Grupo de Moda SOMA SA

BOVESPA:SOMA3

Earnings Call Analysis

Grupo Soma Q1 2024 Financial Results and Strategic Updates

Grupo Soma's Q1 2024 gross revenue increased by 2.8% to BRL 1.4 billion, with a net revenue rise of 7.5%. The company highlighted substantial growth in its direct-to-consumer (DTC) channels, especially digital, which saw a remarkable 25% rise, representing 70% of total revenue. Despite a 26.7% decrease in wholesale channel revenue, Grupo Soma forecasts significant recovery and growth in Q2. The gross margin improved by 2.5 percentage points to 44.1%, offsetting negative tax impacts. Adjusted EBITDA increased by 2.6% to BRL 146.2 million. Farm Global saw impressive performance with a 45.3% increase in gross revenue, driven by strong international sales.

Strong Revenue Growth Amidst Challenges

In the first quarter of 2024, Grupo Soma reported a gross revenue of BRL 1.4 billion, reflecting a modest increase of 2.8% compared to the previous year. This growth was driven primarily by its own direct-to-consumer (DTC) channels, which accounted for 70% of total revenue, growing by 12.5%. The company concluded the quarter with a customer base of 5.9 million and 1,042 retail locations, including 375 owned stores and 607 franchises. However, wholesale channel revenues saw a slowdown, attributed to an earlier revenue recognition, leading to a 26.7% decline against the first quarter of 2023【4:1†source】.

Earnings Performance Lacking Behind Expectations

Hering, a key brand under Grupo Soma, experienced a net income of BRL 21.3 million, down 63.7% year-over-year, shrinking to an adjusted net income margin of 1.7%. The company's gross margin improved to 44.1%, despite this dramatic net income decline, up 2.5 percentage points from the previous year's first quarter. This is attributed to increased contributions from DTC channels and a reduction in markdowns【4:1†source】.

Strategic Initiatives and Future Projections

Grupo Soma aims to enhance gross margins further, targeting a structural recovery to historical levels of around 66-67% by 2025. The management emphasized the importance of gradual price transfers to mitigate tax impacts. Notably, the sector is expected to witness continued improvements in margins based on adjustments to their pricing strategy and production efficiencies【4:1†source】【4:12†source】.

Strong Growth in Digital Channels

The company noted a significant 68% growth in gross revenue from digital sales, which underscores shifting consumer behavior towards online shopping. This channel has emerged as one of the fastest-growing segments, further solidifying its revenue contribution as it aligns with overall industry trends towards e-commerce【4:17†source】.

Significant Changes in Product Lineup and Strategy

To address past challenges, particularly in seasonal product offerings, Grupo Soma plans to refine its inventory strategy and reduce reliance on winter garments due to unpredictable weather patterns. They will focus more on flexible inventory management and precise market positioning【4:4†source】【4:10†source】. This transition is underpinned by successful product traction in both their own channels and collaborations, which have historically driven sales【4:5†source】.

Overall Outlook Remains Positive

Despite the current fluctuations in financial metrics, the company's leadership projects a positive outlook for the second quarter of 2024, anticipating a recovery and significant growth in revenues through both direct sales and optimized wholesale operations. The confidence stems from strong performance indicators observed during showroom activities, alongside continued push in digital growth【4:3†source】【4:17†source】.

Earnings Call Transcript 2024-Q1

[Operator]

[Interpreted] Good afternoon, everyone, and welcome to the Earnings Call for the First Quarter of '24 at Grupo Soma. This presentation and the release are already available on the IR website in the company. I want to take advantage of this moment to say that we're recording this event which will also be available on our website.We'll start off with a message from our CEO about the first quarter. Then after we'll get into more details with Gabriel Lobo, presenting the operation and financial results in the first quarter. We'd ask you to all send your Q&A through the platform.Now, I'll pass the phone to Hobarto so we can begin the presentation. Thank you very much.

[Roberto Jatahy Gonçalves, executive]

[Interpreted] Good afternoon, everyone. As we begin our presentation for the first quarter of 2024 at Grupo Soma, we received a gross revenue of BRL 1.4 billion with an increase of 2.8% compared to the strong base presented in the previous year. We ended the quarter with an active base of 5.9 million customers, over 14,000 wholesalers and a total of 1,042 stores, 375 of our own stores and 607 franchisees.As we analyzed the brands that are part of the Grupo Soma ex-Hering portfolio, the gross revenue reached BRL 909.5 billion, and a peak of 8.7% in regards to the first quarter of '23. This growth was mainly levered by the performance of our own DTC channels that represent 70% of our total revenue at Grupo Soma ex-Hering.On the other hand, the wholesale channel had a slowdown in the revenue with an increase of 1.7% compared to the same period of the previous year. This slowdown is a consequence of an important anticipated revenue in the channel due to the high levels of services we had at that time. This impacted the company's cash position without any benefits when we look at the year as a whole, which made us return to 2024 to the standard billing calendar.Therefore, we should have significant growth in the second quarter of '24. And this displacement mainly impacted Farm, which is why it's important to analyze separately the revenues of the brand's own channels, which represented 10% growth versus the first quarter of '23 with an emphasis on physical retail, which grew 16% versus the same period in the previous year.Wholesale channel revenue dropped 26.7% versus the first quarter of '23, and this drop will be reversed in the second quarter of '24 as showroom sales grow well versus the same period last year. Maria Filo had a growth of 15% in the DTC revenue compared to the first quarter of '23, with a significant markup gain as the volumes of markdowns dropped significantly.If we eliminate the past collections and compare only the winter collection, the growth in DTC would be over 30% versus the same period last year. As we mentioned, Maria Filo is going through a change in the creative direction that impacts the aesthetics of the product and aims to work at a price point that's higher than its historical level with an average price between Animale and Farm.Since the first collection of the new creative team, we had a very strong traction in the DTC channels with greater speed of adherence to new product proposal. When we talk about the B2B channel, we can observe an important churn at the base, considering the change in price points, but we also understand that there's an interesting market to be explored in women's clothing in this price range.Among the other brands in the Grupo Soma's ex-Hering portfolio, I want to highlight Farm Global. It was a spectacular quarter for the brand when it comes to accelerating the top-line growth and profitability, and also returning to historical EBITDA margin levels. Farm Global reached a gross revenue of $34.7 million, an increase of 45.3% compared to the same period last year.In addition, the active customer base continued to grow quickly, reaching more than 200,000 active customers in the base, which represents an increase of 30% compared to last year. In the first quarter of '24, the digital channel continued to show strong traction with a 68% growth in gross revenue, driven by a notable increase in sales in Europe, especially in the city of London, which remains as the second largest sales volume in the channel, only behind New York.In the wholesale channel in the U.S., we had a high volume of full-price sales, consolidating Farm's position with the top 5 brands and the biggest performance in the department stores. Despite challenges related to overstocking in many department stores, we were able to achieve robust 34% growth in the selling compared to the first quarter of '23. When we look at the other top 5 brands in contemporary fashion, department stores were very comfortable because we still have a lot of room for growth. Just as an example, #1 sells 4.5x more than Farm, and #2 sells 3.7x more. So we still have a lot of room for growth.And when it comes to brick and mortar retail, we had really good growth in the first quarter of '24. In the pipeline for this year, we have plans to open 4 more stores in the U.S. in addition to 1 in Paris. We're also expanding through franchises. We opened a store in Turkey, another 1 in Mykonos, and soon we'll open one in Dubai. It's very clear to us that now is the moment to accelerate the opening of physical stores.Farm Global, given its high markup and a much shorter capital cycle than what we have in Brazil, has no cash-generating problems to support expansion. The challenge is in finding suitable points with palatable costs at the speed we would like. With each physical store opening, we observe a relevant growth in our active customer base, which ends up -- will end up being captured through our omni-channel in digital. Therefore, year after year, we've been expanding in a sustainable and responsible way, conquering space in the global market.And I remember a bit of the excitement we had with the first store we opened in the U.S. 5 years ago at Soho. At Soho, we had that big dream and we were really aware of the challenges we would face. Now as we look behind us, we have profound gratitude to see that this dream became a reality. Together, we were able to build something that's extraordinary and we have a lot of achievements ahead of us.We keep up with increasing the assortment of Farm Global and the demands for swimwear and shoes lines, which were timid and seemed to be stronger and stronger. The desire for these 2 categories has been surprising and now, as we access a more mature and efficient production chain, we expect to have a significant growth in the shoes line.Now moving on to Hering, the total gross revenue reached BRL 522 million, with a drop of 6.1% compared to the first quarter of '23. In another quarter, the significant growth of our own channel stands out, with an increase of 11.8% compared to the same period in the previous year, mainly driven by the digital channel. E-commerce had its third consecutive quarter of highest growth among channels, with an increase of 25% compared to the first quarter of '23, reaching an all-time high revenue of BRL 70 million and a CAGR of 41% in the last 5 years, favoring full-price sales.We also want to highlight the success of the collab with MV on March '24 for the second year. These have generated high engagement among customers, conversion rate for the younger public. In the wholesale channel, we have a drop of 21.3% when we look at the 23% growth upon '22, and this is mainly due to the fact that the customer went through a second semester that was overstocked in the overtops line due to very warm winter that happened in '23. It's really clear to us that we can't rely on these items from winter because the world is going through a climate transformation, we need to reinvent ourselves in these categories.So unlike the wholesale channel, where we don't have interferences on markdown policies, the sell-in revenue for the franchisees did not have such a sharp drop because we were able to act quickly during last week, winter, marking down this product category and not carrying inventory to the subsequent collections. The sell-in revenue for the franchisees reached BRL 157.9 million in the first quarter of '24. A 1.4% drop versus the first quarter of '23, we had a shift between the first quarter and the second quarter. In '24, when we look at the autumn and winter collections, which tends to benefit a better performance in the second quarter of '24, which is really similar to what happened to Farm.We hope that in the summer collection, the turnover in the second quarter will get back to delivering good levels of growth. The sales performance in the current showroom has been very positive, already considering the change in the in-season volumes. We're confident also in the double-digit growth in the top line for the B2B channels for the third quarter of '24.The gross margin reached 44.1%, which is in line with what we mentioned in the last call, with a strong gain of 2.5 percentage points in profitability compared to the first quarter of '23. Despite the negative tax impacts in the first quarter of '24, we still see margin growth opportunities in the upcoming quarters coming from the work done in Hering's industry.Now we understand the focus is going to be repositioning the brand, improving the perceived value of the product, and consequently the gross margins. We also believe that there's a lot of opportunities for better management in the B2B channels that we should capture from the second half of the year.And so, with this, I end my presentation and I'll pass the phone to Gabriel so that he can present the financial indicators in the quarter. Thank you.

[Gabriel Silva Leite, executive]

[Interpreted] Good afternoon, everyone. And as an initial highlight, as we get into Slide 11, the gross revenue in the brand portfolio without Hering reached 900 percentage points, a growth of 8.7% versus the first quarter of '23. As Roberto mentioned previously, this growth was really leveled by our own channels with an increase of 12.5% compared to the same period in the previous year.The net revenue went up 7.5% versus the first quarter of '23, and the growth in the net revenue below gross revenue is mainly due to 2 factors that increase the deductions from gross revenue. The first item, which comes from the effects with the Law 14789 that was approved at the end of '23, [indiscernible] on tax benefits, and that led to an impact of 0.9 percentage points in the first quarter of '24. The second point that was the main impact is due to the increase of 2.7 percentage points in the share of digital and total gross revenue, and consequently, that generates a default effect with an increase of 0.6 percentage points in the total tax rate versus the first quarter of '23.On the next slide, moving on to Slide 12, the gross revenue ex-Hering reached BRL 509.2 million, a growth of 4.3% versus the first quarter of '23, reaching a gross margin of 65.6% in the first quarter of '24. And this represents a drop of 2 percentage points compared to the same period last year. And it can be explained mainly due to the shift in tax rules that recently were implemented as I'll present up ahead.First, we had an effect coming from the Law 14789, as you mentioned, and this leads to a 0.4 percentage points effect with the taxation of the PIS/COFINS related to the tax benefits from the fashion law for Grupo Soma ex-Hering, 1.3 percentage points related to the change in the rules related to the withdrawal of the ICMS credit in the PIS/COFINS base. And this change, as we mentioned in the last quarters, happened as of May '23, and that has a negative base effect in this quarter only, 0.2 percentage points due to the gain in digital share in the gross revenue, which impacts the increase in the default. And that has a carryover effect on the gross margin, and 0.2 percentage points, which is more connected to the actual operation related to the deferral and the launch of the collections for some brands that chose to have a preview before Carnival and launch a little later after Carnival.And with this, we had a carryover in a longer markdown period, and we launched the collections more towards the end of the quarter. We understand that this was actually an extraordinary movement compared to last year. And the gross margin gets back to the levels that are a little more normalized from now on.And moving on to Slide 13, Roberto already mentioned the gross revenue at Hering, and that's why I want to highlight the impacts connected to the net revenue. The net revenue at Hering dropped 7.8% compared to the first quarter of '23. That was impacted by the drop naturally in the gross revenue, but also because of an increment in the rates of taxes on sales.The first one is the drop in the sub-engine impact in the quarter. Here, once again, the biggest effect is the volume of units in the industry in RDC due to a lower share in B2B in the total revenue at Hering. This impact in the total rate was 0.7% versus the first quarter of '23. And the second effect is related to provisions that don't have cash effects, as we mentioned, due to the effects of the Law 14789, which taxed PIS/COFINS on tax benefits, and in this case with Hering due to the apparel law, the impact or clothing law had an impact of 0.6% in this first quarter of '24.And the third point is related to the increase of the share in digital where it grew 3.8 percentage points. If you compare with the first quarter of '23, and as a consequence, that impacts the DIFAL that contributes 0.4 percentage points versus the first quarter of '23.Moving on to Slide 14, we talk about the gross profit at Hering and the gross margin of the company. And in the first quarter, Hering's profit reached BRL 195.4 million, in line with the previous year. So we want to highlight that we had significant gains in profitability with a gross margin reaching 44.1%, an increase of 2.5 percentage points compared to the first quarter of '23, which more than offset the fiscal impacts that were described in the previous slide, as we mentioned before.Several factors contributed to this increase in the gross margin in the first quarter. Roberto has mentioned a few of them, but it's important to mention that first of all, there was an improvement in the channels with greater share from our own channels, and also the e-commerce channels, or DTC, gained share in the total revenue.And besides this, we had an increase that was significant in full price sales and operation, and a drop in the markdown levels, and higher sales of collection items, and finally, the profitability of the digital channel, which is something we also have been searching for ever since the beginning of '23. And the profitability in digital grew, contributing to the expansion of our total gross margin. Our digital at Hering has delivered similar levels to the margins of those in physical retail, which demonstrates to be something very positive. Since this is one of the fastest growing channels in the operation overall, it's what's most growing in the operation at the moment.And so, moving on to Slide 15, when we look at our DNA, that added up to BRL 552.8 million in the first quarter of '24, and that represents 38.6% in the gross revenue in the quarter, a slight increase of 10 basis points versus the first quarter. And this demonstrates our solid discipline, as we mentioned, ever since the end of the year '23, where the year '24 would be a focus on SG&A. And even in a scenario where Hering's revenue is dropping in the first quarter, we were able to keep our expenses under control, and we were able to keep this really flat. And that was important to control and manage our SG&A even in this very adverse scenario.If we only consider the ex-Hering expenses, we would have an important improvement of 160 ex-Hering basis points. So when we include the line for other items, when we consider our long-term incentive plan, we consider a total of 40.1% of the quarter's gross revenue, in line with the previous year, adding up to a total expense of BRL 573.7 million.So then on Slide 16, we can see that in the first quarter, our adjusted EBITDA averaged BRL 146.2 million, an increase of 2.6% versus the first quarter of '23. The adjusted EBITDA margin was 12%, an increase of 20 bps compared to the first quarter of '23.Now, when we get into our net income on Slide 17, the adjusted net income added to BRL 21.3 million, a drop of 63.7% compared to the first quarter of '23, reaching an adjusted net income of 1.7%, a drop of 3.2 percentage points versus the first quarter of '23. And so, the first quarter of '24, I think it's really important to explain that the effect and accounting impact came mainly through the provision with the effect of Law 14789, where Soma Group took on a conservative approach in the provisions for the law, which considers the taxation on PIS/COFINS and also income tax and social contributions coming from revenues that are generated through tax benefits from the fashion law and the clothing law.And these effects have an accounting impact on the gross revenue deductions and the income tax and social contribution lines. In the first quarter of '24, these effects added up to BRL 49 million. And among these, BRL 40.8 million were provisioned in the accounts, but did not have a cash effect. This is a really important point to mention. And BRL 8.2 million had a cash impact in the quarter, and they're related to the taxation on PIS/COFINS that was paid by our subsidiary, Cidade Maravilhosa, that impacted our gross revenue deductions line.If we exclude all of these effects related to the Law 14789, the adjusted net income would be in a comparable base of BRL 70.3 million in this quarter. So we would have actual growth if compared to the same period last year, if it weren't for our better conservative approach and our provision policy in regards to this law.So, on Slide 18, we had an important improvement in our financial cycle. And of course, that led to an improvement in our cash cycle in the company. We were able to have an improvement of BRL 102.4 million in our cash generation if we compare to the first quarter of '23, the operational cash generation them added up to BRL 145.6 million in the first quarter, which represents 10.2% of the gross revenue, which is led by an important -- efficiency in the working capital in our stock line, which is something we've been mentioning ever since the end of last year.So at the end of the first quarter, the financial cycle added up to 242 days with an improvement of 7 days in the annual comparison. The improvement in the cycle reflects the success in this process with the work adjusting the average stock terms that has been taking place for a few quarters, enabling a reduction of 14 days in the 1-year period, getting back to very healthy levels.On Slide 19, we have 1 of the main indicators for debt in the company, which is mainly the net debt to EBITDA indicator, and it's important to mention that this is the adjusted pre-IFRS EBITDA. And this confirms our financial discipline in the company, and it reinforces our commitment to have this indicator close to what we consider healthy, which is close to 1x net debt-to-EBITDA. We ended with -- I want to remind you that we have the adjusted pre-IFRS EBITDA.And on this slide, we also bring the schedule for maturities of this debt, and we had already mentioned this during the call for the closing of the year with an important aspect of re-profiling this in the beginning of the year with the issuance of the CRI financial instrument, and that redefined the profile of the debt at really attractive rates and a good duration. We had a flow of amortization that's a lot more adequate, and an expectation for cash initiatives in the company in the future, considering 76% of the maturities of the debts in the long-term.And with this, I want to end the financial presentation and get into the Q&A.

[Operator]

[Interpreted] We'll start off with our Q&A. And our first question comes from Luis Guanais from BTG. He's asking about the space for improvements for the gross margin and Some ex-Hering and increases in prices to offset the growth in the tax load. Could you please talk about this a bit?

[Roberto Jatahy Gonçalves, executive]

[Interpreted] The gross margin that we noticed, we've been searching for structurally is about 66%, 67%. So, yes, it's over time the path to recover the historical margins is transferring this to consumers and increasing our prices. We didn't start this in the first quarter because we had already sold the autumn collection and we couldn't transfer this price yet. But in the second quarter, we start having a gradual price transfer. And we understand that this won't lead to major impacts because the margins in the Some Group ex-Hering are not that sensitive to prices.As we can see, in other operations, they have a lower average price, so we're really comfortable in this sense, and we believe that from 2025 onwards, we'll have margins already demonstrating the historical levels.

[Operator]

[Interpreted] So, our next question comes from Maria Clara, Itau BBA. And she wants to know about how to explore the Hering trends. And when we look at the gross margins, you mentioned that there's room for more gains over the year. Could you talk about the main initiatives that contributed to these gains? Please provide them.

[Roberto Jatahy Gonçalves, executive]

[Interpreted] Well, I think that, first of all, you still have some important fundraising in regards to the project that we mentioned, and that have been delivering better margins. But I think the most important lever we have here is considering the increase in volume, reducing fixed costs, and we know that the sensitivity in these volumes to Hering's margins are really high. And we're already ready to begin all of this manufacturing process with the Farm and [ Foxton ] brands, and we're probably going to replicate this to other brands. This will increase volumes, reduce our fixed costs. And we have another lever that's also very important, which is the improvement of the perceived value, separating the average price in regards to the peers and especially the magazines or department stores.

[Operator]

[Interpreted] Our next question comes from [ Gustavo, XP ], and he's asking about the pressure for profitability related to tax impacts. Should we see this impact throughout the year, or do you think it's going to be possible to mitigate this with a mix or price transfers, as you mentioned?

[Roberto Jatahy Gonçalves, executive]

[Interpreted] We should -- considering they weren't able to see this throughout the quarter, we should end this year with about 66% or 66.5% gross margin ex-Hering. And from '25 onwards, we should get back to 66.5%, 67%. And these are the historical levels when we consider the gradual price transfers.

[Operator]

[Interpreted] Gustavo also mentioned Farm Global. Farm Global has been growing very well, and you guys mentioned some adjustments and inefficiencies that were already solved in Europe, but what's the profitability like there now, and can we quantify this to mention the improvement of these adjustments?

[Roberto Jatahy Gonçalves, executive]

[Interpreted] Well, the gross margin has been converging with this period overall. We had many efficiencies, but this has been converging from the margins in the U.S. And we also noticed that the margins there have been growing compared to previous periods. So as you mentioned, numbers are a lot greater than in Europe, and we're keeping up with the margin in the global operation of about 15%. So we've already corrected this through not only an improvement in the margins in Europe, but also an improvement in the gross margins, as we can see, and we get back to a margin at the historical level.

[Operator]

[Interpreted] So then, he also wants to mention another point about Farm Global. When it comes to growth, do you expect that Farm Global will keep up with the same pace throughout the year?

[Roberto Jatahy Gonçalves, executive]

[Interpreted] Well, no, actually the expectations are to grow at rates about 25%, 30%. You can't -- although you have this kind of potential to grow over 80%, it's not recommended. We have to do very good work and very strategic work to enter the regions in a careful way. Growing at 50% does not represent sustainable long-term growth in the market. So, I should keep up with 25% to 30% sustainable growth as guidance, which is what we believe is healthy for the operation, not necessarily what's potential, but what we consider is healthy and sustainable.And so, when we consider the departments and improve our own store management, we have to keep up this pace that we'll be able to deliver a real robust operation internationally.

[Operator]

[Interpreted] Now we're going to move on to another topic. [ Eric ] from Santander has had a question about the wholesale channel in Brazil for some ex-Hering and Hering. Could you please talk about the stock levels and the health of this channel?

[Roberto Jatahy Gonçalves, executive]

[Interpreted] Well, when we consider ex-Hering, we see that the levels of stocks are very healthy. And this is very clear in the showroom we had in April, where our results are very good. So when we talk about Hering, and we mentioned this in the previous calls, and the wholesale channels, we do have overstocking. We can notice this, especially in the winter products, because last year we had a winter with very high temperatures, and that actually hindered the sales in the showroom for autumn. So what we can expect up ahead is the second quarter mid-singles. And if we consider the showrooms that are going on now, we should deliver double-digits.

[Operator]

[Interpreted] Now our next question comes from Irma, and she's asking Gabriel to get into more details about the factors that led the gross margin of the operation ex-Hering downwards at the first quarter.

[Gabriel Silva Leite, executive]

[Interpreted] Thank you for the question. I think we provided a lot of details about this in the call where we mentioned this also in the release, explaining more details about the main effects, as we mentioned. These are not commercial effects if you look at the operation commercially, and we consider that markups are actually growing, but these are tax effects only.And as Roberto mentioned, we throughout the years are going to transfer this to pricing, but this needs to be done gradually. The main effects, as you mentioned, within the call are the Law 14789, which came at the end of 2023 with an impact in the PIS/COFINS line, and then the first main effect, I think, is more base-related, which is the removal of the ICMS in the PIS/COFINS base, and then we look at the COGS line, which affects our margins, of course.And of course, that impulses the default, and that also impacts the ex-Hering gross margin. So these are the three main effects, and all of them are more connected to fiscal aspects than actual commercial aspects. And we understand that the operation itself will continue to be very healthy.

[Operator]

[Interpreted] Irma is sending another question to Roberto. And she wants to understand more about the Hering stocks. Is there any lesson learned of the initiatives you guys could avoid up ahead?

[Roberto Jatahy Gonçalves, executive]

[Interpreted] Well, I think that by what you're mentioning with the over-the-top lines of the Hering wholesale operation, we've been talking about this a lot. And we really had a winter period last year that was very much -- that was very challenging with very high temperatures. And we were not able to eliminate this channel or the commercial policy for the channel. And of course, these over-the-tops were not marked down very differently than what happened in the physical store.So yes, it's a lesson learned, and we need to understand that we can't really foresee weather conditions anymore. Climate change is becoming more and more intense. And our recommendation, and what we're working towards, and we can reduce these winter items and have them at lower proportions, so really heavy items, we think, are really risky to continue to work with in our Hering assortment. So it's like an assortment correction where we add less weight in the over-tops, and we bring this into the collection.

[Operator]

[Interpreted] Yes. The last question by Irma is, the store opening plans, and should we count on a temporary pressure in the margin?

[Gabriel Silva Leite, executive]

[Interpreted] Well, no. Actually, the margins in the U.S. grow compared to their history, and the operational inefficiencies drop. So we really don't see any pressure in the margins. Actually, now with Europe growing more, considering that we have a price point that's higher than the U.S., the Europe margins should be even better than the American margins. So. there is no caution point in regards to future margins for the international operation at Farm.And in regards to margins, of course, 1 other point that involves Europe. We have a real big relevance from the U.K. in the continent. And in the U.K., due to market conditions, we can have a higher markup than what the operation already had in the previous sellout. So our biggest markup, which is extremely high, and that brings in major profitability in the operation of the country. Due to the relevance in this country, the overall share, makes us push the markup upwards in Europe overall. So this is important with our positioning in the U.K.

[Operator]

[Interpreted] Joao Soares has another point. And he wants to cover the performance of B2B at Hering in the second quarter onwards. So what was the summer showroom like, and how would this revenue impact?

[Roberto Jatahy Gonçalves, executive]

[Interpreted] Well, I think we can expect second quarter with a mid-single growth in B2B. This is coming from an issue, which is the showroom that happened in November. And we went from a showroom in November where people were really scared with the winter issue that they had experienced last year. So once again, we had another issue with overtops, and we had tops that were offered at a higher quantity than what we would like to offer nowadays.We see there's a lot of concern from wholesalers in this category of products due to the predictability when it comes to temperature. But when we look at the second quarter, we're really happy with the wonderful performance we're noticing in this showroom that will lead to a third quarter that's closer to mid-teens.

[Operator]

[Interpreted] Okay. Our next question comes from Vinicius at UBS, and he wants to ask if you could talk about the quality of the inventory at the wholesalers and franchisees for Hering, and could you talk about the diagnosis of the performance in the wholesalers?

[Roberto Jatahy Gonçalves, executive]

[Interpreted] Well, the inventory and stock at the franchisees, we understand that they're at very low levels. And we've seen ever since the third quarter last year and the fourth quarter last year, we had a very big mismatch between the sellout and sell-in. We talked about the in-season issue and pre-season issues. And so, today, we can see franchisees with the undersupply, and we can see why we adopted this policy.So we have another point, which is, we have more control over the commercial policies of the franchisees, and we didn't allow the more winter items to have no markdowns. And we actually have a pretty low stock in the franchisees. So when we talk about wholesalers, then we do have stock levels with the winter products, for example, as you mentioned, with low turnovers, and we hope to be more diligent in the assignment provided during this period of the year. And with this, we hope to get back to growing in the channel with more product intelligence.

[Operator]

[Interpreted] We have another point here from Vinicius is already answered, but we want to emphasize, which is how are you considering price increases due to the higher tax load, especially in the Soma ex-Hering? If you consider all the tax increases, what's the gross margin you think is adequate for this sector?

[Roberto Jatahy Gonçalves, executive]

[Interpreted] As we mentioned, we're going to recover these margins at structural levels that we consider to be healthy due to our historical levels. So, in the first quarter, we weren't able to transfer this, but I think it's important to mention that we were not able to capture this throughout the quarter.But we are sure that these price increases can take place gradually, and we understand that the ex-Hering brands are a lot more protected in regards to this because the price sensitivity is not that big. It's actually pretty small. We had a pricing test in the operation, and we can see the perception is not that significant. So you can easily recover the gross margin levels.

[Operator]

[Interpreted] Now, Vinicius also brings out a point in the growth of Farm International, and he wants us to discuss a bit more of the growth drivers and the receptivity towards the brand out of Brazil.

[Roberto Jatahy Gonçalves, executive]

[Interpreted] Well, I think the receptivity in the brand is spectacular. And everyone wants Farm, and even some commercial spots. We're going to have another store in London. It's a really difficult area and very challenging considering the mix. So, these are owners that really take care of the mix of products, and they've been inviting us to open up stores in some of the best spots in Europe and the U.S. So I think that the acknowledgment and brand recognition we have is very strong. We see Farm present in many spots.And when we look at the growth drivers, we look at wholesale, and we see that we're considered 1 of the top 5 brands that most sell at full prices in department stores in the U.S. So when we wanted to look into what the gap was for top 1, we were very happy because we saw that there's a lot of room for growth still. And now with a better assortment with shoes and accessories, and we have a lot of room to grow. When we consider digital, we've been growing at high rates, recurringly. And that demonstrates gain in the brand awareness. And so, physical kind of retrofits this. And so, these stores have profitability that's quite interesting.And the Farm International agenda is the opening of physical stores. And with this, we have also seen some features and options when it comes to franchisees and other markets, especially with other franchisers trying to operate with Farm in certain countries. And we've been very cautious about this process so that we don't take the wrong steps. So everything when we consider the global scenario is kind of uncertain. So, we'd rather be careful, research, and ask questions so we don't take on the wrong movements, searching for more accelerated growth that would not bring much value to the operation.

[Operator]

[Interpreted] Well, with this question, we're reaching the end of our Q&A, and I'll pass the floor back to Roberto for his final remarks. Please, Roberto.

[Roberto Jatahy Gonçalves, executive]

[Interpreted] Yes. I want to take advantage of this opportunity here to talk about my beliefs towards certain brands. And I want to start off with Farm Brazil. Farm Brazil is a brand that is spectacular. It's far from its full potential in some way this year due to all of the issues we had. I think we've been very diligent when it comes to stock controls. And we can see that Farm is selling DTC at higher rates than anything else. So, this is a point we're going to work on next year and really test this to understand the maximum potential of Farm. Because when Farm pushes 15% to 20% growth, that generates a lot of working capital. But I think that was an important step we took on.We were kind of scared with the provisional measure And we kind of held on to Farm Brazil's growth in the DTC channel especially. But the Farm International issue was not related to this in any way. It was 1 situation we had with wholesale in the past. But in the second quarter for Farm, we consider it's going to be very positive. The third quarter will be good and the fourth quarter will be exceptional at Farm in Brazil. So, I'm really comfortable in sharing this information because it's really solid.And now about Farm Global, we talk about growth a lot and how we're going to grow quicker. But in the beginning, I really didn't believe in it that much. I thought it was going to be a challenge. But Farm's team worked on this and they did some spectacular work. And now Farm Global is a real reality in the Soma Group portfolio. It really moves the needle and we have a huge addressable market. So this operation is an operation that enchants me more and more and surprises me more and more.Now, I also want to talk about NV, another point that I really believe in. So NV, after we performed the acquisition of Hering, we had the acquisition of NV and then we had this vision. And at that moment, they were going to grow and they wouldn't need help. And then, we can see that NV really needs help in the creative process, in the sourcing and with Hering at another business unit. We're going to be able to focus a lot more on this with our team. And we'll be able to quickly put NV back on the track.And NV basically doesn't have wholesale in 19 stores, a lot of growth still coming from NV. And so, I wanted to talk about Hering as well and my perceptions in this period. And so, I was leading Hering together with [ Ciago ], and Hering does have an opportunity for improvement in gross margins.I have not been able to give Hering the wholesale franchisee model. So we have this model with offices and commercial reps. But I think that now with Ciago and Alexandre, they'll be able to actually make this channel more efficient. So I believe in the growth of revenue at Hering and gross margin revenue growth as well. So, we've been seeing a lot of noise and a lot of skeptical investors when it comes to the capacity of these two companies to work together.And this pessimistic interpretation of what we're seeing has a bit of a distortion. And I have a very positive vision in regards to this deal. It was built in a very long conversation process with Alexandre. And this started off ever since the acquisition with Hering. And we spoke about this culture issue a lot. We have a real big perception that this could be a niche. We're really mapping this out, and we've been protecting the business units. I was being very cautious about this. And we know we have these risks. We know this could happen, and we're never going to neglect this, neither me or Alexandre. We've been keeping our eyes open a lot, and so that we can ensure we have a sustainable company that is highly profitable.And now when we talk about culture, I want to remind you all that about how I started working together with Marcello. Everyone has a perception that we were having a real easy relationship for 15 years without any kind of lack of understandings. We have diverging opinions, me and Marcello, in regards to many issues in the business. We always found some common ground though. But the issue now is that the Soma Group model really protects these kind of frictions, which is based on governance and agreements and the rituals.And today, we have real simple work that doesn't generate friction throughout the year. In regards to budget issues, we have a budget. We agree upon this with the director for each brand. Both of the parties have to be comfortable with this. Once this is agreed upon, we request an EBITDA margin, kind of pushing the EBITDA margin a little upwards if we think the top line is going up. And this kind of unleashes a potential purchase and, of course, the calculation for expenses. And this is all agreed upon.Once this is defined, we block the budget which is our budget cap. And people have to fulfill this budget that was agreed upon between the operations and expenses are also blocked systemically so that the operations can work in an independent way, in line with budget agreement. So this model never gave us any problems. We never had any kind of negative points. We have a lot of partners and shareholders here for many years. And I don't think we're going to have these kind of problems.So, basically we can bring a bit of this knowledge and bring this into the business unit level. So this is more of a process and agreement point here than an actual sensitive friction towards the operation. Me and Alexandre are also very mature people. We understand the challenges we have ahead, and also the huge upsides we have to capture. We have all of our assets and heritage in the company. Everything's locked in for 10 years. My family's equity, Marcello's, Alexandre's equity. And we're really satisfied in the past 2 or 3 months we've been coexisting with this plan.Of course, we have divergences, but everyone is being very optimistic about the business, and we consider it's a very good move for the business. There's no lack of alignment or fight. We're far from this. We have very positive agendas. We're all eager to get to work and find many synergies. The volume of synergies we mapped out are in 3 months working here. Of course, we had previously already designed some of these points. We started seeing and noticing things we didn't map out before and it's really easy to capture certain things. We even have some non-recurring and recurring synergies.So, this deal, in my opinion, is something I continue to believe in. If I were to get back in time, I would definitely have this deal again. No repenting here between me, Marcello, Katia, et cetera. But, of course, that merger impacts personnel, teams, and all of this. But we've been working with support from Arezzo also to try to mitigate any problems. We want to try to take advantage of all the talents in Soma and all the good talents at Arezzo. And we really want to take advantage of the talents we have and the main synergies we need to search for are costs, contracts, expenses, and especially synergies for revenue.And synergies are huge. They're far from just being synergies for women's shoes in women's brands for Soma Group. I'm really happy when I see Katia and Marcello already interacting very well. Katia has a great relationship with Alexandre, and they created this great connection and relationship. Now we're going to be working on the first Pulsar, which is the Farm showroom within the wholesale Arezzo stores. I'm going to be present next week.Alexandre will be in New York, but I'll be with Marcello at this Pulsar event. So I think things are moving along. And I'd say, things are even better than they seem to be. So I think we have a big capacity to handle partners and shareholders and we also have a good relationship and harmony. Marcello also really encourages this a lot in the company and I'm sure we'll have a lot of harmony and good relationship between the business units.And what we've been trying to do is this process and methodology is what we already do in Grupo Soma. So the business units are going to be more protected at this moment, but we're going to feel this out better. And when we look at Soma, we see that there's the Soma culture and we have the subcultures in each brand. And when we look back then, we see Farm and Animale, things have nothing to do with each other, but we just respected the subcultures in the companies.And so, I'm really comfortable in regards to this. I've always had a very transparent relationship with the market and my partners, and I have no concerns in regards to this at the moment. So, I just wanted to share this comfort with all of you.And with that, I end my call saying good afternoon, everyone. Thank you so much. Thank you, everyone. Goodbye.[Statements in English on this transcript were spoken by an interpreter present on the live call.]