our total sales. We used to say that within 3 to 5 years, we should see this gap closed, and it is very clear to us that we will be able to close this gap within the time frame established. So we're very confident.

And production itself, which is the main driver here, is doing really well. As we said today, we are at more than 2 million cards issued, and this comes from this production machine that we have in our physical stores and another indicator that we have been tracking very closely within our governance model, and we already talked about this governance model in other calls is the delinquency or the bad payment indicator.

The over 90 is at about 50%. So it is better than what we had planned, but this does not reduce the responsibility that we have to analyze and revise and look at the credit brands, what is the rollout behavior? What is the payment behavior. So we're very confident about the work that our internal team is doing. We're very confident about the capacity, the internal capacity that we have to turn this lever into a very healthy level and sustainable level for the business.

[Operator]

The next question is from [ Vitor Santander ], you can ask your question now.

[Unknown Analyst]

My first question is about your fashiontronics operations. It's still very challenging. And you just made some changes in your operations proposal your -- so what is the representativeness of the different categories within fashiontronics? And what impact would this have on your top line? And operating margins? And the second question is about your apparel margins.

You showed your numbers compared with '19 and now you had a better assertiveness in your assortment with a positive impact of your logistic changes as well. So I want to understand if there is still more room for an expansion of these margins relative to the supply initiatives that you're implementing?

[Milton Lucato Filho, executive]

Thank you for your question. First, about fashiontronics. I think that we are still going through a moment of a lot of pressure when it comes to the consumption in this category, particularly for smartphones. We see that supply is not yet normalized. There is a very promotional competitive dynamic. So the profits are still negative for this category for this segment, specifically and the technology change to 5G, which we believe will start impacting consumption in 2023.

This shouldn't cause any changes in the next quarter. For the next quarter, I think that this category is still concerning this segment specifically. And meanwhile, we are focusing on the beauty segment, which is now present in more than 200 stores, and we keep expanding it in our digital channel. And this category is at nearly 15% with clear prospects for growth of this year along the journey.

So if we think globally, there are 2 different factors. We see a clear growth factor for the beauty category and a clear decline factor for the smartphone category. And the energy that is coming from the beauty segment is helping us compose a better margin for this segment as a whole and having a positive impact in our results.

Now as for the apparel margins I think we have to see this from different perspectives. First, of course, there was -- if you improve your commercial proposal and the assertiveness of your commercial proposal, this will always help. Regardless of this, the context, regardless of the scenario, that's why I think it's so important to see our evolution in terms of our products and assortment, which was very important in this journey.

And second, we have the levers themselves. The levers should bring more and more either digital level, so with more technology or with a different distribution models, these levers should keep contributing, we still have elements that are still to be captured and implemented. So there is room to evolve. So my answer to you is yes. An example of that is the push and pull distribution.

We are at 26% in terms of rollout. So there's still room to expand and increase. And we believe we can reach 40%. This is our target. So yes, there is room to improve. And the price management algorithms, for example, such as dynamic pricing are algorithms that are continuously evolving. They are continuously being developed and evolved so there is room to advance and evolve in this sense as well.

So our opinion regarding our apparel, our merchandise margins is a positive look. We have a positive look about this subject.

[Operator]

Next question is from [ Philippe Citibank. ]

[Unknown Analyst]

We want to understand a little more about the modernization of your supply chain or FID and push and pull, which we know is going important for your industry. So when do you -- when are you planning to finish this project to -- and what is the additional capital that will still be required to finish this project?

You talked about the 0.5 percentage point margin gain coming from the evolution of your supply chain. So can you give us some color about the expected gains for your EBITDA margin in 2023 with the final implementation of this project.

[Paulo Correa, executive]

Thank you for your question. The push and pull dimension specifically in RFID, we are now at 23%. And month after month, we are seeing an evolution in this implementation. We believe that 2023 will be an important year. We are now in the middle of this journey. There's still a long way to go. There's a lot to still evolve in capturing this sense.

And the investments, I think that when we plan our investments, our budget for 2023, we are thinking of how we can ensure that 80/20 relationship. So how can we bring the maximum impact with minimum investments? We still have a significant volume, but most of it is already done. It's already completed. So there are 2 steps to this journey.

The first step is capturing the investments that we already made. There's still a part of these investments that we are still to capture. And the second stage, the second phase of these investments, which would bring further opportunities to capture these investments in push and pull. So we still have room to advance in the 2 dimensions. And 2023 will be an important year in this -- we want to ensure at least 80% of capture of this impact.

[Operator]

This question-and-answer session is now closed. Thank you for participating. Now I would like to hand the conference back over to Mr. Paulo Correa for his final remarks. Mr. Correa, you may proceed.

[Paulo Correa, executive]

Thank you, everyone, for participating in our call. We are here once again talking about our journey our consistency, our execution capacity, of course, with all the setbacks and challenges that we are facing right now, either in our industry or in the country we are still very confident about our evolutions and our progress looking forward.

We're very confident about our growth potential and the value creation potential that our company has. Have a great afternoon. Thank you, everyone, for participating.

[Operator]

C&A earnings conference call is now over. Thank you all for participating, and have a great afternoon.

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