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Good afternoon, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Lojas Renner Third Quarter of 2018 Earnings Conference Call.
We would like to inform you that today's live webcast, including the slide presentation, may be accessed at Lojas Renner's website, lojasrenner.com.br in the Investor Relations section at the website platform and also the MZiQ platform. As a reminder, questions will be taken by telephone and by the platform. [Operator Instructions] We would like to mention that questions coming from journalists will be taken by our press office at the number (11) 3165-9586 and the country code is 55.
Before proceeding, we would like to mention that forward-looking statements that might be made during the call related to the company's business perspective, operating and financial projections and targets are beliefs and assumptions of Lojas Renner's management as well as information currently available to the company.
Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions as they refer to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors may affect the future results of the company and lead to results that differ materially from those expressed in such forward-looking statements.
Now we would like to turn the floor over to Mr. Laurence Gomes, CFO and Investor Relations Officer. Please Mr. Gomes, you may proceed.
Good afternoon, everyone. We are here in order to talk about the main highlights of the results of the third quarter of '18. With me, we have GallĂł, our CEO; Paula Picinini, our Investor Relations and New Businesses General Manager and Luciano Agliardi, our Controller.
The third quarter of the year was marked by the return of the good pace of sales with an adequate commercial management of the collection production. In the third quarter of '18, we posted a 6.9% growth in same-store sales, and this performance, when compared to the industry's business sector shows that we're currently gaining market share.
Regarding the gross margin, I would like to mention the increase of 0.4 percentage points consequent from the mix and lastly, through the collection [ production ]. The lower volume of markdowns as well as the favorable exchange rates has been contracted for imported items.
Regarding the operating expenses in the third quarter of '18, the values represented guarantee the operating levers that we documented and that increase of 12.6% was due to the growth of the number of stores and the implementation of the digital initiatives and the new business cycles. As a consequence, the retail EBITDA grew by 29.3% in the third quarter of '18. EBITDA margin went from 13.3% to 15.2%, with an expansion of 1.9 percentage points, also positively impacted by other operating expenses.
And I would like to highlight the fact that in spite or even if we exclude the nonrecurring effect of BRL 20 million in tax credit recoveries, the retail EBITDA margin would have expanded by 0.7 percentage points. The results of Financial Products was BRL 86.6 million in the third quarter of '18, going back 11.5% vis-Ă -vis the previous year, impacted by the reduction in the participation of private label and total sales as well as the growth or more moderate growth in the cobranded portfolio's revenue due to the stabilization and also the reduction of the spread, between this period, the improvement in the concession credit assignment and recovery, the improvement in this [indiscernible] was supported by the digitalization of credit initiatives, and this guaranteed the maintenance of the quality of our portfolio and lower levels of delinquency as well. Thus, the total adjusted EBITDA was BRL 347 million, an increase of 15.9% in the third quarter of '18, and the margins went from 19.8% to 20.3%.
And now, the highlights for the net income that grew by 38.4% going from BRL 140 million to BRL 194 million. And this performance reflects the operating improvement, as I have referred to, of the reduction in the negative net financial results of lower growth in depreciation expenses, and the effects of the lower income tax rate due to the recognition of BRL 24.7 million regarding the judicial decision related to the tax deduction of the PAT program of the local food program. And as a consequence of this performance, we had an increase of 1.4 percentage points in our ROIC in the last 12 months from 21.3% to 22.7%.
These were our main highlights and now, we will be available to answer any questions that you might have.
[Operator Instructions] Mr. Joseph Giordano from JPMorgan.
I have 2 questions, in fact. One, same-store sales. If we look at the normalized, let's just say, speed of the second quarter, I would like to better understand this acceleration. What was the reason for that? And if you could separate the digital agenda that you presented in the Investor Day, and could you break this down or what already comes from only channel or from e-commerce? And the second question has to do with the gross margin. I would like to understand the more promotional adjustments that happened in Camicado's results that were overall very small.
This is Laurence. Thank you for the question. In relation to the same-store in the third quarter, what we can say is that it consistently improved and we show a sequential improvement over the quarter. And 50% was due to flow of traffic and the other one was [ cyclical ]. And as we said before, I think we have a very good transition in our collection as well as a good acceptance of the new collection. I would say that this is the main reason. And about your second question in relation to the initiative that we presented in the Investor Day. I think it's a little bit too early because we already have some initiatives in initial stages, and the performance is going very well. However, I will say that it's a little bit too early for us to be able to mention any gains from these initiatives. And regarding your third question, the promotional adjustment for Camicado. I think we see here a strategy of the end of one collection and the new collection, a mix. We believe that this is just normal, this is our tactical move in terms of ending one collection and waiting for another so we are well prepared for the fourth quarter.
Another question, please. You're talking about the gross margin you had hedged gains and for next year, have you already started to hedge your imports for the winter collection? And could you share with us at what exchange rate you're doing this?
Yes. So during the third quarter, we see a contribution of this exchange rate, and it is practically offset in the fourth quarter or neutralized. So we have a good expectation for our gross margin in the fourth quarter but not coming from the exchange rate or the hedge. It will come from the collection itself and for the preparation or the mix of our inventory. Now for 2019, we have made strides with the protection of our margin, yes. And we understand that there are still uncertainties not only in the local market because of the transition in our government but also uncertainties having to do with the international market in Q3 that are making some moves that will translate, evolve. And we are trying to have a conservative stance in order to eliminate the uncertainties and protect our operating margins. The first half of next year is practically totally protected at an exchange rate close to 3.90. Thank you very much, Joseph.
Ruben Couto from Santander.
Talking about your inventory levels, we see that the level is higher than last year. In the second quarter, there were some deterioration year-on-year for the reasons that we know. But we also see a deterioration in number of days. So we have to prepare ourselves for the fourth quarter. So is there any other factor involved in the variation?
Ruben, this is Laurence. Thank you for the question. We had a higher volume of imports and this was a preparation based on this higher volume of imports due to the condition of a favorable hedge that we have and we were very well prepared. And we believe that we are very well prepared not only for the fourth quarter but also for the high summer. And we see also a higher inventory in Camicado and Youcom. Higher levels in Camicado had also an adjustment in the purchasing power if you're going more towards the imported items and also in the preparation for the year-end. However, we believe that we will be able to start the next year with an inventory very well aligned with the growth in our sales. So we feel comfortable with the level of inventory that we have.
Thiago Macruz from Itau.
I have 2 questions. I would like to just ask if there was a pressure on the gross margin in the third quarter because of the leftovers of your collection in the second quarter? And then part of that, you had a very good expansion in your margin in the Renner brand. And also, I see that there is a pressure in terms of the spread in your financial operations for different products. But you have -- but you can launch new products in order to offset this with creativity. Are you thinking about launching new products in Realize in the floor plan, let's say, in 2019 in order to offset this scenario that you talked about of a [ crowded street ]?
Thank you for the question. Well, the answer for this -- for the first question is no. We had a lower markdown level than last year in the quarter. Of course, you know very well that all products have a markdown that is aligned to a slight cycle and it was better than last year. The strategy of maybe one collection impacting the other show there is nothing in the sense that I would say the maintenance of our competitiveness, and we take attention to our positioning, and we have to keep ourselves competitive and lots of attention to the market. And regarding the spreads and the portfolio of products, the Financial Products, the initiative then, some that we have already prevented, they are more in the sense of revitalizing the current drivers that we have and more in terms of focusing on the shopping experience and the attraction of the products, of course, aligned with Renner's positioning. Not really so many new product. Okay, so there is a pipeline of initiatives in this regard and I would rather not go into details about it right now.
Robert Ford, Bank of America.
Could you talk about e-commerce? What about the trends in e-commerce, your returns?
This is Laurence. Thank you for the question. Well, we continue with a good pace in terms of bringing market share in online and e-commerce. Our click and collect, we already have this in our stores, and we already have 30% participation of click and collect, and we believe that it could still make strides. We already have same day delivery and next day delivery in SĂŁo Paulo and lead time, a very competitive lead time as well. Delivery times in general, we're advancing in other e-commerce platforms of Camicado and Youcom and the -- in this multichannel initiative. And I take this opportunity to talk about the inauguration of the 3 brick-and-mortar stores of our shops . And this was an exclusively online project but we opened 3 brick-and-mortar stores already with the totally omnichannel format since their inception. And we have been seeing that the exchanges of products 97% occur in brick-and-mortar stores. So we have been seeing this synergy or additional sales and additional traffic, consumer traffic in the stores as well and we launched. And here, we have some initiatives that has to do with delivery more personalized campaign. And now, we have the [indiscernible] already made that has already started. And it was launched with faster and lighter app and more segmented app as well. So I think things are going very well and the share gain was -- growth in market share comes from a fourfold higher increase in online.
And what about the growth of e-commerce and how it is affecting your plans in the medium run?
Could you repeat the question? Mr. Gallo -- Mr. Gomes asks.
This is Gallo speaking. I think you remember that in the Renner Day, we emphasized the fact that we believe in the omnichannel model, and that creates a positive synergy where one sale in e-commerce transforms or becomes an additional traffic into our stores, into our brick-and-mortar stores, as Laurence has just mentioned. And one thing that we see also is that in the stores or in the markets where we have stores, the participation grows more quickly. And now, with all these improvements that were mentioned during the Renner Day the new website and the better use of our communication budget, more product synergy that we are obtaining from that, all this leads us to start to perceive that the omnichannel model is extremely positive and a lot remains to be done in this regard, and as Laurence said, our growth is quite relevant, four-fold or 4x more than the market growth overall. And most probably, this growth of -- level that we see in the market should be on the website, online. And because of the fact that we use online and off-line, we see a higher pace of growth than the market in general. So this is our view of our growth in e-commerce also.
But you're not able to grow in the shopping centers there in Brazil. What about smaller situation with a smaller population? I would like to know how you're looking at the growth of brick-and-mortar stores in Brazil.
Up to 2021, our objective is to have 450 stores. And what we see now is that we are going to market nuclei, I would say that are smaller and bringing very interesting results. And when we met 20 years ago, we talked about 400,000 inhabitants per square meter in order to make one store feasible. Then, we went down to 200,000, 250,000. And now, we are doing some experiments around 100,000 and 110,000 inhabitants or even 60,000, 70,000 and creating this hub of 110,000, 120,000 inhabitants in a radius that may be accessed in 30 minutes by car. And this has proved to be an interesting experience. And undoubtedly with e-commerce, this could further growth. You know very well that we have a very high degree of fragmentation in this market. We have the 5 biggest players in this market in fashion, us and 4 competitors, and we have 14% of the market. So there and the other markets or the remainder of the market. We have part of this market in smaller towns or cities in these nuclei that I have just described in terms of population. And we'd like to remind you that we have the possibility of increasing our productivity per square meter and that we always [ manage ] the fact that before acquiring share of market, you have to acquire share of mind. And we have 3 different venues, so to say, here in SĂŁo Paulo, in the South. We have 40, 50 years and on average, 12 and the remainder in the north 3, 4, 5 years ago are present in the market. And when we evaluate the participation of cards in our target market, in our target population, we see that the number that we have here in the South could generate additional cards and additional populations in these markets. And I see that our growth is not only by means of organic growth by means of new stores. We may also grow by increasing more productivity or having more productivity per square meter. And together with e-commerce, this gives us a very interesting synergy for our next few days, I would say.
Fábio Monteiro, BTG Pactual.
I would like to talk about products. I heard from you about the evolution in the medium and the long term, not in the short term, the effects of the card fashion projects. You have already made a considerable investment in the last few years. And what about push and pull? Could you tell us the status of the push and pull, give us an update? And connectivity. If you could tell us a little bit about your relationship with your suppliers. And do you already see an improvement in lead time? I would like you to give us an update, an overall update, in this regard so that we may work on the improvement that these projects could bring about in the next few years.
This is Galló, Fábio. So we can -- we're consistent in constant evolution. We are very open to the market. We had some setbacks in our collections for women's fashion and now things have gone back to normal. And we continue to invest a lot in terms of our suppliers. We have 9, 10 engineers that focus on our suppliers all the time. They go to our suppliers in order to improve the processes and the reduction of water use, energy use, everything related to sustainability and everything that we described during the Renner Day. And for the procurement area for the whole chain, the supply chain, this gives us many different alternatives. For instance, a better construction of our collection, the use of artificial intelligence. And we already started work with that in order to be more efficient in the amount that we buy and also the distribution per market. Blockchain started to control where our futures are in each one of the suppliers. And everything we that to control over this chain, and we collect all the data regarding trends, and then we transform these trends into products with our suppliers. And we then start having new KPIs and new information. And all that lead us to be even more rigid regarding all that. We could imagine an increase of productivity in this area and the reduction of lead time. Now about push-pull. We continue to develop push-pull. We have practically all our basics operating, and we are advancing with our collection in 3 parts, fashion, core, and [ ascension ]. This is a pyramid. And of course, we have fashion where we use less [indiscernible] because we have new pieces or items that have smaller amounts that go straight to the stores initially. And when you go to the core, then we have a relevant percentage in the core part of the pyramid, I would say, 40%, 50% in push-pull. So things are going well. And in the future, we can see already improvement that we can make of a distribution center, for instance, we are still assessing the next steps. And this next step will lead us to higher efficiency then maybe adding new technologies and differentiated equipment. Many good things that may be added in order to improve our productivity, the flow of our merchandise as well and lead time as well.
Excellent, GallĂł. But one thing you said drew my attention. You said that in your core part of the pyramid, maybe half of the items are already -- each has to be in the push-pull structure. Did you take core over central? Could you reach almost 100% in a few years' time?
Well, certainly, while this is our target, I cannot -- well, it's not going to take a long time, everything that I have just described. I would rather not give you a ballpark figure. But I would say maybe 1 year, 1.5 years tops, we would reach these figures.
Franco Abelardo from Morgan Stanley.
Two questions. The first, looking at the short run expansion. We see some news that some stores planned for this year will be postponed for 2019. So some specifics about the Renner brand expansion in 2018. And do you know the number of new stores to be opened in 2019? This is the first question. And the second question has to do with Financial Services. We saw a drop both in revenues and the EBITDA from Financial Services, totally expected because of the comparison base. My question is the following. In the third quarter, it was more difficult because of the comparison base. But starting on the fourth quarter, could we see an increase in the revenues and maybe also in the results from your Financial Services? Or is the base so very challenging and we expect a drop in these results in the fourth quarter?
This is Laurence. Thank you for the question. The first one about 2018. Well, this is regarding calendar, this happens every year. Sometimes, you have some postponement and sometimes you have some that are open before schedule, and we are, according to our schedule, I would say, 25 for this year. And this would be very normal in terms of postponement. Regarding Financial Products in the fourth quarter, the answer is yes, we see it going back to normal the results from Financial Products in the fourth quarter of 2018. And I think this was the biggest impact on our revenues in the third quarter. So we estimate and we expect a healthy growth in the results from Financial Products in the fourth quarter.
So 25 stores, close to 25 stores and the total new stores, right?
Yes.
Because of the closing, that would be 20 if I understood correctly.
Yes, yes, that is correct.
[ Fabio Fala ], BBA Investments.
I would like to know from you about the payment position. Cash sales are using sales for third-party card and delinquency of Financial Products has dropped quite significantly from the third quarter of last year now consistently. Are you more conservative in credit assignment now, credit approvals? Will you be more conservative from now on? Or will we see a higher participation of Renner Card in the total sales? And could you give us an update about your operation in Uruguay?
This is Laurence. Thank you for the question. There have been no change in our credit assignment policy. Our policy continues to be stable. And what we saw was a higher degree of efficiency in collection and credit recovery. For some time already, we have been implementing and investing in technology and with our own teams and also the processes that we have reformulated for collection. And because of all these efforts, we've been able to have the more effectiveness in this area and also making available higher number of channels in order to facilitate recovery. Today, practically, we have 100% digital credit processed and credit assignment and maintenance and the recovery of credit. This is 100% digital today and this makes us more agile and more efficient in recoveries. And also the quality of our portfolio has improved. So there's nothing to be adjusted in this operation because it's very consistent and very healthy in the credits. Initiatives, well, the participation of the card is a big challenge. This is a trend. It is very challenging because of cards with different functionalities. But what we have said is the following. We believe that we can mitigate or we can recover or even cope with this competition with initiatives in terms of reformulating the shopping experience and the functionality of the credit instrument [ of payment ]. About our Uruguay operation, we are going well. We have a good operation. We have a good pace of sales with a good acceptance of our collection. We have already said before that the operation is performing better than we expected, a very positive performance. So this has been a very important learning experience for us. And we are proving the success of [ hidden ] models in another country. And soon in 2018, we're going to open an additional 2 stores in Uruguay.
And I would like to ask another question. Have you changed your strategy for Black Friday for this year?
Well, this is an important date for retail, and we will be participating as we have participated in previous years in this challenge normally such as we do in other important retail dates.
Richard Cathcart, Bradesco.
I have 2 questions. One is a follow-up on [ Fabio Fala's ] question about the portfolio. In the presentation on Page 13, you have this information. The Renner Card is [indiscernible] less than 2% on the previous year, between 2% and 3%. So could we expect something closer to 2% from now on or maybe between 3% and 4% such as happened last year? And the second question has to do with e-commerce again. Laurence, you said that you had a pilot of same-day delivery, and real next-day delivery in SĂŁo Paulo. And I would like to know if you intend to have same-day delivery in SĂŁo Paulo as well.
With regard to your first question, yes, it is reasonable to estimate something close to 2%. I think this is feasible, it's reasonable. About your second question, we are adjusting our operation, and we are streamlining this functionality of the service. And as we gain more traction in this functionality, this could occur in the next few months. However, this has not been defined yet. It is important to have consistency in the whole process and -- in adding this functionality of e-commerce.
This question comes from the webcast platform. What about your expansion through e-commerce? Do you have a target or intend to increase your investment in this thing.
We have been making confident investments in order to consolidate the platform and all the technologies. And we will continue to make investments that I would say that the bulk of the investments in order to guarantee the addition of new functionality. This has already been made. This investment has already been made. We will continue to invest but our CapEx in this area is not as relevant as it was recently. Our whole marketing area is focused on the productivity of social media. And we will continue to invest in a normal range.
The Q&A session is closed, and I would like to give the floor back to Renner for the closing remarks.
This is GallĂł. Quickly, very quickly, I would like to talk about 2019. Everybody is asking us, "Well, what about 2019?" And first of all, I would like to say that regardless of solution A or B, we will not have a recession. We will see a targeted growth of the GNP of Brazil. And the solution seen as more favorable by the market will certainly drive a climate for more conductive to investments. And everything that we said during this call will mean that we will take advantage of all the growth opportunities that we have described for you during this call. And these solutions that might not be as favorably seen as by the market will not be the end of the world. Because I believe that the major test is a value proposal by the company. If they have a reduction in the businesses. Of course, you have to show more competitiveness than your competitors because consumers are always consistently assessing our competitive advantages. And even in this situation of having this B situation, we have to have a very good package to offer products in stores, and e-commerce and omnichannel. We have to offer this kind of package. At this moment, they even give us an opportunity to grow in relative terms vis-Ă -vis the market exactly because of the value proposal that we believe is very competitive. So regardless of the results, so we are very close to what is going to happen. I would say that we are very well prepared for both scenarios, A or B, and we are very confident that we will be able to have a good year in 2019. Thank you very much for your participation, and we hope to see you in our next call. Thank you very much.
The conference call is closed. Thank you for participating. We wish you a good day.