Raia Drogasil SA

BOVESPA:RADL3

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to RD - People, Health and Well-being Conference Call to discuss its 1Q '22 Results. The presentation can be found on RD's Investor Relations website, ir.rd.com.br, where the audio for this conference will later be made available. We inform that all participants will only be able to listen to the conference during the company's presentation. After the company's remarks are over, there will be a Q&A period. At that time, further instructions will be given.

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of RD management and on information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events, and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of RD and could cause results to differ materially from those expressed in such forward-looking statements.

Today with us are Mr. Eugenio De Zagottis, IR, Corporate Planning and M&A Vice President; and Fernando Spinelli, Investor Relations and Business Development Director.

Now, I'll turn the conference over to Mr. Eugenio De Zagottis. Sir, you may begin your presentation.

[Eugenio De Zagottis, executive]

Hello, everybody. Welcome to the Raia Drogasil first quarter '22 conference call. And I'd like to start by saying that this was obviously a very challenging quarter for us. And the main reason is we have a very material inflationary lag and actually lag is a better word than pressure because it's a transitory effect. So, our last authorized price increase before this quarter had happened in the beginning of the second quarter '21. We had 4 quarters of very strong inflation, which amounted to something like 11.3% CPI over this period versus our last authorized price increase of 7-point something, 7.5%. So, we had something like 400 bps of difference between the last price increase undertaken into this quarter and the current -- than current inflation level.

As I mentioned, it's a transitory effect because already in April this year, a new price increase reflecting this high cash situation has been authorized. And we have already passed that in the beginning of April to our prices. So obviously, we have a very challenging quarter here with significant margin pressure. But we are starting a second quarter that will be completely different, but very likely, we will have a margin surplus versus last year and then come into a second semester in which we expect to have normal margins, leaving this lag finally behind. Despite of all this margin pressure that becomes self-evident here, the structural performance of the company has been very strong and I would like to highlight some of these aspects.

So, the end of the quarter, with 2,530 pharmacies, we have opened so far 52 stores, 12 more than we had opened in the same quarter last year. And we also closed 12 stores. So, we have an expansion which is accelerating. We have a guidance of 260 stores a year for which we are absolutely on track. The return that we're seeing in recent stores despite the changing profile in terms of regions, demographics, et cetera, we are seeing a very strong returns higher than we saw in the past. And I'll talk more about this during the presentation.

We posted BRL 7 billion in gross revenues, an increase of 16.6%. But it's important to mention here that if we take out COVID test from the base because we had a peak in the first semester of last year, the total growth would have been 17.8%. So, we have a 1.2 percentage point headwind from the high COVID test in comp base of last year. So, the structural growth is higher than the 16.6%. And still, we had 8.9% for mature stores despite the 1.2% headwind. So all in all, we would be around 10% mature stores, which is way higher than the last price increase authorized of 7.5% and pretty close to the current CPI.

Digital has been definitely highlight, BRL 656 million. On a running rate basis, we are already doing BRL 2.3 billion in digital revenues. RD Digital is in the verge of becoming the #4 player in Brazil, if you like toward a separate chain. Despite the fact that digital was already big last year, we are still growing 51% and retail penetration reached 10%, which is really a landmark number for us. So, there is real behavior change happening here. And the channel mix is something I'll talk later in the presentation is very differentiated with big prevalence of mobile and especially of the app within mobile.

Contribution margin, [ BRL 631 million ], 9% margin. Obviously, there's pressure here just like in the EBITDA margin, which was 5.6%. First quarter EBITDA margin is always lower because we have assortment in February. We have vacation in January, but obviously, 5.6% is way below what it should have been more than normal. But again, this is credited mainly to the big lag in terms of inflation and also to investments we're undertaking to support the new strategy of the company. I'll talk more about this as well.

Net income, 2.1% margin and negative free cash flow of BRL 320 million. There's a seasonality effect here. When compared to fourth quarter is a low cycle quarter. First quarter is a high cycle second quarter because of forward buying in anticipation for the authorized price increase. So, a quarter with margin pressure, but a quarter that also shows a lot of strength by the company in the structural cuts and this is what we carry forward.

Well, talking about the expansion. We ended the quarter with 2,530 stores, 52 openings, 12 closures. If we look last 12 months, we have done a pretty important, never think more than 150 stores -- 250 stores in the last 12 months. So, we are fast approaching the pace for the guidance of 260 openings a year. And obviously, 29% of the stores, they are still undergoing maturation, either in the early mid or late stage, only 71% of the stores have been matured.

Here, I would like to share how the profile of the current expansion is different from our history. We entered this year alone more than 80 new cities in Brazil. And we're talking small cities. Small cities where by definition, we were not competing before. So, the fact that out of 250 stores, at least 80 stores are in new cities. This is a very bold expansion. We are entering markets that are smaller than before. We are finding spacing -- places where previously we couldn't go, but now we're going and we're going with tremendous returns and tremendous assertiveness.

The other aspect here is the demographic aspect. So, if you look our store footprint today, 1/3 of the stores are Premium stores that serve the A class, 2/3 are Popular and Hybrid that serve B and C class. But if you look on the expansion, only 14% is A class, 86% is B and C class. So, a very different expansion from the one we used to do before. But if you look at the returns and we calculate and we estimate internal rate of returns, net of cannibalization and net of inflation on a real basis, our historic numbers have been around 20%.

If we look the recent numbers for stores opened last 12 months, we're talking currently a 24% real internal rate of return, net of cannibalization. This is a completely different expansion from any other in the market. This is different, not only in the sheer scale of the expansion, the fact that we're opening 200-plus stores, 260 stores this year, while the fastest-growing competitor is opening something like -- is pointing at [ 100 ] stores. So, the size is completely different. But the economics of expansion are also completely different.

I mean, our mature stores sell in average BRL 900,000. If you look at our competitors, our main competitor is at BRL 700,000. Now, our third competitor has probably BRL 600,000 and other competitors are less than that. And we are able give or take to reproduce this kind of high revenues per store in new stores as well. And this is what is driving such a very high marginal return.

We factor cannibalization into Generics. So, if the new store is selling BRL 800,000, but BRL 100,000 is coming from another store or around a group of stores nearby, we're accounting only 700 stores as marginal for the calculation of internal rate of return. Our calculation doesn't include [indiscernible]. Again, it's net of inflation. So, the size of the expansion and the return of the expansion are completely unmatched in the market. And the reason is we are a true national chain that makes similar profitability all over Brazil.

Our lowest state in terms of revenue for mature store, we are selling [ 750 ], which is more than the local incumbent in the market. And 750 it's an amazing sale in terms of producing very good returns. We have the brand position all over Brazil. We enter in states in new markets where the brand -- in these markets where the brand is already established. So, we are swimming on the blue ocean. For our competitors, they're swimming on a red ocean. They have some native markets where they can grow, but they have huge entry barriers when they move to the other markets.

So, ours is the only true in national expansion with this kind of scale, with this kind of returns. And this points to a huge opportunity ahead. We are nowhere close to exhausting the organic growth opportunity, as I think the increasing returns have shown. And today, as a consequence of this, we have more than 2,500 stores. Drogasil is the #1 pharmacy brand in Brazil in revenues with 1,400 stores. And Raia is the #2 pharmacy brand in Brazil in terms of revenues also, with more than 1,000 stores. So, this shows the strength of the company.

In terms of how the expansion has been different, here, we can see the mix of markets, Sao Paulo, our native market versus outside markets. Sao Paulo has accounted for only 18% of our last 12-month expansion and the results -- and the returns they are still growing and not going down, which points to the fact that we are true national brand. Market share, there's something that I have to say before showing the numbers, which is this is a number that gets distorted in a quarter like this.

The way IQVIA calculates market share is by capturing demand data directly supplied by middle and large chains and by capturing sell-in data provided by wholesalers for the small players. The problem is that in a quarter like this, that happens just before a huge price increase of more than 10%, forward buying has been huge in the market. So, if the share of the sell-in right now doesn't reflect demand and we can see here this.

According to IQVIA, in terms of factory prices, the market has grown 16% with 14% for sell-out informants, which is probably represents demand growth. But the sell-in informants have grown 18%, which no way it's a correct number. So, this distortion means that this normal market share data that we provide every quarter, becomes meaningless in a quarter like this. So, the best proxy that we have and this is what we're focusing here is the market share gain or loss within the sell-out informants because here, we're comparing demand to demand, apples to apples.

So, we have grown 60 bps on a national basis. Sao Paulo stable losing 10 bps and gaining significantly all across the other markets; 100 bps gain in the Southeast, 140 bps in the Midwest, 50 bps in the south, 80 bps in the Northwest and 180 bps in the Northern region of Brazil. So, we are doing really well here if you look at the structural data and use it as -- this data as a proxy for the total. It's not a perfect proxy as well. I know that, but it's the best data we have this quarter. Hopefully, next quarter, without the sell-in distortions, it may be easier to figure out where we really are considering the historic metrics that we have always used.

Consolidated revenues, we reached BRL 7 billion in quarterly revenues, 16.6% of top line growth. And again, if you just consider COVID tests, which had peaked in the first semester of the year, this growth would have been 17.8%, which for a company our size, it's an amazing growth. I mean the absolute revenue addition that we are producing every year is a very high number, is a very high number. And as a result, the gap between us and our competitors increases every day.

When we did the merger, we were the same size of competitor, today, we're more than twice their size. We are reaching -- our size is reaching the sum of the sizes of the order top 5 chains, chains 2, 3 and 4 and 5 in the market. We're almost there and we'll be there not long given the revenue addition we have every year. We are not only the largest chain, but we are the one which is growing the fastest, which is a paradox that we're very happy to maintain.

In terms of mix, we are now seeing a mix normalization following some mix changes happened during the pandemic. The main shift is in OTC, because COVID test count as OTC, we have seen a huge peaking OTC growth in previous quarters and not only COVID test, but also things like masks, things like hand sanitizers, these are all classified as OTC. So, now with the pandemic sieging, we are seeing the OTC decelerated because of this huge comp base, but other things that had suffered from the comp base reacting like branded pharm. So, I would say this is a more normal mix than the one we've seen before. And I would expect some kind of stability going forward here.

Here, in terms of comps, we achieved same-store sales growth of 10.8%, with 8.9% for our mature stores. Again, that is this 1.2 percentage point tailwind from COVID tests. We will be talking about something like 10% mature store growth. Considering the fact that the last price increase applied had been 7.5% and inflation right now is 11.3%, despite this inflationary time lag, our mature stores adjusted for COVID test, they're very close to inflation, which is a remarkable number that shows the structural strength of the business.

Digital has been another huge highlight in this quarter. We are now doing 656 -- we reached BRL 656 million in the quarter. We are talking BRL 2.6 billion annualized revenues, if you multiply this by 4%. Digital revenues already account for 10% of our total retail revenues. And we have then achieved this growth based on the strength of our apps. So, the number of app downloads has been growing steadily. We have more than 18 million cumulative app downloads.

The mix of our digital is very different from all our competitors. A couple of things I'd like to highlight here. The first thing is that in terms of revenues, Super apps account for only 8% of digital sales. This means that 92% of digital sales, 92% of this 10% is proprietary chains, it's the customer relating with us and us alone and nobody else in the middle. Obviously, we work together with the Super apps. We give our customers choice, but our job is always to do a better job than they do.

I think today, they do a better job in some aspects like logistics, like app experience, but our app is more specialized, running programs like manufacturer partnerships, like partnerships with companies that have insurers, dealing with electronic prescription. So, this specialization plus the fact that we allow Click & Collect, that the Super apps perhaps don't allow plus the fact that we use all our existing stores for Neighborhood Deliveries for example, makes our app -- makes our proprietary platforms, not only [indiscernible]. This is one point.

The other point is call center that shouldn't even be classified as a digital, represents for us only 4% of our digital sales. We have other competitors who have published figures similar like this and we have seen a much higher reliance on Super apps and call centers accounting for north of 20% of the digital sales. So, if you take this 12% out, means that 88% of digital sales are from channels who are not only proprietary but also modern and with a very strong emphasis in mobility. Mobile represents 74% of our sales, 49% alone there. So, the app makes half this revenue here on its own. So, this shows the robustness that we have. It's not a state-of-the-art app as of yet. There's a lot of things that we have to improve, but the app is evolving and the numbers show that.

Our Net Promoter Score is improving a lot as the cycle of releases -- of new releases for the app is accelerating. On top of this 14% is Mobile site, 11% is Social, ordering through WhatsApp. Basically, we're talking here what becomes what we call Neighborhood Deliveries and WhatsApp sent directly to the store and then the store should direct the customer. So, this channel mix is very different because of this low reliance on Super app, because of this almost very [ diminute ] share of the consent, and there's a huge participation of the app that nobody else, nobody else has.

Well, talking about the financials now. So, gross margin, 27.7%, 20 bps higher than same quarter last year, which is the net present value adjustment given higher interest rates. Cash cycle is higher than last quarter. Last quarter is a seasonal low. This is a seasonal high. And because of the stronger forward buying in anticipation of a very high price sequences even higher than first quarter last year. So, we are at peak year, but this is something that will normalize through the year.

Before talking about the margins, I'd like to stress again the point about the inflationary lag that we're currently dealing with. So, the inflation right now is 11.3%. Inflation that based the price increase that was applied early April is 10.5%, while with less price increase, 7.5%. So, we are talking between almost 400 bps of inflation gap. But this is a transitory gap because this high inflation has driven a high -- an even higher price increase that was already fully applied in the beginning of April. So, we're already looking at a second quarter that is completely different from this first quarter that we are reporting. So, this is amazing news.

The second great news is that the focus projection shows declining inflation. So obviously, if we end the year with a lower -- if decelerating inflation, this means that this price increase will hold better for longer. Obviously, if we see something again that is stable or grow inflation, obviously, there may be pains by the end of the cycle of the current price adjustment, but everything shows the fact that inflation, we will see the interest rates are going up, so this is a good perspective for the year. This will bring an expected inflationary with composition.

Selling expenses has significantly pressured 18.6% versus 17.7% last year. This is a direct effect from the fact that our mature stores are growing something like below 9%, slightly below 9%. Our inflation is 11%. So, this is providing the pressure in the selling expenses. And this is driving, obviously, the contribution margin to be transitory lower than it was last year, now 9.1% instead of 9.7%.

G&A is also pressured, 3.5%. It's the same level of the previous quarter, given the fact that there is less sales in the first quarter, which is a relatively good news on a sequential basis, but still it's a big pressure versus the one quarter '21. What's happening here is obviously there's inflation. But there's another factor here, which is the investment we are doing to supporting our structure to support our strategy.

We -- I mean, we have a very bold strategy based on digitalization of the relationship with the customer, focused on the new pharmacy and completely transforming our core execution and how the company operates on top of developing 2 completely new different businesses, which are the Marketplace and which are Health Platform. No way we can do that with our resources. This is also a timing issue. This is not money that is spent for good and that will forever pressure our margins.

Actually, if we look how the margin of the company has performed outside of this quarter that has the significant inflation pressure despite the fact that we invested 1.2 percentage points in G&A over the last 3 years, our margin, give or take, has been holding well. So, the bulk of this investment has been self-financed. In this quarter, that's not the case because of the inflationary gap. But as we get back to normalization, second quarter and the second semester, it becomes -- to become apparent that we are not fully, but substantially self-investing to do this. And this investment, obviously, it's a short-term pressure for our margins. But the other way to look at this is, this is execution capacity. And execution capacities are huge difference for the company.

We're talking here, talk much people. We are talking here cutting-edge technologies, and this is what will allow us to drive our execution and to enhance and to further enhance our competitive gap versus our competitors. We are the largest player in the market, investing probably the largest percentage amount right now in Generics. So, this is a very strong dry powder that should drive a huge advantage in execution coming forward.

But again, this is not a number that I think is forever. We are now stabilizing this number. I don't think we go beyond 3.5%. And at some point, we want to start diluting it back. And obviously, by the time the Marketplace starts producing results, and the same with the Health Insurance -- the Health Platform, then obviously, this will support a very strong value creation. So, this investment is also a reflection of our long-term mentality.

We don't manage the quarter -- the company quarter-by-quarter, month by month, but even year by year. We do what's needed to do to create value. So -- and it shows the long-term value as I mentioned and it shows the condition on the strategy that we pursue. But the short-term effect, when you couple this with this huge inflation lag is a big pressure versus last year. But good news is, year-end here. Second quarter, we expect margin expansion versus this very high 8% margin here. And then the second semester, we expect normalization of our margin. So, we are already seeing a very different scenario from what we saw in this first quarter. This first quarter is part of the past right now.

Net income, same margin pressure, I'm not going for the details here. But important to comment that we have booked -- we have adjusted BRL 13 million in non-recurring gains out of our adjusted profitability. Free cash flow has been pressured in the quarter because we're comparing a seasonal quarter with a lot of cash cycle investment versus the best quarter in the year in terms of cash cycle, which is the fourth quarter, but this will normalize through the year. And even with the speaking cash consumption, leverage is only 1x EBITDA, so not a problem here. And finally, by the end of the quarter, our shares were going down by 1.5%. But in obviously negative offer as the Bovespa has been growing 16%. Recently, we have seen more pressure in the stock, but what will drive the end value creation is what we're able to do in the longer term.

Now, 2 final slides to sum up where we are before we go to Q&A. I think we have to separate the transitory margin pressure that we've seen this quarter from the structural performance that we carry forward beyond the next quarter. So, there's a lot of things here that I think are very restrictive and this performance is de-coupling at a fast pace from our peers.

We opened 52 stores in the first quarter, 252 over the last 12 months. So, we are very close already to the pace implied by our 260 store opening guidance. Not only this, but the IRR, which again is real, net of cannibalization, does include perpetuity, has stayed consistently above 20%. By now, it's 24%, despite the difference in profile expansion, a lot of small newer cities, very limited focus on Sao Paulo, strong focus on B and C classes. And still, within that of the same or higher returns, which points to the huge opportunity that still have ahead.

We have grown nearly 9% of mature stores despite the headwind from the COVID testing. If we take out of the base, the COVID testing, looks only at the normal mix, we will be talking more than 10% mature store growth. And still, this 8.9% is 1.4% above the CMED last price increase with the 1.2%, we're talking 2.6%, and we'll be talking close to the current inflation.

Market share, we are gaining market share as measured by the sell-out because sell-in right now is garbage. But this is going on and it's a very healthy number, stable in Sao Paulo, strong games everywhere else. Our annualized digital sales at BRL 2.6 billion, with 88% through modern and proprietary channels versus only 8% of third-party apps and only 4% of phone sales, which is a [ foster ] from the past, and it's a low profitability channel because of the cost of the -- cost of the call center.

And finally, our competitive edge is expanding. If you look at the total revenues of the company, it's approaching the sum of all the other top 4 chains in the market; #2, #3, #4 and #5, which shows, I mean, the sheer scale advantage that we have. If we look at EBITDA, the gap, we are bigger than the EBITDA of the other top 4 chains. In terms of the margin pressures that we already mentioned, the main issue here is the inflationary time lag that now already got corrected starting in the second quarter. And this strong G&A investment to support our structure to support our execution. And this is the fuel for all the transformation that we are pursuing. And finally, we are expecting normalization of margin with margin expansion in the second quarter and normal margins in the second semester.

And highlighting here some of the elements of our strategy. This is advancing at a very fast pace, the New Pharmacy is not about tomorrow, it's about today. The New Pharmacy is what's driving higher loyalty by customers, higher spending by customers, mature store growth for the company. So, BRL 2.6 billion of digital revenues, 51% increase, 10% retail penetration. 91% of orders fulfilled at our pharmacies, 88% of the channels we're talking modern and proprietary channels, including 74% mobile, which includes 49% of the app itself. And our NPS is growing in a very good pace.

Our NPS of the digital is still not as part of the NPS of the stores. Our goal is to provide the same experience everywhere. Obviously, as we implemented a lot of agile teams. As now the productivity of the agile team is going up, the frequency of releases is improving as a result of the conversion to microservices that is going on, but there's a lot of progress already made. Migration to the cloud, all these things is unleashing the power of the [ squads ]. And the squads is unleashing the improvement in the app, which is unleashing the improvement in the NPS.

So, we are starting a virtuous cycle that should result in a couple -- maybe some time in a state-of-the-art back. So, they will have a good, robust app that fulfills 5% of the total sales of [indiscernible] but our ambition is beyond that and the quality of the experience has still a lot of [ function ]. And finally, the health app is working, really well, driven by the COVID. So obviously, this is a number of tests, it's not revenues.

Prices are not necessarily in the same year. Now, there's lower testing price than there was in the past. But it shows that the number of services provided at the health app was just with COVID test, plus the fact that we have now 230 stores providing general vaccination and this number is also increasing a lot. So, the health app is also a strong part of our value offering, and this should be integrated with the Vitat Health Platform coming forward.

The Marketplace is progressing well. We still think it's too early to publish GMV. But the GMV, whatever it is, it's increasing 5.5x versus first quarter last year. So, the Marketplace is starting to scale up. For a huge company like Raia Drogasil, anything takes time. And obviously, for the Marketplace becomes material, we need some more time. But the scaling up is taking place as we speak. Number of SKUs is increasing, sellers is increasing, engagement is improving. So obviously, there's a lot of homework to do like implementing new summer center. We are developing the logistics blueprint to use our full store network to service 3P items. So, there's a lot of homework to do, but I believe the marketplace will be transformational.

And finally, the Health Platform. We already have 900,000 unique visitors for Vitat, more than 200 free programs being offered to these customers, 800,000 views of our Health Podcast, 8.6 million unique visitors at that portal. So, Vitat, today, I mean we bought last year start-up named Techfit. That is the basis of Vitat today. This is a startup that had a lot of these programs focused in health care. And on top of that, what we're doing is we're developing a very strong content platform, which will be important for everything that we do.

And we want to create a 360-degree journey to support chronic patients with high lifetime value, integrating digital solutions with the health hub, with dispensing, with a de-risk to the treatment and then to support the chronic care of these patients. Today, we're not there yet. I mean these programs are more like lifestyle programs, stand-alone weight loss programs or nutrition product programs, but we are using these assets that we acquired to serve our core chronic customers. So, this means low customer acquisition costs, that's people are ready with us and very high customer lifetime value because we'll be focusing on our best clients.

So, these were our prepared remarks. Now, let's go to Q&A. Thank you very much.

[Operator]

And now we'll start the Q&A session. Joseph Giordano from JPMorgan is here with us.

[Joseph Giordano, analyst]

I have few ones. So first, we can see the company diversifying its expansion. So, moving away from Sao Paulo and still like higher IRRs in the range of the low-20s. So, my question to you here is like when you look at this margin of stores, so don't want to like see the hybrid or like, let's say, a lower income one, how does the sales per square meter compare to the legacy stores, right? So here, just to fine-tune our growth algorithm here. And I'm thinking on this digital penetration, right? So, it stands at 10%. How does it vary across the entire country, right? So, probably like in Sao Paulo, it's much higher than in other regions. So, that would be interesting to understand like what's the potential revenue to be unlocked on top of the existing platform.

And then moving on like to the Marketplace. So, you seem like the company adding sellers more and more SKUs back. A couple of years ago, you mentioned that the TAM for this market was about BRL 100 billion. So basically, doubling the addressable market you have at the company. So, my question is like if you have like any grasp of how relevant 3P sales could be within this marketplace, GMV? And lastly, when I think about like the historical algorithm we had to forecast higher. So, it's basically like stores, maturation and operating leverage, right? So, things haven't changed.

So, how do you see like the dilution of G&A and even selling expenses going forward since you still have like about 25% of stores to mature, but you are on the other side, investing in this ecosystem platform. So basically, like if you think back in the day, we believe we had an extra like 250 basis points and operate on contracted operating leverage, so taking EBITDA margin on a normalized basis, close to 10%. So, how should we frame this going forward?

[Eugenio De Zagottis, executive]

Joe, thanks for the questions. I'll start, if I forget something along the way, please help me, okay? So obviously, the expansion diversification has been very, very successful. Today, if you look our mature stores, we have an average sales of BRL 900,000 per store per month. And our worst market in terms of sales per store, we do BRL 750,000 a store, which is a remarkable number and much higher than the local [ incumbent ]. So, this is a number that provides amazingly then. I'm talking about the lowest. Obviously, there are markets selling BRL 1 million, BRL 1.1 million and many markets, BRL 900,000, et cetera.

If you look the new stores, the number is slightly lower than that. The number today is not BRL 900,000. The number today is like BRL 700,000 to BRL 800,000 in average. Obviously, at the end of the day, we're looking at internal rate of returns. So, the number may be slightly lower, but this number is coming on top of a structure that's already there. So, it's highly accretive and it's producing net of cannibalization, 24% internal rate of return. The other aspect is that the mature stores, they have also grown. So, in some way, this means that our revenues per store is not going down. We have been maintaining revenue per store, even if the new product has slightly less revenue per store. But we look store by store.

So, there are stores that -- with BRL 500,000 of marginal sales, we can do the returns we need, and it's fine if we get BRL 500,000 a store that depend on the CapEx, margin, et cetera, we may need BRL 800,000, BRL 900,000 to get where we are. So, the decision is top and obviously, there's an average, but it's store to store. For us, as long as the returns are there, in order we creating value, and this is what matters. So, we're very happy with the numbers the way they are. And these numbers are completely inexistent if you look around the market.

As I mentioned before, our main competitor sells BRL 700,000 per store. Our #3, after closing a bunch of stores and not opening stores for many years, is selling BRL 600,000 per store and other guys are even below that, more like BRL 500,000, BRL 550,000 and we sell in each of these guys core markets more than these guys sell, even though we are a relatively newcomer, obviously not in Sao Paulo, we're here [indiscernible] but in the other markets we don't have incumbents but we do better than them in terms of unit economics. So, this is one thing. The other is about variation in [ retail ] penetration. This is a very good point, and there is a big variation.

Let's not forget that [indiscernible] national chain, we serve -- we are -- we have operations in markets where our presence is very mature like Sao Paulo. In urban areas that have a habit of digital utilization much more entrenched than in other markets, we have small cities in the countryside with the value proposition of digital is [ diminute ], markets in which the potential is there, but our presence is not that dense yet. So, I would say our top markets, our top urban areas, we are doing more than 20%. And we're talking seniors like Sao Paulo, [indiscernible] really, really strongly there.

In small cities in the country side, it's a very low number. And in some markets like the Northeast, the number it's meaningful, but it's below the average of the company. So, there is a catch-up opportunity. The way this number goes further up, obviously, you can grow more in Sao Paulo, et cetera, but markets like the Northeast, the Midwest they have to come up. Maybe the country sites, especially the smaller seats will always be lower but still has a long way to go. But obviously, this catching up at some point, I think it will happen.

In terms of the market, your third question, I mean, I don't -- frankly speaking, I don't think there's much value now in talking a lot about total addressable market because we're talking -- we're starting from ground zero. So right now, grabbing volume, scaling up in terms of looking -- if you look at total addressable market, I mean, the market share will be so diminute that I don't know if the TAM makes any sense to talk about this right now, obviously longer term, it will make sense. But right now, we need to -- we want to scale up and we are scaling up. We believe the Marketplace will be relevant in the medium term and will be transformational in the longer-term.

Things take time in a large company like us to move the needle, but it's the pace of adoption is important. It's happening. We are happy with the pace of the scaling that we're seeing. And we have assets that are absolutely unique to leverage the business. We have more than 40 million active customers. If you get -- if you look at the digital customers, if you look at 80% of our digital sales come from customers who are at the same time, digital and wired customers. And these guys have an average frequency of buying with us of 24x a year. This doesn't exist in Brazil. I don't know if any other segment vertical that has a frequency like that. And much less so the general leasing marketplace that try to aggregate a lot of low pay or low frequency categories to try to combine a medium frequency for the customer. I think our frequency is way ahead of all these guys.

So, the moment that the customer already comes to us this frequently because of the 1P, naturally, it starts bumping into the 3P offering within the core categories. I'm not talking mobile, phones, televisions. This is a no go for us. We're talking about beauty, about nutrition, we're talking about [indiscernible] products, things like that. So, we are part of the everyday habit of the customer. The platforms are an eventual transaction that the customer does. If the customer finds, all he needs in our vertical from us with good service, the customer naturally buy from us just because he's already there.

And the other aspect is that we can use our popularity to better serve the customer to have a much cheaper logistics, much more efficient logistics than anyone else. The vision is that just as we have Click & Collect today for 1P, and that Click & Collect is 50% of our sales, we will have at some point collect for 2P. That's a big -- we're developing the blueprint for that. There'll be investments today that takes time, but that's where we're going.

And finally, in terms of the -- how we model the company, I think -- let's forget for the moment the 3P and the additional Health Platform. This is much more open ended. 3P, the way I would model is, what first assume that a certain share of the digital [indiscernible] and model. So let's say, at some point, we get total digital x percent of the company. And 3P will be a share of that. That way you can model, you can assume take rates, et cetera. And I think you can have a reasonable model like that. The most important is modeling well, the 1P business. And I think there are new drivers, but I don't think the economics changes that much.

Obviously, digital is accelerating is increasing loyalty, is driving higher spending, is accelerating stock comps, but in the end of day, it's about, okay, how much mature start grow. And obviously, the digital will make the mature store grow, I don't know, 100 bps ahead of inflation, 150 bps, 50 bps whatever there is, but to be ahead, and this will generate operating leverage. G&A is a different story. I think we've got peaking early. I think for the short term, we maintain speed and then probably we start dilutive. So, it's about modeling that.

There is maturation of stores. We have [ 100 bps] in additional contracted margin expansion because of maturation. And the other thing is we have invested 120 bps in G&A over the last 3 years. I mean, this is not to give away money. This is not money in the trash. This is an investment that will have to return through the 1P acceleration to the 2P to the Health Platform. So, in terms of value creation to the very least, you have to give the benefit of the doubt that this 1.2 gets back, if not more, and obviously we do it because we believe it's good to remark. So, this is how, I conceptualize about the model.

[Operator]

We don't have any more questions at the moment. So, the Q&A session is over. Now, Mr. Eugenio will present the final messages.

[Eugenio De Zagottis, executive]

Okay. So, thank you all for attending this conference. Thank you all for your support as long-term shareholders of the company. I think we are a company in which we really privileged to have an amazing shareholder base. Our main shareholders, they come back since the merger, if not since the IPO days of high in Brazil. And this is the trust of the shareholder base that allows us to really walk the talk when you think about long-term value creation, about not focusing in the quarter in the year and really doing what it takes to move the needle and long-term value creation. This is how we manage the company, and it has served us well that you hear, and I'm sure it will continue to see. This is only possible because we have a shareholder base that is stable, they trust our execution, and that supports this kind of mindset and that can pick us away from the everyday quarterly gains that the market try to play.

I'm referring obviously to the controlling shareholders, but I'm referring also to our main investors in our table. Obviously, I mean this is a quarter of transitory but significant margin expansion. The good news is the quarter is already behind. We've already seen a second quarter margin expansion because of the high price increase driving high inflation in investors. It will also be a peak. But then I think we get your second semester where we expect to have normal margins balances without the down effect from the first quarter and without the up effect from the second quarter. So, I think it gets back to businesses. But despite the fact of the transitory pains and we talk a lot about that, I'm not repeating myself here.

What I'd like to focus on is how -- on the structural shape of the company. I mean, how well the company is doing when you look to the structural performance. Our expansion keeps on being amazing. We grow at a pace that nobody else dreams about growing with returns that nobody has with a regional diversification that nobody has. We have an absolutely unique expansion. Nobody has been able to come close to what we have done. And when our competitive structure accelerate, demand well, they had to close a ton of stores. They had to start growing stores today made more harm than good for themselves.

So today, they don't try to copy what we're doing because they know we have unique competitive advantage in terms of market presence, in terms of operational capacities, in terms of expansion track record, et cetera, et cetera, et cetera. This has driven internal rate of return on real terms, net of cannibalization, which right now is 24% and which has been consistently above 20% despite the changing expansion profile despite the fact that we are opening a lot of small cities, we are entering -- we opened a very much lower number of stores in Sao Paulo than in the past, focused everywhere, even in Sao Paulo as B and Class and the returns are there, which show that we have the capacity to keep moving down in the market and keep expanding and creating value for a much longer term. This is 260 stores. The guidance for this year. We don't have an official guidance going forward. But I think we still have a very strong expansion for many years to come with unmatched returns.

If you look at how the mature stores are performing, 8.9% of growth, which is way more than 1.4% more of the price or the last price increase before this quarter. And let's not forget that we have 120 bps of headwind from the COVID peak next year. So, we will be talking more than 10% mature store growth taking out the COVID testing. So, the structural part of the structural performance, so to speak. Market share is doing well.

Obviously, the metrics are blurred this quarter because of reporting. But if you look other metrics like our pharma share, like share with amongst lot of pharmacist do really well. We have stable Sao Paulo, growing everywhere else. The digital has accelerated in a pace nobody dreamt was possible. It's 10% of total sales, it keeps growing. We have the most modern channel mix in the market, the very low dependence on third-party apps, only 8% is coming from [indiscernible] food, et cetera. Only 4% is coming from full sales.

Our competitors who have reported these numbers, they have more than 20% from sales in the mix and much higher reliance on third party apps that we have. And today, we have BRL 2.6 billion of digital revenues. We are close to -- RD Digital alone is close to becoming the fourth player in the market if it was a separate chain. And finally, the competitive gap keeps moving on, not only in execution, not only in digital, but also in sheer scale.

We are close to sell on more than the sum of players 2, 3, 4 and 5 in the industry, which shows the size of the scale and competitive difference we have built up. And this will keep expanding because not only we're the largest chain in Brazil, but together we're to the fastest, which is a paradox. It's not -- it would never be expected. I think the smaller players have the obligation to outgrow this, but this is not happening, and I don't know if it could happen anytime soon.

So, thank you again for your support. We will be in New York next week in the teleconference, and we are available. Our IR team is available for any of you. Thank you very much.

[Operator]

RD's conference call is now over. We thank you all for participating, and wish everyone a good day.