Lojas Renner SA
BOVESPA:LREN3
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Lojas Renner SA
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Good morning, everyone. We'll start our video conference for Q3 '22 for Lojas Renner. I have Pavia, CEO and General Santos, CFO .This video conference is being recorded, and there is simultaneous translation. We will only have the Portuguese version on the screen. So if you wish to follow in English, you can access in the chat box or on the RI website Journalist questions can be submitted to our telephone 113-165-9195. Any statement here about the business perspectives, projections and financial results are beliefs and assumptions based on currently available information and are not assurances of performance involving risks and uncertainties because there are certain situations that may not occur. [Operator Instructions]
Now we'll get started with our presentation, and I'll pass the floor to Daniel.
Thank you, Carol. Good morning, everyone. Thank you for being here. So let's start talking about our net retail revenue. As we mentioned the advanced winter transferred a little bit of the results from Q1 to Q2. During Q3, we noticed that this prolonged elongated winter had a negative impact in the sales results. And even with these 2 effects, the company was able to have 35% growth versus 2019 and 10% compared to 2021. Remember that Q3 2021 was the first quarter of 2021, where stores went back to normal business. So even with this growth of 10% versus 2021, we still got some gains in the market with about 7 percentage points in July and August based on the IBG's numbers. And then important highlight here is the Youcom performance in this quarter with good sales performance, once again, 27% versus 2021 and about 85% compared to 2019.
Now about our digital performance, the digital channel performance, we still have relevant growth of GMV with an increase of 29.4% compared to 2021. And the omni strategy is still a very effective strategy. The clients choose the most convenient channel for them to buy and the digital sales in Q3 grew 14.5%. We continue enchanting our customers, delighting our customers with a really good navigation serving experience with a new app, and we evolved our service level. Today, in Q3, we have 80% of all deliveries in Sao Paulo and Rio de Janeiro in up to 2 days and 50% in 1 day. Our marketplace continues to grow. We currently have about 800 sellers combined in Q3, representing 10% of digital GMV. The other channels as marketplace represented here in the Renner favorite B2B Wata channels now represent about 25% of our digital revenue . About gross margin, it was 0.4 percentage points higher than Q3 2021 and minus 0.5% compared to 2019.
In terms of operational efficiencies or the lowest markdowns, we were able to come very close to the 2019 levels. Youcom in Renner were pressured due to the spring and summer low sales due to the winter-like situation. And this is explained with the comparison basis, it's a bit weaker in this quarter because we had a gross margin that was a lot lower than the historic average for Camicado. So about operational expenses we had about the same levels of the same quarter in the previous year representing higher investments in the lifestyle and apparel. The expansions in Cabreuva channels compared to the first and second quarter where we had the biggest impact of the preoperational cost impact for the company over Center, and we have our 2 new control Reposado that were not in the base for the previous quarter with their OpEx now included in the first quarter 2022. Comparing SG&A after 2019, we continue seeing some gain efficiencies through brick-and-mortar store and digital channels.
There's nothing very new in this grid. But what I can tell you is that during Q4 and then the next year, we'll continue to see sequential gains in efficiency. As the business continues gaining scale, our digital channel will gain efficiency with our new DC and also with our new strategy that will start in the next quarter for next year. And our ROI gain also due to the digital marketing investments. The LREN3 result was impacted with greater defaults during the period, influenced by a macroeconomic scenario with greater debt for family and continues at an all-time high. And although our stable client bases, versus Q2 2022. But with the over 90 days, reflecting this macro scenario that is a lot more challenging and a lower default rate more default routes because we have more conservative credit lines in LREN3 during the third quarter. We are still very careful with the credit policies. And in our newest portfolios still have good credit behavior. And we believe the over 90 levels that reached the peak in Q3 will start reducing gradually along Q4 and 2023.
The increase in net losses reflect greater provisions due to the default rates in the portfolio, especially in November. It's worth highlighting that this 4.2% net loss was impacted by the portfolio sale. The result was $23.8 million and because this is an older portfolio, there is no impact in the makeup of the portfolio according to the levels you can see in the report. In summary, the performance of Reis in Q3 is below expectation, but we continue seeing some restrictions in providing credits because the macro scenario has not evolved. We had a perspective of going back to granting credit, but the macro scenario did not allow that. So we continue with more restrictions. In our expenses and consumption levels, this has maintained basically lower, especially in September. The portfolio closed about 300 million below our expectation, which leads to impact such as the over 90 share. If we apply these 300 million in the total of the portfolio, the over 90 would be about 1% below the expected level here, 18.6%, 17.6%.
The greater provision values for the overall portfolio is about 18%, which is in advance compared to Q3 '21 and Q2 2022, 4% above Q3 2022, although there is a slight decrease in the over 90. We feel very comfortable with the provision total that we carry over from the portfolio to face the default levels we have projected. The total adjusted EBITDA for Q3 was 5% above Q3 2021 due to the recovery and the EBITDA for financial products. Net profit was 50% higher than 2021 due to the better performance of the Retail segment with benefits from the fiscal incentives such as investments and lower net expenses. We've had some effects in the result that is worth highlighting here. One of them is the benefits of the Freezone in Manaus with the results from September. So we recognize the same results. You can find greater details in our observation notes in our income report. The higher net profit in Q3 will continue to be relevant because of the innovation. We see all the expenses in innovation every year. And throughout the year, we take this credit. So this was taken in '21 and '22, and we'll continue taking place in '23 and '24.
The DC Cable is in preoperation. And in this quarter, we had about BRL 25 million impact in our expenses and the sale of the portfolio that I mentioned before. So move to Q4. Now I'd like to make a few comments about our expectations. Although there we have colder temperatures in October, we are still very comfortable for Q4, pushed by the Black Friday event and Christmas events. Both November and December represent about 75% to 80% of the sales in the quarter. So November and December, just getting started November now is the big driver for the Q4 performance. We still have expectations to close 2022 with market share gains and total EBITDA at very similar levels to 2019. In addition, we are getting ready for 2023 and for the growth in the next few years with a focus of increasing profitability gain. As for our ecosystem, there are some highlights for the quarter. First, very much in line with the omnichannel journey.
We have 2 new stores in the period, 7 renters, 6 brick-and-mortar stores and one on street and one in shopping malls. 7 are in locations where Rene did not have visible stores to brick-and-mortar stores. So we have 30 openings, by the end of September with around 40 new stores in the year. By November, we'll open 10 more stores. As for the digitalization process for stores, we had important advances with the expansion of new channels and with better experiences for our customers. With 111 stores, of which 88 were implemented this year.
By November, we'll have 133 million for with self-checkout. And now to increase innovative products, we have launched our digital financial platform ,an Orbi Bank to drive the ecosystem. This reinforces our relationship with our customers, including Renner, Camicado, [indiscernible], Aqua and operations of [indiscernible]. As for the Cabreuva DC, we have started the system integration and the Camicado operation is now 100% stabilized and the performance indicators are now moving forward with the Camicado brand. Renner now became the Brazilian retail store with the highest number of followers on Instagram.
We generate desire and passion information, content to connect customers with the brand. The social network visits increased compared to the same quarter 2022. As for the indicator for our ecosystem journey, we had a relevant increase from '21 and '22. We still have a long way to go to reach our objectives and targets, but we were able to increase our digital service with our client base has continued growing with about 19 million new customers. Our online service levels with deliveries, as I mentioned, are still growing. T+2 in total around Brazil is at around 51% and of deliveries in D+2, and our goal is to reach 70% to 80% of all deliveries for Rio de Joni. Sao Paulo, as I mentioned, we are at around 80%. Our main customers increased as well with 2.1% in total, now representing 30% of sales. As for the cost to attract digital customers, the CAC still is dropping and should continue to drop in the next quarters. And for service revenue and Orbi Bank, we believe that it will continue to be relevant in the next quarters.
[Operator Instructions] The first question is from Thiago from Itau BBA.
I have 2 questions. You mentioned that the new DC had a negative impact on expenses and I believe, around $20 million to $25 million. Is there any duplicity in terms of rentals in Q3? And consequently, would it make sense to consider lower expenses for the next period when this duplicity is eliminated. And my second question very reasonable to say that the sales in Q3 was impacted by the climate, but I imagine that August might have been a better month. Can you point us to how much better August was compared to the rest of the quarter to try to maybe mentally figure out how much the climate has affected you.
This is Fabio. Actually, the quarter, I would say September was a bit more impact at July and August as Daniel mentioned, we anticipated some of the sales that was very positive for Q2 according to our results call for Q2, but this anticipated some of the winter sales in July and August, but it could have been better. And in September, which is a month where we start to transition the different collections for spring and summer usually with higher sales. There was an impact from the cold temperatures that helped us with the fall line, but actually hinder the spring line. So on average, I would say that September was a bit outside of the curve. In terms of the DC, there is some duplicity especially because now we are in a pre-op phase for the DC we have. Part of the operational of the operations already functioning and the new area is only operational for Camicado for apparel we're still testing. And now we are going to start our operations testing in November and December. So this duplicity does exist, but I will let Daniel explain the future expectations.
It will continue for some time for Q4 and Q1 and Q2 next year because we already have people in training. We're already testing equipment, so we start paying rent. But we cannot close the other parts of the operations and still collect all of the benefits from when the DC is fully operational. So this effect will start to drop and to slow down as of Q3 next year when we start closing down the operation of the old DC.
Our next question is from Chambo from XP.
I think from our side, we have 2 topics that we would like to address with you. Starting with the income tax, I think you mentioned some of the benefits and the effect. So our question is just to try to understand a little bit more in terms of what we can expect for the magnitude of these effects? And if this should be considered a new level of the effective rate in terms of income tax and LREN3 , you also mentioned some of the expectations to evolve the over 90. So we just want to understand if there are more opportunities to sell portfolios that you might have mapped or if this was just a one-off thing you did and that we should not see in the future.
Chambo, thank you for your questions. So to talk a little bit about Realize, start with your second question. We sold 1/3 of our portfolio above 360 days. So yes, we still have part of this portfolio that could be sold. We still have 2/3 of this above 360 days that could be sold and that have already expired. So we are looking at this, but it can happen so that we can focus on the newest recovery groups above 180 and to try to reinforce our recovery effort. So we had 2 things, ongoing. So one this thing has been recurring. And I think we've already discussed this at other points. We will have this every year, more specifically in 2022, it was a bit higher versus 2021 due to our highest higher investment in innovation. This innovation and investment, we believe, will be stable from now on. So we believe it will be recurring in the next year as well. And as we close one period, we calculate the results and we can take credit for the next year. We can borrow credit for the next year.
The next question is from Ruben Couto from Santander.
It's been very clear that the EBITDA 22 will be similar to 2019. But looking at the first 9 months performance for releasing expectations to grow retail similarly in Q3 to reach this EBITDA demands an accelerated recovery retail levels. So is there anything specific that makes you a bit more confident in where we should see this expectation actually taking place?
Thank you for your question, Ruben. Daniel can give you some more details, but I would say that in general terms, on the expectations that we had at the beginning of the year. We have seen that LREN3 has a bit more difficulty a bit below our expectations due to this more challenging scenario due to default rates. So if we think about our own projections that we had in the beginning of the year, LREN3 tends to have worse results than our actual expectations. But Q3 was a lot better than our initial expectations. And even with more challenging scenarios, be it with the climate temperatures or sales differences, we are still able to reach a good market share gain and good sales levels.
Now even if LREN3 having some very specific situations in the last month and in this quarter, we do expect the gradual recovery in retail for LREN3. What I would say is that when we look at last year, first, we have a better gross margin than the year before that. So automatically, that is a good contributor to this improved performance. Second, both November and December, like I said, are 75% to 85% of the sales for the quarter. So the effect will scale. And no doubt, this will provide efficiency gains. This combined effect allows us to come close to this 2019 level. So what we expect is that the gross margin will be better. And the scaling that we expect to see in November and December. I think these are the big levers to actually reach our expectations despite the LREN3 performance, as you mentioned.
Our next question is from Joseph Giordano from JPMorgan.
I'd like to touch on 2 points here. First, about LREN3. I'd like to understand, when we look at these portfolios, can you please explain to us what you're usually able to recover from these default portfolios in terms of efforts versus selling these default portfolios? That's my first point and second we saw a very strong growth in September, as you mentioned, the climate gotten the way. But I'd like to understand how you see the competitive landscape, of course, that the climate is the same for everyone. So everybody is sobering the same effect. So how do you see the gain, the number of baskets sold in shopping centers? How do you see the evolution of the company in the future? So let's start with your second question.
Thank you for your question. The competitive landscape, we do know that there is some was in competition. I think there are fewer competitors in the overall tenor especially with the smaller ones, we've been seeing this since the beginning of the pandemic, since the beginning of the crisis with many smaller retailers getting weaker and some other actually big retailers without so much strength. So I would say that the competitive landscape is now less aggressive, I say, which helps us to gain market share.
So according to our monitoring, both from the IBGE data and internal monitoring, we are still gaining market share, partially due to this weakened competition and also due to all of our investments and products, operations in omnichannels that is now bringing increasing gains for us, although there are some difficulties such as the climate in September, but we still are gaining more market share even if we had a more stable scenario. So if I understood your question, between us trying to recover all of this credit and actually selling, I think this is what you wanted to understand. Our history for LREN3 has been keeping these people portfolios and trying to collect and trying to recover. But this also depends on the economic scenario we have at the moment.
So our thought was there was a lot of operational efforts and management efforts to try to collect and to recover these default portfolios. So with experience from other companies, we thought it would make sense to organize this in a way to sell this portfolio to focus our energies in the fresher, let's say, portfolios. So you can have better collection rates and recovery rates and focusing more on operations now that LREN3 is growing with several other opportunities. We made this decision to focus on the short-term portfolio. And when we notice a good opportunity, we can sell these default portfolios. So that was our rationale to decide on selling this. And just to add I think the recovery as much the recovery rates are higher in the younger aging portfolios. We have the oldest aging portfolios. The recovery rates are usually lower.
Next question is from João Soares from Citibank.
I have 2 questions. The first one, when we look at 2023, you have a very clear plan to grow top line in the short term or medium term, around 15% is the magic number. But looking at the next year, we might have an important fully down in prices because this year, we saw a lot of price increases. So in 2023, my question is, how do you see this component reflecting the top line growth for next year? So that's my first question. Second is about the margin recomposition. Although we have this top line growth, very clear, we still have some difficulty looking at the horizon of recomposition of margin. So if you could share your perspective, that would be great.
Thank you, João. So the growth from 2023 onwards, it's very difficult to set a number, but with all of our investments, our expectation with the investments for service level omnichannels and expansion to be able to grow both physically and digitally, not only in price but in volume as well, which is an important component. So we imagine that we have the potential to grow even higher than the average in the prepandemic years. And part of this is connected to price and price is very much linked to inflation and all the rest would come from volume or productivity gains in our existing stores, increasing our productivity in our existing stores and growing sales on the digital channels and expanding the new stores as well About margin? I can talk about margin. We have 2 things. When we look in the future, when we think about inflation, be it due to the FX rate or inflation, we do expect a more comfortable year, which helps us to recompose our gross margins to get closer to the 2019 levels. And also, I always say that one of the big offenders of our retail margin is the SG&A profit.
So remembering that other slide, I show you, we have scale gains for the business. So when we gain productivity with the existing stores, we continue with our expansion plan. This allows us to gain volume. And the other point is efficiency gains in our digital operations. We have a new DC that will be operational as of Q2 next year. So we'll have part of this efficiency gains, about 3% gain in margin in digital just from the new DC. And then our transit point strategy as well to improve our gains in marketing to digital margin. So we believe that in 2 to 3 years, we'll have our SG&A levels will be very similar to the brick-and-mortar stores. Combining all of these facts, we believe that in 2 to 3 years, we'll be able to reach a level of retail margins very similar to 2019. This is in the conferences and talks and discussions that we've had, we continue with the same plan.
Very clear. Just the last point, can you quantify the duplicity of the DC just to give us an idea.
Well, this quarter, it was $25 million we believe about $70 million, $80 million the accrued level for this year, and we believe that it will be the same for next year, between BRL 70 million to BRL 80 million. And of course, the evolution of the DC will allow us to have a final number, a final figure, but $70 million to $80 million Okay.
Next question from Vinicius Strano from UBS.
You've been evolving a lot in terms of technology and data. So I'd like to understand how this has been contributing to your product lead time and how this has been translating in gross margin? And maybe in the long term, how do you see opportunities to go back and expand gross margins at levels even higher than 2019 to leveraging all of these initiatives? And how are you getting ready for Black Friday here in terms of assortment and product customization and actually promotion appetite and credit loans for the event.
Thank you, Vinicius. As for data, I think this is essential and both for product lead time and in the margin evolution. If you think that we had a very high pressure of cost pressures in the former quarters and months. And we were able to offset a lot of this with some mark even with the climate differences with good sales before and now towards the end of the third quarter with lower temperatures, you have a higher participation, a higher share of just a few items, but the margin gets worse. And we still were able to reach margins very similar, very close to the 2019 level using data, distributing the right product, allocating the right product. We also have really gain more efficiency and buying more the right product and now with pricing. So part of the evolution and in terms of the data will be better perceived as of the next quarter and next year when we will also be able to scale on our new DC to gain even more efficiencies, especially in quick distribution with better lead times to make these products available directly or through stores with a higher granularity of the SKU.
So in terms of data, this is helping both in our internal decisions and operations, and we expect to see even more gains in the next years. As for Black Friday, I think this is an important event for us especially in the digital channels. The physical channels are important as well, but the Christmas event, there's a lot more relevant. And Black Friday has more relevance in the digital tenet. So we're starting to get ready with a bit of a different strategy from last year, especially due to the World Cup because we have another competing event for the first time during this time of the year. So we have created a strategy, especially in the digital channel to have certain promotions that we're getting ready for buying products and with the margins to have a positive event with very healthy margins. I think you also talked about gross margin. What I can say is that there are opportunities. But just to mention a few points.
On the one hand, when we look at the Youcom growth, which was a faster growth than Renner, it is because of the brand. So we have a mixed effect that helps. When we move over to Renner itself, Fabio mentioned the intelligence applied for fulfillment. But on the other hand, we also have the efficiency and success of our collection. We know that a good contributor for gross margins is the LREN3 markdown level. And this is linked to the good fulfillment of the stores, and is evolving and gaining efficiency. When we look at our product mix, offer in stores, when you can offer the right appropriate mix with the markdown levels with the lower markdown levels, that is a good lever for margin. But we still believe that we could do more, although we are facing these results in '20 -- the best results in 2019. That doesn't mean that, that is the limit. There are several things that need to work well will allow us to advance. So I would say that, yes, there are some other levers, and we're working on them to be able to increase our 2019 levels.
Next question from Irma Sgarz from Goldman Sachs.
Just a question about gross margin. I know we talked a lot about it. But just to confirm, although your Q3 closed with a bit higher stock levels, as far as I understand, you don't see any specific risk for greater markdowns .I don't know if necessarily in Q4 or maybe Q1 next year when you have these promotions. But just to understand the current stock levels or there's some part of this that is due to the DCs and about LREN3, what is the risk appetite for you towards the end of the year and the beginning of next year, do you feel that the customers that are now may be more stable, having better buying power? Or how do you feel that your customers depend on the emergency well for checks or of course I know that you have lowered your risk, but I just want to know what you're actually feeling.
Thank you for your questions, Irma. About margins. This higher stock levels is an effect of the anticipation, especially with imported products because we were afraid due to several fragility points that we had throughout the year for the imported product supply. We were afraid that there might be a that are doing a very important part of the year. So we had the imported products with a longer lead time to prevent any rupture. And we didn't see any rupture in the chain and the supply chain was very agile and efficient in both production and arrival of the products were shorter than we expected. So this is new stock. This is new inventory, although it might have a higher weight right now.
But in our projections, this should go back to normal throughout the quarter, and it is the new inventory that we need now. So lower risks of markdowns. Of course, we have 75% to 80% of sales that still need to happen. So it really depends on the performance of the next month. We have positive expectations, but we don't see any risks for all the inventory at this point. This is just new inventory due to anticipation about really LREN3 and risk appetite. When we talk about risk appetite, I think we need to understand that the economy is still very gradual due to the default level. So we gradually start bringing in new clients, new customers using our strategy for our private label, you know that it's just for them to buy in renter and try to really pump some oxygen to our portfolio. And as we see some improvement, we upgrade this to the cards. That's our strategy. But we've been observing the market to understand the speed of these movements. And this will depend on how we see the default levels.
Next question is from [ Vinit Suspredo ] from Merrill Lynch.
Still on the credit operations dynamics, you mentioned that you can see better performance of these newer portfolio. So how much is this due to the improvement of the consumer health? And how much is this an effect of the mix of customers when you compare to the pre-pandemic level, how is the credit concession levels compared to the prepandemic levels?
I can answer that. Well, there is an effect of both because when you restrict concession and have a customer base coming in being approved with stronger filters, your default rate is reduced. But at the same time, we have customers that have already been in our portfolio that don't get affected by the restricted credit. So we have greater restrictions than the prepandemic times, I don't have all the figures, the numbers here with me, but we still have a higher restriction level than what we had pre-pandemic. So we don't believe that we will go back to those levels in 2022. As I mentioned, we'll see this new strategy of bringing in new clients to our private label, but it's still too early to say that we'll have the same levels that we had in the pre-pandemic times.
Our next question is from [ Alexandre Namek ] from Morgan Stanley.
I think most of the questions have already been answered, but I just wanted to know a little bit more about the economics of the 3 stores because you're concentrating your expansion in this format of stores. So could you just talk a little bit about the economics? And if you could compare this by region because when we look at the Street store basis, they are much more concentrated in the South than the total base. So I just wanted to understand what the economics by region looks like.
Thank you, [ Alexandre ]. Actually, this is an important question because we've been mentioning this expansion plan as this is a very important moment for the company. This is something we had been expecting to come in, and we've been doing gradually along the years, and it's just been intensified now, and this is a very healthy expansion for us when we are asked about the economics for these stores. In general terms, people sometimes focus too much from either street stores or shopping malls, but we're talking about small cities that sometimes don't have a shopping mall.
And in some cases, it's hard to say that if it's a street store or a store within a minimal, but we have some cities in the country with a very relevant demand for us with a target audience that is very relevant for us. And these have been some of our best performances on average above average. So we don't compare performance per region, but they have had a performance above average. And then Daniel can share some numbers, but the expansion plan goes through some specific regions within performed concentration in the South but also in the Southeast, Midwest, in Sao Paulo, Parana, Santa Catarina, but the growth of the gross and some others in the northern most regions. Go ahead, Daniel.
As you said we are prepared some material and we'll try to provide more details in our next conference. Just to give you a bit more details about the strategy. But when we take our current basis with this exact profile, so cities in the countryside interior seed in interior Brazil above cities with average income above the average, the national average. These are stores where we see great potential for consumption and where we have applied the strategy, the speed to reach a maturation maturity level or is much higher than the other areas partly because the occupational cost is lower. So we see that the economic equation for these stores is superior than the average of the average stores around Brazil. And due to the speed of growth for these stores and the levels of profitability and the ROIs are better than the average we have today.
So we're talking about maybe 12, 13 stores that we have applied this exact strategy and logic makes us very confident that this is the right strategy for growth and profitability. And just to add to this, there's also an important part here. Dan and I are talking about each store on its own. Each standalones are with results that are higher than the other average from the same level of the kinds of stores. But in addition to that, we also need to look at these are new stores, new locations, and we have 2 other positive effects. In addition to being above average, they don't cannibalize anything else around. They don't reduce their impact results from other stores, they just add and add 20% to 30% to the online sales for that store. So I think the economics for the store on its own without any additional online sales is above average. It's a totally additional sale without cannibalization and increases to 30% online sales for the city. That's why we're very happy with this new expansion line, and that's what we believe in moving forward.
Next question, Rafael Ito from Safra Assets. I think you might have dropped. We also have a question from our chat from [ Luiz Garni ] about the economics of shopping malls versus street stores. I think we've already answered that. So with that, I will pass the floor to Fabio and Daniel for their final remarks.
Thank you, everyone. Thank you for this call. I think we had a shorter presentation to have more time for questions. I really like this format. Thank you all for your questions. and strong Q4 in sales. Thank you, everyone, for participating. We truly believe that despite all the sports term challenges, difficult scenarios, we have a company that is very well prepared for any situation. So we still believe in gaining market share, gaining market and a gradual recovery of our results. And from now on, we believe that especially 2023 forward. Moving forward, we will see good growth with an even better recovery of results due to everything we've been doing in the last few years. to provide positive results to delight our customers, engage our teams and consequently have better results for our shareholders. Thank you, everyone. Have a good weekend.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]