Guararapes Confeccoes SA

BOVESPA:GUAR3

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon, everyone. I would like to thank you for your presence in our video conference to announce the results of the first quarter of 2023. We are going first to hear Andre Farber, our new CEO, and then we are going to have Fred Oldani, our CFO. We also have with us, Francisco Santos, responsible for Midway; João Braga, responsible for lifestyles and our Director of People sustainability, all of them available in our Q&A session. [Operator Instructions]. So this conference call is being broadcast in Portuguese and simultaneously translated into English.

The presentation you're going to see is in Portuguese, but there is a slide deck in English available in our Investor Relations website. Statements made during this conference call relative to business prospects, projections and goals of the company. I beliefs and assumptions of the company's management and they are not guarantee of performance. These were my initial remarks. Now I give the floor to our CEO, Andre.

[Andre Farber, executive]

Good morning, everyone. I am new with the company. This is my first video conference. This is the second week only. Everything is very new to me. And I think that I am part of an evolution of Riachuelo and renewed the company is trying to implement. So I have been just 1 week. You can see, Fred, to my left, it has been at 6 months. Friends has been for 8 months. who looks after fashion retail has been here for 1.5 years. So this is a period of major transformation for this company that I am running from now on.

For you to get to know me better, I've been working in retail for many years with the strategy to I have 3 major experiences. I started my career 10 years at been company, consulting, I was part of a start-up of Ben late in last century, I help them to develop retail then I worked for Boticário, which I got to know through Ben, where I was for more than 15 years. I started as a consultant for 4 years, and then I was the manager for more than 11 years. At Boticário, I had the chance of going through all changes in Boticário from one brand and one channel to multichannels and multi-brand.

So this was a period that was very fruitful with many good things happening, and I also learned a lot in retail. It was a great school for me. In the last 2 years, I was with Dafiti. I think you've heard about it. And I really had a deep wide in fashion digital, and that's when I joined Riachuelo on May 2. It's still too early to talk about my strategy and my perceptions because it's only -- it's been only a few days, and it would be unfair and inaccurate to say anything, of course, already have some opinions, but I think it's still too early.

I would like to share with you a little bit of my mandate, the main focus on what I agreed with the Board, with shareholders. And I think that this mandate has 2 main points of concentration first. Number one is to strengthen our core, our business and our core includes the factories, stores, digital, the financial company and also the shopping mall. It's kind of a broad idea to strengthen core and to give you slightly more detail, there's a lot line behind it, but I'm going to give you 2 examples of things that I believe that will strengthen core, which is to invest in fashion, a lot invest in product.

We are doing this already, and we will continue to do that more and more, and we're going to invest in women's clothes, which is our main category. That's one of our core elements. Another very important point about investing in core is to make our supply chain more efficient to explore the assets we already have. And I think that this may provide great results to Riachuelo, making our supply chain more responsive. And we are likely to have better margins and have lower inventory. So these are only some of the themes I could make a long list to you, but as an example of how to improve our core.

And I think that the second point in my mandate or in my term in office has to do with the debt. I think that you are absolutely familiar with the terms of the company, we want to reduce debt. In order to do that, we need to generate cash and to improve the company's capital structure. As it says here, in this journey, I have only just started this journey and I'll be in close contact with you. I hope to get to know some of you and to hear you and to learn about your perceptions about the company. It's very important for me to know what you think and to learn from that. And I will be seeking some of you for conversations. Thank you all very much. Thank you very much, Isabella and Fred, and I would like to give the floor to Fred to start our presentation.

[Frederico de Oldani, executive]

Thank you, Andre. Good afternoon, everyone. I'm going to start the presentation on Slide #7 with an overview of the highlights of Q1 '23, First, net revenue that attained BRL 1.8 billion or 5.3% year-on-year increase. What lies behind this growth is the growth of same-store sales of our physical stores that reached 4.8%, and we should highlight 2 effects here. Number one, it's the evolution of women's clothes. So we've been seeing quarter after quarter that this is the category where we have invested the most in product, and we are still seeing a performance that was well above the average, and we are very happy that the first phase of this beginning of work is very successful.

When we include the digital channel, same-store sales was 0.7. As we said in previous quarters, we had negative same-store sales, but we believe there would be an improvement in the first quarter, which is true, which happened. And the same-store sales have an effect of the digital channel that is undergoing profound changes, but they are short-term effects. It might affect our performance in terms of same-store sales for 1 or 2 quarters. And -- but after that, we are going to see our performance going back to normal in this channel, especially if we compare it to previous periods.

Our EBITDA has reached BRL 87.5 million, a substantial growth as compared to last year, 41.5% growth year-on-year. And then we are going to give you more details, but this performance was driven by a significant improvement in the mix and strong control in operating expenses in the company as a whole. Now talking about Midway, we had a 10% growth in the first quarter in net revenue, and we remain very conservative in increasing this portfolio. We want to increase the revenue from the same customers. So extracting more value from the same portfolio working in an environment with credit restrictions and in line with the difficulties that we see in a scenario, especially considering delinquency numbers.

Now when we look at Midway coverage ratio, we had an improvement. We went from 93.7% at the end of last year to 94%. Our loss ratio was practically stable, similar to what we had last year. If we -- a natural seasonality from Q4 to Q1, if you look at Midway numbers, we are really confident that we have the right strategies that we implemented in the past once we saw this deterioration in credit portfolios in the market. And our result is very much the consequence of actions that we started implementing last year, but they still be implemented almost every month trying to make the most of opportunities in micro-segments of the market where we still see opportunities to continue.

Now going to free cash flow generation. Something else important that happened in this quarter was that we had BRL 41.9 million in contrast with last year when we burn much more cash. So we had a reduction in CapEx as we had said that would happen. And there is another color that it's worth mentioning, we had a receivables advanced in the first quarter that was smaller than we had last year. So our normalized cash generation would be even higher than the BRL 42 million that we are reporting. Another highlight is that our cash position remains very good, BRL 2.5 billion in cash.

This is more than enough to cover all the maturities that we have, not just this year. but also next year, which takes out any kind of pressure that the company could have in the short term in terms of rolling the debt or any financial restriction, meaning that the company is at an extremely healthy financial position. Along with numbers and the results of the first quarter, we published 2022 integrated report with the issuance of UY and GRI standards. And so we have sustainability indicators, which is something that is very relevant in our business.

Now moving to Slide #8, you can see the details of our performance. Here, you can see the performance of products, net revenue from products where we have a growth of 2.9% as compared to last year. And here, you can see that in last years, were strongly impacted by the pandemic 2021 and '22. But in 2023, we are getting to a sales scenario that is more normalized with a sales performance of women's products where we are investing more effectively already demonstrating a significant improvement in our results.

On Slide #9, you can see the gross margin from products. Here, we had a reduction of 2.1 percentage points as compared to the same period last year. So I think that there are some points that we should mention. First of all, it's the performance of Q4 and especially October and November were below what we had expected. In December, we had quite good performance. And this performance didn't make it possible for us to let out all the inventory that we had. So we started the year with slightly higher inventory levels than we had anticipated.

There is another point that is related to the strategy. We've been working faster to clear previous inventory. And this too demonstrates as you can see in our inventory levels that are reduced and part of that requires us to be slightly more aggressive in some quarters at some specific times, especially when we have sales in Q1, Q3, but we are not seeing any significant impact when we look at the consolidated numbers for the year. Probably, we are going to have slightly higher volatility in the quarter-on-quarter margins. But last year was a good reference for this year's margins.

Now moving to Slide #10. Here, you can see the performance of EBITDA from products. Here again, we had a first quarter of products closer to a normalized quarter we are going to go back to margin levels slightly above Q1 2020 after 2 years of results that were severely impacted by the pandemic. It's also mentioning that today's result has a component of the digital channel that will now start to contribute for the performance of products after many years when the digital channel caused a negative impact. And another important point is to date that the share of the digital channel is substantially higher than it was in the past.

So our margin from products is getting close to the levels that we consider normal. Now continuing the presentation, we have the results of our financial company Midway with Midway, we are making many adjustments in trying to extract more value from our portfolio despite very low growth of the portfolio, considering the restrictions that we are seeing today as necessary to work with great conservative approach. So revenues have been growing, but this is not yet enough to offset the increase in delinquency rates that we saw in the last 12 months. And this drives our EBITDA down. It's a small drop as compared to the same period last year, about 22%, but the positive EBITDA result that we think that for the current scenario is really okay.

We're still very far from pre-pandemic levels, but it's clear that we are headed towards going back to normal levels in terms of results at Midway. And so here, you can see the evolution of the losses on the portfolio. So losses here are almost stable as compared to the end of last year. And as a reminder, seasonally, Q1 always has a slight increase as compared to the end of the year, considering that the portfolio goes up at the end of the year because of Christmas sales, especially with our private label card, despite the nominal drop in the numbers of the portfolio, we are very conservative in grading credit. But if we look at the losses we are really stable and in line with our plans.

There are no surprises here in the losses of Midway. Now if you go to the next slide, you can see the coverage level is very good. There has been an increase this quarter from 93.7% to 94%. This 94% are levels that are higher than our pre-pandemic levels. So these peaks and troughs during the pandemic, their one-off events. But if we compare our coverage ratio to the past, yes, we are more conservative working with coverage levels that are very high, even higher than our track record. Then you can see delinquency rates, both for the credit card and personal loans. So this is the short up to 90 days. You can see that they are absolutely stable, both for the credit card and personal loans now long delinquency, when we look at the carte card is absolutely compliant with the natural seasonality of Q1.

But when we look at delinquency rates of personal loans in last quarters, it's been growing. And we believe that next quarter, we will be able to see a stability in the delinquency rates of personal loans which is substantially better. And you can see here that this in a short over, but the portfolio in the middle between the third quarter last year, which is kind of negative, but considering our average times of 11 months, this portfolio is practically cleared out, which makes us really okay in terms of an improvement in Midway's performance, especially in the second half of the year.

Now going to consolidated EBITDA. Here, you can see a 40% growth as compared to the first quarter last year. An important point here is the difference in the breakdown of the EBITDA in the first quarter this year, especially if we compare to 2020, when the breakdown is completely different, especially if we consider the products and financial services and the positive message here is that in terms of products, it is likely to improve further and further. We're working hard to improve our retail operations. And Midway is still at bad times, considering delinquency rates, but it is likely to improve substantially in the future. So we think that the quality of our performance is much better than it was in the past.

Now going to the next slide, in terms of operating expenses. So here, there was a major effort. We worked pretty hard to adjust everything that has been a 9% nominal drop as compared to Q1 last year, a level that is still below the Q1 2021, which was at the beginning of the pandemic. So this SG&A effort, we gained almost 6 percentage points in G&A as compared to net revenue and so G&A over net revenue, which shows that the company is very successful in controlling our operational expenses and to improve the efficiency of the operation as a whole.

Number 2, we analyze the debt and leverage. Here, the debt is almost stable as compared to the end of last year, our leverage rates are the same, 2.5x EBITDA, if compared to pre-IFRS EBITDA and 1.7% over full EBITDA. As a reminder, our covenants are measured yearly based on net debt over EBITDA, net debt over EBITDA pre IFRS. So we are at 1.7x after 3 months. So we are at a very good level to navigate this year. On the right-hand side, in your slide, you can see our debt amortization schedule. You can see the cash and it shows how much our cash position is good.

So we have a total of BRL 1.9 billion maturing before the end of last year with a cash position of BRL 2.5 billion. So we have enough cash not to need to roll any debt for the next 2 years considering that our expectation is to go on generating free positive cash both this year and next year. So the company's financial status today is very, very good despite the scenario that we are seeing with many challenges, the macroeconomic environment and the credit scenario, considering the events that we saw in the beginning of the year, but the company is very well prepared to deal with any scenario that we might come across from now on.

Lastly, if we think of cash generation, there has been a significant change in cash generation last year. So we turned around from negative to positive cash flow. So here a change in the working capital and then CF operation and reduction in CapEx. We are improving almost every single line. As we said, this is a year of quite positive free cash flow, which will help us to reduce leverage substantially, especially in the fourth quarter of this year. And just to say something that this is the last slide in talking about our investments. So it's BRL 1 and 5 million in Q1 3. It's 13% below last year, it should not exceed BRL 450 million this year in contrast with a level close to 600 last year, and investments are still focused on technology.

This is the highest share and also in the opening and remodeling stores. This is especially remodeling stores. Now I end the presentation of results. And I open our questions-and-answer session. Thank you very much.

[Operator]

Well, our first question comes from Daniella [indiscernible] Analyst of [ XP ].

[Unknown Analyst]

The first question regards the margin dynamics. You did excellent work in the line of operating expenses. And I would like to understand how much more room do you see in terms of opportunity in terms of operational leverage as your revenue goes up. But more specific, more in terms of reviewing the structure, something along those lines? Is there anything else in the future? And what about the recovery of gross margin, especially products? Because in Q2, it's kind of funny in times of weather I don't know what it's been like for you in terms of the margin along the quarter and looking more into the end of the year.

And the second question regards Midway. So the scenario has been very negative because of the macroeconomic scenario. But there is another player in your industry saying that maybe even structurally, there has been a change in the dynamics in our industry because of higher competition and you're going to gain relevance in the whole, and it will be less relevant to your results. What do you think about that? Do you think Midway fits into this context of a recovery and not going back to what it was in terms of business relevance. This is the second one. It just got attention and score so the Midway mall.

And also thinking of your core business in terms of relevance to the business and also a possible divestment in your operations, does it make sense that it's part of your core with Midway and products not being revisited or divested.

[Frederico de Oldani, executive]

Well, I'm going to start answering your question, and then I'll ask my colleagues to answer. In terms of expenses, it's been many years since we started implementing many changes to improve efficiency. We are going to continue having benefits in the year. I think that, yes, we do have opportunities, but opportunities depend much less on cuts, but rather on improving processes. I think that what Andre said about improving the core, this addresses a great part of it. So improving processes that will create benefits for us in all lines. So this is something that continues, but not as intense as we had over the past 2 years.

As to margins, I'm going to start, and I'm going to ask Joel to complement. Well, the second quarter, of course, it started slightly hotter than usual. So we sell a little bit less winter when it's hot and tickets in the winter are higher. I think it's still too soon for us to have a very clear vision. So this is a very important week for us, Mother's Day. And the next week is a week of very intense sales and temperatures have started to cool down. And as it gets colder, it won't have much of an impact in this quarter's margins. But of course, if the weather goes on warmer and our margins might be affected. But they are much more short-term events rather than structural changes. Well, if the winter is slightly colder, margins are slightly worse or better, but it doesn't change our perspectives for the midterm. João would you like to say something?

[João Braga, executive]

Daniela, I think that Fred said everything. I would just like to add that we are seeing the results of the quarter. There's still a lot to happen, especially Mother's Day. And then looking into the weather, we are going to have some cold fronts. I think this year, winter will start later. But in any way, we are paying attention at that so that we don't have a repetition of what happened last year, at the end of the year. And so we had a performance in sales that is very much related to the weather and other factors such as the World Cup, FIFA World Cup and Brazilian elections.

January was good. So the winter hasn't started yet. But as you don't have to make any major efforts to affect margins so that we have better marks and what we want to do is basically to do our homework to review our portfolios and then we need to have a good reaction time in our manufacturing plant. In any way, we are confident. I think that the winter might still not be so intense this quarter. So we need to see what happens quarter-on-quarter, but I think that we are going to end 2023 with margins very much in line with 2022. Now talking about Midway, I think that the scenario is still very deteriorated if we want to analyze it. But we can see avenues for -- and once the cycle of delinquency improves, we see many avenues of revenue that will make it possible for us to improve midway profitability.

If we compare what we have today and some result levels, we are going to deliver better results, even we can see the levels getting better in the market. So almost 3 sales in retail are through our channels and our media. So we have the financial and ecosystem, everything integrated and everything working for the recovery of our financial services. I think that one important point that we saw last year is the importance of your having and a channel that is integrated with a financial company to avoid adverse selection when we go to open sea. So the lesson we learned last year is that a financial integration with retail is very good. We always believe that it had great value, but we can see that we can navigate through difficult scenario, and we can see in our bases.

We have good quality customers, but it's good despite the adverse scenario. So this just reinforces what we think in terms of the retail financial integration that we saw. As to the mall, I think that this discussion whether the mall is an asset that should be with Guararapes Riachuelo or not, I think that this is up to the Board of Directors. It's not for the management to examine that to extract something else from the mall. So if we manage them all, we are always trying to maximize performance, considering that it is a shopping mall with very good performance already much better than the average. And we still see opportunities there.

We might not say so much about them all because it's kind of stable and predictable. So the parking lot will contribute with about 10% of the mall revenues, which is something very important. There are improvements being implemented in the mall, small renovations. We are working on mix. So even though we don't say much about them all, it is an asset and one is under our management that we are going to seek efficiency. We will try to extract the most firm finance, the factory and everything. We have space to improve performance. Andre? I can hear you, but I can no longer see you. Yes, we can hear you too. It's very clear.

[Operator]

Our next question comes from Eric, sell-side analyst from Santander. Eric, please ask your question.

[Eric Huang, analyst]

I think that looking at the industry and processes, I would like to understand a little bit better what the company sees in terms of opportunity. In terms of improving your performance in terms of collections also looking at the short term, so fashion retail overall is getting more and more agile.

[Frederico de Oldani, executive]

As Andre said, one of our main assets is our factory, and we are going to work intensely to use it to make the most of it in terms of its response times so that it's shorter and shorter. So we want to respond to everything going on in the market. So we want to have this capacity of being faster, more reactive and there are many processes and planning of raw materials. We also need to focus on which is -- which product is the most competitive. So all improvements in terms of sourcing and is becoming more and more competitive. This is going to provide us gains. Eric, I'm sorry. We cannot hear you.

[Eric Huang, analyst]

There was something wrong with my microphone, but I just wanted to thank you.

[Operator]

Next question comes from Clara, sell-side from Itaú.

[Maria Infantozzi, analyst]

What about store review and initiatives that you have been implementing since last year? And what is the return on that? If you could give us any idea would be great. And something just to touch on is the bottom line that was impacted because of -- it was not recorded. I would like to understand what happened and what's impact this quarter.

[Frederico de Oldani, executive]

I'm going to try and answer first and then Joel will complement if needed. I'm going to start from the second question. The thing about the deferred tax, if you look at the company, what we have in terms of tax losses, deferred income tax is about BRL 800 million already constituted last year, we had recovery studies. We think that we can recover the BRL 800 million over the next few years. If you look at the ITR, you can see what we expect to recover, but you're going to see that the recovery scenario is much better, especially thinking of Riachuelo so last year, we decided to stop constituting deferred income tax over our losses, especially at Riachuelo, but especially for Riachuelo, we stopped doing that.

Of course, Riachuelo individually. The first quarter is always worse for it. Its performance gets better during the year, especially on Q4, and this is something which is a new dynamic. We don't see anything in terms of tax losses when we think of Q1. And this is why as to renovations, and I think Joel so there is renovation and many different renovations we have had since full renovations. When we kind of rebuilt the tire store. Now we have had many smaller interventions. And we work on lighting and neutralizing of walls. And I think that this is what we ended up doing last year the most.

We also had a number of renovations to adapt store areas. So reduced home fashion in many stores. We're still doing that. We are increasing apparel especially women's codes. So we have many different models of renovations that were successful. We have had quite positive results in these interventions. And the focus this year in opening is going to be small. We're going to open 5 or 6 stores only in the year, but we are going to make many interventions in stores along the year. Some have impact that is much greater than others, but it's different to readapt the layout in contrast of providing full lighting for the store. In line with what we have been saying and our thinking that Andre joined us to reinforce the core, improving the store experience is one of our main drivers.

One way to improve the core is to improve experience to improve the stores and we are going to do this along this year. I would just like to add that this is an important pillar in our strategy, the physical channel, and we want to build loyalty in the physical channel. So what we've been doing since 2022, we have about 190 stores with these interventions of different times and intensities. And we want to continue that, but only at a lower scale. So if we think of our product and obviously, the effort.

[Operator]

Our next question comes from João Andrade, sell-side analyst from Bradesco.

[João Paulo Andrade, analyst]

My question is about the flow dynamics, price and volume and how it went along the quarter, which is the prevailing variable, whether it's price, temperature or the appetite of consumers that's slightly smaller? And a broader question as to the entry of the Chinese competitor that has been recently announced. And do you have any strategies for a different environment where this Chinese player will be playing?

[Frederico de Oldani, executive]

I'm going to start and if you want to complement. Well, we see as positive the movements that we see of marketplaces and imported that were getting the benefit of some technical issues to be able to operate in conditions that were not equal as ours. Now if any one of them nationalizes their operation, this is most welcome because we are going to compete with the same conditions. And we know a lot about the difficulties of operating in Brazil, decks, logistics, labor conditions. And we are not worried at all with having local competitors so long as they operate under the same rules and conditions as we do. So we see this as something positive if it happens. As to the price dynamics and flow, João, if you could try to address this part.

[João Braga, executive]

our segment is very much affected by the still challenging macroeconomic scenario. So we have high inflation, high interest rates. This has put pressure on families, especially low income and where Riachuelo operates. So we have all these impacts that we have mentioned and we have this challenge. As to the dynamics, they are the same as usual. We have dynamics of having promotions, especially looking into the future. So what effectively is not performing so well and what we need to do. But in essence, we believe that there is a good evolution in terms of value proposition and we think that customers really accept things well.

[Frederico de Oldani, executive]

Now I'm going to go to some questions that have been asked to us in writing. We have a question from a sell-side journalist, Vittorio. So in a line of bonds and securities. In the cash flow statement, there was a consumption close to 1 billion. What is it? So if we take cash, what changed was the line? It changed from the type of bonds. It was from committed to so one line goes through the cash flow and the other doesn't. So basically, it's just a change between products that are very similar in terms of liquidity.

[Operator]

All other questions have been answered in the questions that we received from the analysts. So we now end our Q&A session. I would like to thank you all very much for your participation. And our Investor Relations team is available to answer any other questions you may have. I wish you all a very good afternoon.

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