Guararapes Confeccoes SA

BOVESPA:GUAR3

Earnings Call Transcript 2022-Q3

[Unknown Executive]

Good afternoon, everyone, and thank you for joining us to our third quarter 2022 earnings conference call. [Operator Instructions] Just as a reminder, this conference is being recorded and translated simultaneously. The PowerPoint presentation will be in Portuguese here, but the English translation is available on our IR website.

I would also like to highlight that any forward-looking statements that may be made during this call related to the company's business prospects, projections and operational and financial targets are based on the beliefs and assumptions of the company's management and on information currently available to the company, and there are no guarantee of performance.

Now I'd like to turn the floor over to our CEO, Oswaldo.

[Oswaldo Nunes, executive]

Good afternoon, everyone. Thank you for joining us. Let's talk about our strategy. We continue evolving our ecosystem specialized in fashion lifestyle and financial services. We're building our brand and leveraging the strength of the customers in our ecosystem. The role of the marketplace has not changed, and it's still complementing our business model with categories and products where our brand is not strong and reinforcing this proposal with a robust financial services offer for Midway, now with digital accounts, loyalty programs and a new CRM to leverage our client base and to increase the penetration of Midway in that base.

Within this context, we have just defined the expansion of our strategic horizon in a growth agenda for the coming years. We have reinforced our direction and our beliefs and also our strategic discipline and focus. Right now we are fine-tuning most of the initiatives and projects that will be a part of our strategic horizons in the next 5 years.

In our discussions, we have the support of first-line strategic consultancy firms that helped us to reinforce our direction and beliefs. We had, as a turning point, the investments already made by the company as well as the initiatives and projects that are ongoing. The support is going to help us to move faster in the opportunities and capture a value from now on.

Still talking about the strategic cycle, more recently, we made our management structure at Midway more robust to support its growth within the ecosystem. We have a new executive director that is in charge of that business unit. His priority and the focus are on internal growth opportunities, optimizing our current portfolio, so we want to be able to extract more value from our existing customer base in our ecosystem and not to lose sight of the challenges of the current scenario in terms of granting credit.

And we also have a loyalty program, which is key to increase engagement and traffic in our ecosystem. We have just launched Xodo. We are in a pilot phase until the end of December, but we have already achieved positive result. The combination of Xodo and the new CRM, which is having quarterly deliveries will enable us to scale personalized journeys with Midway that's going to increase the role of credit cards, and on retail, it will increase the role of customers within the ecosystem as a whole. We are also going to be able to gather more customer data with Xodo in order to generate intelligence and establish a greater relationship with our customers and create a more profitable relation within our platforms. For Midway, getting to learn about the retail customers is also differential because then we'll be able to offer credit with the right risk and return profile.

Before I turn the floor over to Fred, who's here on my left, I want to talk about the negative same-store sales that we had in the quarter. The same-store sales is a consequence of our decision to continue adjusting our product and price positioning as well as to increase the efficiency of the digital channel, replacing profitability with growth for now. We are aware that right now the macro scenario is exerting pressure on customers' revenue or income and that doesn't help our top line. And these 2 effects explain the negative same-store sales of the quarter. Without them we wouldn't have had a positive same-store sales.

And let me talk a bit more about our positioning. In fashion, we have a positive same-store sales of almost 10% in the women's category, even with the lower temperatures in the month of September, and that shows that we are on the right track, and we continue advancing in other important categories of our core business. We know that growth is important, but it's now time to consolidate this new proposal with a longer term view and to keep the strategic discipline to make sure we have long-lasting and consistent results from now on.

The other element that impacted the quarter's same-store sales was the focus on digital channel efficiency, leaving aside short-term growth in order to prioritize that channel's growth and efficiency. We think that our penetration in fashion online has room to grow, but right now we're focused on increasing our share by expanding the omnichannel customer base from our current base. We have many customers that only buy in brick-and-mortar stores. And that's where the loyalty program, Xodo, and the new CRM come in to increase loyalty of customers and bring them to the digital channels as well, so that we can grow with efficiency and profitability in that channel.

And to conclude my remarks, we have 2 new directors here, Francisco, who's in charge of Midway and Frederico, our CFO, who are joining the team to help us deliver on our growth plan for the strategic cycle with discipline and efficiency. And I'll be back at the end to answer your questions during the Q&A session.

[Frederico Oldani;Investor Relations Officer, executive]

Thank you, Oswaldo. Let me just add 2 points here about the quarter. First about the strategic decision that the company has made to focus on profitability, especially in the digital channel and the homeware segment. We have already seen this impact on the evolution of our merchandise EBITDA this quarter; that was the main result this quarter, reaching a new level and a permanent gain that has been achieved with this new strategy. About Midway, it's important to highlight that we had a gradual evolution in the credit portfolio, but this evolution is being carefully thought. We are working with a substantially lower risk level than we operated in the past because of the challenges that we see in the macroeconomic scenario and delinquency levels that we expect for the coming quarters.

Now moving on with the presentation on Slide 6. Let's talk about sales performance. Our sales achieved BRL 1.4 billion this quarter, virtually stable compared to Q3 '21 and minus 3.9% in same-store sales. As Oswaldo said, this was mainly due to a strategic decision made at the company to focus on profitability of the digital channels and on the homework category. If we excluded that, we would have had a mild growth in same-store sales this quarter, but despite of all of the difficulties we had with the weather this quarter. Nevertheless our apparel performance starts to reflect the improvement in our value proposition, and it keeps on growing with a highlight for the women's fashion category with consistent growth of around 10% in same-store sales this quarter. Another performance that is worth highlighting is the beauty segment that has had strong growth as well. This is very aligned with our value proposition, which is the new Riachuelo lifestyle.

Now moving on to Slide number 7, let's talk about gross profit and gross margin. Our gross profit achieved BRL 702 million in Q3, aligned with the numbers of the previous quarter. Here we can see a gradual reduction of gross margins, which reached 51.1% in Q3 '22, a 0.2 percentage point increase. This expansion is already reflecting the choice of products and also the evolutions in price management and assortment in our portfolio. And to conclude, our apparel gross margin has reached 55.2% in Q3 '22.

Now on the next slide, you can see our merchandise EBITDA. Here, we had a strong performance, around 40% growth compared to the same quarter in 2021. We should highlight here that we had great discipline in operational expenses, which much more than offset the slower sales performance this quarter. We have been showing EBITDA levels that are higher than pre-pandemic levels, which show that the main challenges during the pandemic seem to be behind us. Our EBITDA margin achieved 12.2% in level that is quite close to the levels we had in Q3 2019. In spite of the fact that at that point in time, we had a very low penetration of digital channels, now we have substantially higher penetration of digital channels, and that exerts pressure on the margin, but starting this quarter, since August, we see that the digital channel has reached the breakeven point. So this should no longer be exerting pressure on our margins from now on.

Now on the next slide, you can see the Midway portfolio, adding up to BRL 4.9 billion, a 24% growth year-over-year in our credit portfolio. And in spite of this growth, we are being more conservative in granting credit, working with a much lower risk level than we operated in the past. We continue with a higher PECL level that is more appropriate to the current scenario and the portfolio performance. We expect to have a high PECL for the coming quarters, but we see an opportunity to increase revenue and penetration with our existing customer base.

Exploring the credit card, we had a higher penetration in the past with a credit card and interest rates. So I think that we have a good opportunity to improve our results in the coming quarters, exploring this portfolio a bit more.

Now moving on to the next slide. Let's talk about Midway results. We can see a sequential evolution compared to the previous quarter. That shows that even in this challenging scenario with high delinquency rates, we have had consistent results at Midway. And we believe we still have room to improve in the coming quarters and not necessarily increasing the risk appetite. We expect to continue with a conservative attitude, but we should be exploring an increase in revenue within the same customer base.

Now on the next slide, let's talk about consolidated financial performance. Our consolidated EBITDA had an 11% growth, especially due to the product performance since Midway results are still below pre-pandemic levels. Here, you can see the effort that was made to gain efficiencies, which generates a higher dilution of operating expenses as compared to our revenue and a nominal drop compared to the levels in recent years, in spite of the robust investments made in infrastructure to strengthen our omnichannel strategy in recent years. So even with all of the investments, our management structure is quite robust, and we have been able to capture many efficiencies when even if our omnichannel levels are completely different now.

Now let's talk about our debt. Our leverage is 2.9x EBITDA in Q3. Our management continues committed to reducing leverage in the coming quarters and trying to improve the management of our capital structure and indebtedness levels. As we announced, we just completed the issuance of debentures of BRL 400 million at Guararapes, and we're also issuing debentures at Riachuelo, which has already been announced worth BRL 300 million. So we are aiming for a very efficient management of our debt structure. We want to have available to us all of the instruments that we can. And we are also discounting receivables. As you can see on the right-hand chart, we did BRL 300 million advance on receivable and this should become recurring. We expect to continue advancing receivables in the coming quarters. That is one of the indebtedness options with the most competitive prices that we have available today.

And now on Slide 13, let's comment on investments. This quarter, we made investments of BRL 163 million, most of it in technology and store remodeling, which is in line with our strategy to reinforce our omnichannel ecosystem. Remodeling and opening new stores are also in line with our retail strategy. So as you can see, our investments are very well aligned with the main strategic fronts of the company. Accumulated CapEx BRL 447 million year-to-date.

So these were the highlights for Q3. Now I'd like to open for questions. We have our executive directors here to answer any questions that you might have.

[Unknown Executive]

Thank you, Oswaldo and Fred. Let's start our Q&A session. The first question is by [ Tiago ], sell-side analyst at [ XB ].

[Unknown Analyst]

Congratulations on the results released this quarter. I would like to address 3 topics. Considering what you said about the same-store sales performance, can you give us further details about the strategy for Q4? Are you still going to focus on profitability? And what are the opportunities that you see in the women's category, which was much more positive than the consolidated results? So what is the strategy and the sentiment for Q4?

Now my second question about gross margins and pass-through inflation to prices. We saw in the release that part of your profitability gain came from price increases this quarter in addition to the collections that you've been working on. So how have customers been accepting this pass-through of inflation rates to prices? Are there any negative effects on volumes because of those pass-throughs? Are you planning any other adjustments in Q4?

And finally, a third question about expense control. We saw, as very positive, what you disclosed in Q3. So what can we expect from now on in terms of the consolidated results? And what would be a more normal EBITDA level that you expect for the company?

[Oswaldo Nunes, executive]

Tiago, thank you for your questions. I will start and then my colleagues can add to my answer. You were talking about Q4. It's hard to make projections right now. October was a month of low temperatures, which limits the sales of summer categories, although August is the month that has the lowest participation in the sale of Q3. We also have the World Cup coming, which can pose a challenge to the sales of apparel because consumers will be more focused on soccer-related products. And we also have the income pressured by inflation and other factors. And we believe that Christmas presents will be purchased. And the challenge will be a possible concentration of demand after the World Cup and before Christmas, which increases the challenge of providing a good experience in brick-and-mortar stores and in digital channels. But if that happens, that's going to affect all players in the market.

Now let me talk about women's categories. You asked about this category, which has been having a consistently good performance in recent quarters. And if we see other opportunities. Yes, this is part of our strategic plan initiatives. We look at the opportunities of the present, and we revisit stores, timelines with a more robust proposal, and we're going to dedicate more space to this category in order to bring additional sales and better gross margins. About gross margins and pass-through of inflation rate. I think that the highest increase in inflation has already been felt and now it's just about some fine-tuning. But of course, when you're adjusting prices and products in a scenario like this, you might have pressures in the beginning, but as you advance in your strategy, the volumes increase. With regards to expense control, these are permanent gains coming from improvement in automation and process improvement as well.

[Frederico Oldani;Investor Relations Officer, executive]

I just want to add to what Oswaldo said regarding same-store sales. We're going to continue with our strategy to evolve our value proposition, which has been successful, and we're going to keep this for Q4. And in the digital channel, we're going to continue working to keep the breakeven of operations. So we want to adjust customer experience and customer journey without forcing to increase the number of customers. We want to increase customer frequency, but keep some type of control in shipping and media expenses, so that these are aligned with our expectations without any radical move in that. We have reached breakeven in that platform, and we want to keep that.

Now in brick-and-mortar stores, we're going to work, focusing on Christmas. We're going to have a difficult month in December, but we're also preparing for a good Black Friday. And we want to adapt to meet the demands that will happen on different dates, and we believe there will be a great concentration of Christmas sales in the last weeks of December.

[Unknown]

This is Carlos speaking. I just want to add something to the digital channels. In the last 2 calls, we talked a lot about the growth of omnichannel customers, and this continues to be so. We continue to be successful in physical omnichannel customers and we'll continue to move in that direction.

[Unknown Executive]

This is [ Juan ] speaking. I want to talk about the funnel and funnel opportunities. We want to have a more consistent journey in funnel and our product teams are working to evolve in this value proposition with higher quality and we've also been working with an increasingly robust and consistent sourcing and we're even looking into international suppliers to increase our competitiveness. And we have clusterizations of our collection. We see the results of those collections in different regions of the country, and we're focusing also on the size of distribution. And still talking about distribution, we've been focusing on improving our commercial system using data analytics to optimize our inventory and to rebalance our inventories in our distribution centers, and that clearly improves in the funnel performance.

[Unknown Executive]

Our next question is by Clara Lustosa, analyst at Itau BBA.

[Unknown]

What I want you to talk about is Midway's perspectives. We understand that you're being careful in granting credit because of the current scenario and you've been able to expand your portfolio in spite of that. But considering that caution, when are we going to see an improvement in NPLs and provision levels? And do you think that this caution can have any impact on your retail sales?

[Unknown Executive]

Clara. We believe that this scenario will continue to be challenging in the next 2 quarters. But we see that our short-term delays are now stabilizing. The long-term delays are on a downturn, but there is a lag, so we might see some increase in the coming quarter, and we expect this to stabilize in Q2 next year. When it comes to retail, we think that we have a great penetration of interest in that customer base. So our goal is to keep the provision for expected losses, increasing the interest portfolio and that will increase our bottom line.

[Unknown Executive]

The next question is by Joao Paulo, analyst at BBI.

Let's move on to the next question while Joao is trying to reconnect.

The next question was sent in writing, by investor [ Mario Capuano ] from [indiscernible] Asset.

Good afternoon, can you comment on the credit card performance. The 5.1 loss is way below what we saw in other players.

[Unknown Executive]

Well, like we said, we position the portfolio with a risk level that is lower than the risk level we were accepting before the pandemic. So we have loss levels that are more appropriate for the current macroeconomic scenario. And the challenge now is to explore the revenue from interests in our existing customer base, even in customers that have a lower appetite for risk for credit, but we think that the work we have been doing throughout the year is achieving results now, and the portfolio has a good risk return profile.

[Unknown]

Now this is Carlos speaking. Part of the success in the speed in which we've been able to react to this macroeconomic scenario is connected to the creation of a technology that supports the higher quality of the credit engine that we have been implementing. And it's now proprietary in our credit granting modeling. So once we understood that change, the speed with which we were able to react and adapt, is what led to the results that you saw. And looking at our customer base, we're now able to direct credit to the profile of customers that has less of a need of primary credit for their lives. So we look at the clusters, and we assess the risk to return of each cluster and their profitability as well.

[Unknown Executive]

Okay. Let's try and go back to Joao.

[João Paulo Andrade, analyst]

Congratulations on your results and thank you taking my question. My first question is about the weather and the low temperatures. As I said, we had lower temperatures than expected in the month of October, but now things are apparently changing. Have the customers reacted to that increase in temperature? And now a question to Fred and Francisco. Can you comment on your initial perceptions joining the company? And what will your agenda be at the company?

[Unknown Executive]

Compared to October, the temperatures are going up, but we see a slow reaction on the part of customers. Right now we have a summer product mix, but the temperature is not helping much yet.

[Unknown Executive]

Just adding to what [ Jerome ] said, something that we saw in October, especially in the North and Northeast regions, where we have an important store base, in the last 2 weeks, we saw some improvement. This region is not suffering that much with the lower temperatures, although the average temperature there is also below what we usually see, but we have already seen an upward trend there. And after the temperature goes back to normal levels, then we believe we'll see a natural resumption of sales in those 2 regions, already proved that. Now we expect to see that happening in the South and Southeast as well, especially Sao Paulo and Minas where we also have an important store base.

[Unknown]

Joao, I've been in the company for 2 months now, and my first impressions are that Midway, depending on the metric you use is among the top 10 or top 15 largest financial institutions in the country. So it's quite robust, and it's a great challenge to work here. But as opportunity, I see that the credit management is being well done, and this will give us breath for when we have tailwinds next year, I think we'll be ready to accelerate then. And our challenge is to position it close to Riachuelo's ecosystem. We have around 18 million customers buying in our stores every year. So there is a great opportunity to explore financial services there. And with a great focus on our current shelf, when we look at credit cards and loan products, and we also have insurance and assistance products, which are great revenue without credit risk.

So we've been changing the executive structure here at Midway so that we can be better prepared to face the new challenges. But that's probably the focus from now on to integrate Midway more into the ecosystem with this more conservative risk appetite, focusing on exploring interest revenue in the current base. I think these are the first steps of this new management.

[Unknown]

This is Carlos speaking. In recent years, we built all of the transformation and evolution levers for the company. And now we are better-prepared for another value generation cycle with the bases that have already been structured in light of the ecosystem that Oswaldo shared with you in the beginning of the presentation. We believe that the most important part of the necessary assets for what Francisco said to gain momentum have already been established. Now it's just about enhancing and adapting to what we face on a daily basis, but without having to establish the foundation because that has already been done.

[Frederico Oldani;Investor Relations Officer, executive]

This is Fred speaking. This is my fourth week at the company. And I stayed outside the retail industry for 4 years, but I've always observed the industry. And what I can say is that I am positively surprised with the teams. I think the company has amazing teams in all areas. And people are always a major difficulty in retail. So I think we're very well-served when it comes to that. And our technology has already advanced a lot, and that's quite helpful. And I think we're ready to take the next step, which is basically to start exploring value within our new strategy, capturing value on top of growth in our ecosystem, improving product offer, of course, as we already said. And what I can tell you is that I think that we have a great opportunity to capture value, especially from growth, that's the main focus.

And my role in this growth plan is to help make decisions to maximize the overall efficiency of the company. This helps to capture efficiencies. And that's a long chain with many nuances, but there are great opportunities for us to improve performance and grow with profitability. I'd say that is half of my challenge. The other half of my challenge is to manage the company's capital structure. This whole cycle of robust investments in technology, combined with the pandemic has led us to reach a leverage level that is above what we consider ideal. So part of the challenge in the coming years is to bring this leverage to around 1.5x or even lower one-time debt over EBITDA. And in order to be able to do that, we will have to make good choices, choices that enable us to continue growing and that free up resources in the company to reduce our leverage levels. These are the 2 main challenges I'd say, but I'm very confident that we will be very successful in both of them.

[Unknown Executive]

This concludes the Q&A session. I would like to thank you all for joining us once again. And I'd like to say that our IR Team is available should you have any other questions. Have a great afternoon, good afternoon. Thank you.

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