Grupo de Moda SOMA SA

BOVESPA:SOMA3

Earnings Call Analysis

Energetic Growth with a Shade of Complexity

The company marches into the third quarter of 2023 with a determined stride, boasting a 5% jump in gross revenue compared to the same quarter last year, nurturing an annual growth rate of 10.5%. Performance outshines the previous period with a gross margin standing firm at 57.5%, mirroring past year's figures. Despite the shine, gross profit for brands excluding Hering modestly ascends by 4%, confronted by a marginal dip in gross margin by 1.5 percentage points.

High Spirits in the High Summer

Hering's glow is evident with a 7.4% surge in its gross profit versus the previous year's quarter, propelled further by a rising gross margin now gleaming at 43.6%. The brand's strategy pivots on several fronts: savvy cotton yarn deals, sourcing agility, and an upswing in full-price digital and in-store sales. Looking ahead, the executive team revs up for a buoyant final quarter, underpinned by strengthened wholesale channels and optimistic franchise sell-out numbers.

A Costly Leap Across the Pond

An ambition to conquer European markets introduces friction, driving commercial, general and administrative expenses to constitute 41.6% of net revenue, slightly inflated from last year. A part of this swell is attributed to FARM Global's European escapades, grappling with operational taxation complexities and logistical hiccups. Nevertheless, the team exhibits confidence in resolving these snags by mid-2024, thus realigning their European quest.

Taming the Financial Kaleidoscope

The group's purse strings tighten as EBITDA levels hover nearly unaltered from last year at BRL 213 million, although facing a 1 pp pinch on EBITDA margins. Adjusted net income greets a 6.7% modest descent, crafting a nuanced narrative of disciplined financial navigation amidst a turbulent market. Stock is scrutinized carefully, with an intent to restore health to inventory levels, ensuring robust year-end preparations.

Creative Progression Amidst Market Ebb

The brand foresees no seismic aesthetic shifts for FARM but is instead honing its contemporary edge via rigorous market tests. This meticulous curation is predicated on the brand's commitment to longevity and relevance in a fluctuating market, striving for a steady roll-out of new stores and revitalizing wholesaler relations. Embracing prudent financial health for partners, the executive team is optimistically geared up for sustainable growth.

Cost Optimization and M&A Horizons

With a mindful eye on efficiency, the executives are poised to lift the burden of duplicate expenses and finesse the logistic framework, aiming for a sustainable 14% margin by next year. They're weaving plans to flatten SG&A costs, leveraging this frugality to liberate funds for future mergers and acquisitions, thus scripting a narrative of resolute discipline to maintain competitive agility.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, everyone. Welcome to earnings call for the third semester of Group SOMA. This presentation and the results release are now available in the results center of the company's IR website. I would like to take this opportunity to inform you that this event is being recorded and will also be available on our website.

We'll start with the message from our CEO, Roberto Jatahy. Afterwards, Gabriel Leite, CFO, will present operational and financial results for 3Q '23. And finally, we will open up for the Q&A. We ask those who have questions to send them via the platform.

I will now give the floor to Roberto so that we can begin the presentation. Thank you. Roberto?

[Roberto Jatahy Gonçalves, executive]

Thanks, Mardi. Good morning, everyone. Group SOMA has reached a gross revenue of BRL 1,560.3 million, an increase of 5% in 3Q '22. Adjusted EBITDA was BRL 213 million, a decrease of 0.5% with an adjusted margin of 15.6%. The ex-Hering portfolio reached BRL 965.3 million, an increase of 6.8% versus 3Q '22 and Hering delivered gross rev of BRL 595 million, an increase of 2.3% versus 3Q '22.

We noticed a slowdown in the market in September, where most of our brands, especially the biggest brands in our portfolio found it difficult to maintain the pace of growth seen in previous quarters. This effect ended up hurting our quarterly results. We are aware of any negative signs in the macro, but we remain confident, especially with the start of the cycle of declining interest rates, which alleviates the concerns we had about 2024.

Regardless of the macroeconomic scenario, we are aware that we made some exaggerations in our G&A during the virtuous cycle we experimented in '21 and '22, where we had revenue growth of 85% compared 3Q '23 and 3Q '19, and the focus was on top line growth and gaining market share. We are working to bring these expenses to more normalized levels and in line with our history.

Two other points. We are looking at the optimization of our inventories and greater rationality in CapEx, especially in the technology line. The objective is to leave the company leaner with levels of stock healthier so we can capture not just the bottom line of our growth in the few years, but also increase the generation of cash of the company. These cycles are common in Brazil's retail market, and if handled well, generate great opportunities to gain market share when the market accelerates, A bit of what happened in '21 and '22 when we took advantage of the post-pandemic period and grew at high rates compared to '19.

Hering's operational improvements are continuing. This quarter, we completed the first phase of an in-depth project at the Blumenau [indiscernible] plant to understand the ROIC of the company as well as its industries at its margins. The final conclusion of this work should take place in the last quarter, but we can already say that the Blumenau plant is a great strength for Hering and it delivers a great healthy ROIC and margin. In this way, we're starting '24 to produce some recurring basis for the group's other brands, diluting the industry's fixed costs and providing more attractive costs for the other brands.

Hering strategies in the short and medium terms are very clear: an increase in gross margin; the conversion of Hering stores into mega; and an increase of SSS, which will come from adapting the assortment to the store cluster, continuing to improve women's wear; as well as a series of initiatives aimed at improving brand awareness.

Speaking of assortment adequacy. This is an old and obvious initiative for an operation like Hering, which operates in multiple channels and in different store surfaces. But it has never been carried out effectively and with the depth that we are doing now. This is a complex, difficult job. But if done well, it will generate a lot of value, not only for Hering, but also for our network of franchisees.

We also continue to be encouraged by the conversion of the megas, which continue to show excellent operating results, increasing revenue by an average of 114% in the first year with an additional cost of around 30%. If the market is positive, we should open 20 to 25 megas next year, ending the year with 55 to 60 stores in this format. We have noticed a surprising adherence to this movement on the part of our franchise network. We have a large pipeline of demand from franchisees who are waiting for points to become more available in shopping centers.

Speaking of sell-out, we identified significant dispersion of franchises compared to company-owned stores. From our point of view, this is the result of another product proposal, especially in the women's sector, which has been turning very quickly in the company-owned stores. Franchises are slower to embrace anything new and tend to invest in Hering's more classic products, those taking risk. The result of this was a quarter of which Hering's own stores delivered excellent growth. And we have been making this visible to our network of franchisees, and we hope that they will gradually adhere to our recommendations, especially in women's items at the top of the pyramid.

Talking about the group's other brands. FARM is currently going through a cycle of creative evolution, always seeking to stay ahead of the competition. In this process, we are testing other product aesthetics, new price points, new raw material basis as well as new printing techniques that even use artificial intelligence, seeking to differentiate ourselves and always remain a brand of desire for our customers, always, obviously, respecting our DNA. In this process, it is natural for there to be some temporary inefficiencies in the search for new path until an optimum point is reached.

If you look at history, we did this in '11 and '17. And the short-term impacts on sales from these tests are marginal compared to the future gains. We expect an even stronger FARM in '24.

FARM Global continues to show very encouraging results. In the wholesale channel, we are finalizing the spring showroom in the U.S.A., which grew -- with growth of 25%. The active base also continues to grow and has reached 175,000 customers with a growth of 26.6% on last year. What our analysis indicates, we'll also grow in the future in this channel. The traction of digital in Europe has also surprised us positively.

Speaking of physical stores, we continue to grow the profitability of our existing stores and look forward to the openings of the stores already signed in London, Melrose in Los Angeles, Brooklyn, Washington and Paris. This quarter, FARM Global faced a series of operational problems when entering Europe described in detail in our release, which had a strong impact on the results of the operation. All these issues have been mapped out and are easy to resolve. What worries us most is definitely a long way off, which is the loss of desire for the brand, and consequently, commercial traction.

When it comes to the top line, we saw a value of growth this quarter, the result of more solid comparable basis and also a slight shift in turnover to the last quarter. We are confident that we'll deliver the figure planned for '23.

Speaking of Animale, we are still looking for ways to achieve a stronger growth cycle for the brand in the coming years. The changes that took place in previous quarters brought important incremental sales, especially in the city of Sao Paulo. But they did not serve markets such as Rio de Janeiro in the Northeast region. For the last quarter, we expect a better result as a result of weaker comparable base as well as capturing some new situations of use that seek to increase the brand's addressable market.

At NV, after a cycle of more than 12 months trying to stabilize the operation supply chain, we finally completed the project. We have migrated from a completely unstructured supply chain to a sustainable one, reversed part of the sourcing to Asia, adjusted the entire creative calendar. And we are expecting an OTIF for the next winter collection that is much more in line with the group's other brands. After going through '22 in which we had no supply, this year, we've been suffering from collections being received completely late, making sales periods long and launches poor.

Never again will the SOMA Group make exceptions to its procurement model, which includes not only the immediate integration of the financial areas, but also the day -- 0 integration of the supply, PCP, commercial and product planning areas, as well as good creative calendar management.

We are sure that the worst is over, and given NV's incredible sales per square meter, we expect a very positive 2024. The operation has only 17 annualized stores with a potential of more than 40 and wholesale changes that has not yet been worked out for the same supply reasons. We are confident that we still have a lot of growth in NV for the next few years.

Small brands. Brands such as Foxton, Maria Filo and Cris Barros showed excellent growth in this market and continued to gain market share. Cris Barros has been delivering excellent collections on a regular basis and should resume opening stores in order to increase its revenue level. Remember that the operation currently has only 10 stores.

Foxton, which opened a few stores in recent quarters because it has deprioritized within the group, is reinforcing its internal style and communication team, now under new leadership, to accelerate growth in a market that seems to have good opportunities. Today, we have only 32 points of sales and also a multi-brand channel that is still little explored and has enormous potential.

Maria Filo, which went through a creative succession 12 months ago, has received its first collection from the new team. Although the quarter showed growth of 22.5%, when we compare collection against collection, given that the brand launched its summer collection at the end of July, this figure jumps to 44%, indicating that we have another good vector for growth in the group.

From our point of view, it's super important to invest in the smaller brands because they will sustain the group's growth in the long term, unlike global fashion groups, which can focus growth on a few areas given the size of the addressable market. In Brazil, we have to take care of the more mature brands, but always thinking about growth options, either by investing in the smaller brands or in brand extensions of the more mature operations, or lastly, in new acquisitions with strong growth potential.

Our goal as well as our track record is to grow 15% a year with the possibility of alternating between better and worse years. Although this quarter we didn't show good revenue and margin results as in previous quarters, we remain confident in understanding that this factor is normal and part of the natural course of the operation, which lives through cycles of better and worse collections and ends up surfing and suffering from better and worse market moments.

When we look at our portfolio, our opportunities, our team and the engagement we have within the company today, we remain very excited and calm. We are a team of entrepreneurs, each at the head of their own unit and brand, thirsty and restless for better and better results. We have been through 2 years of strong growth. And in this period, we have made 2 acquisitions, one of them large.

And it is natural that 1 or 2 more difficult quarters may occur, where extemporaneous events occur at the same time, especially in the brands with the highest sales. The same complexity that tripped us this quarter, which is having a large portfolio of brands with dedicated teams and different product characteristics. After all, we produce almost 10,000 SKUs per collection, is what guarantees us future growth in a country that is growing little. We know how to identify good assets. We have a healthy partner culture and an unquestionable winning record when it comes to acquisitions. Future M&As together with the growth of our current brands tend to sustain the company's growth over time.

Speaking of the fiscal framework, especially MP 1185 provisional measure, we have an important competitive advantage. When we remember Hering's goodwill, which guarantees us cash generation over the next 7 to 8 years, in line with what we had in previous years -- however, we still have many doubts as to whether this bill will actually pass through Congress. We just have to wait.

In this quarter, the SOMA Group was certified as a B company, an international label that assesses companies committed to generating positive results from an economic, environmental and social point of view. The certification includes all the group's brands, reinforcing our commitment to good ESG practices in the company as a whole, creating and producing increasingly cautious and responsible fashion. This is a very important achievement, especially at a time when the world is positively changing its approach to sustainability.

We know that fashion plays a leading role in this movement, and it's gratifying to see our progress in all of the pillars assessed by system B, workers, community, environment, customers, governance and impact business models. Congratulations are in order for the company's entire ESG department, and we are sure that we still have a lot to do and achieve.

And finally, FARM's international expansion has become a case study for Harvard students. Katia and Marcello, FARM's founders, had the honor and privilege of telling the case live to MBA students last week, a recognition that fill us with pride and reinforces how unique and special the internationalization of FARM is, the only Brazilian fashion brand to achieve such a feat.

Well, I'll end my presentation here and hand over to Gabriel. Thank you.

[Gabriel Silva Leite, executive]

Thank you, Roberto. Good morning, everyone. That's initial highlight, and going to Slide 15 of the presentation. We had a 5.0% growth in the company's gross revenue in the quarter. Looking at the revenue in the first 9 months of '23, we have growth of 10.5%. In 3Q '23, we had an increase of 5% versus 3Q '22. There is a network of -- with a small drop of 4 percentage point. In the first 9 months of '23, gross profit grew by 9.4%, recording a gross margin of 57.5%, very much in line with the gross margin for the same period in 2022.

Looking at a longer period, it is worth noting that the group's gross profit grew by 99.9% and gross margin expanded by 3.1 percentage points in the same period, reflecting the strong revenue growth delivered by our portfolio of brands in recent years, especially those of bigger markup of...

Now next slide. Gross revenue from the brand portfolio without Hering reached BRL 965 million, an increase of 6.8% versus 3Q '22. In the first 9 months of 2023, revenue grew 14.1% versus the same period in '22. As for opening revenue by channel, wholesale was the highlight, reaching revenue of BRL 310 million, an increase of 16.7%.

This positive performance of Hering can be directly attributed to the good level of service, and consequently, to low delivery shortfalls if we considered last year. The gross profit Hering of -- ex-Hering, it didn't grow in the similar proportion. But in this last quarter, we could have a good delivery. And it's important to highlight that the wholesale channel by the conditions that we face in the credit and the consumption ends up suffering a little bit in moments like this.

So now gross profit ex-Hering totaled BRL 560.2 million, an increase of 4.0% versus 3Q '22, with a gross margin of 66.5%, a contraction of 1.5 percentage points compared to the same period last year. The drop in margin in 3Q was about the same factors.

And in order of relevance, I'm going to give examples. The first one, the tax impacts that occurred in 2023 with the reintroduction of DIFAL and the change in ICMS rules in the PIS/COFINS base. This has been commented. These are not new. The second one in relevance order is our operation is our highest level of demarcation. And as we said in the previous quarter, it was expected to have a corrective measure through our cash discipline and inventory control so that we could normalize inventories as soon as possible. We were more aggressive in this quarter. And also the collections of -- the future collections, we're going to have a new planning at the end of the year.

Lastly, we had a channel mix effect with a greater share of wholesale in total gross revenue, what is very good for the consolidated. In the 9 months of 2023, gross profit grew by 9.5%, and we recorded a gross margin of 66.7%. As we said, gross margin does not have any alterations. It's around 67% in a sustainable way. And at some moments when the market is a little better, as it was 3Q '22, we can manage to serve a higher turnover at full price, and then we can deliver a better margin.

Slide 17. Here we have Hering's figures. Gross revenue reached BRL 595 million, so up 2.3% versus 3Q '22 and 5.2% in the 9 months of 2023. Hering's own channels had an excellent performance and showed gross revenue growth of 14.6% versus 3Q '22. In owned stores, growth was 13.2%. And of course, due to a good calendar management and commercial activations done, continuous flow of new products and good in-store execution.

In digital, again, we had another good quarter. The channel saw strong growth of 16.5%, maintaining the same acceleration in revenue that we were delivering in the last quarters. But we saw a discipline and focus in the gain of profitability, and we are trying to do some full price -- we're doing some full price sales and a reduction in net costs. The selling channels recorded a drop in total gross revenue of 2.8% versus 3Q '22 in wholesale. That was the channel of the gross revenue.

Revenue fell 7.5% versus last year. And these were the multi-brand customers. They were concerned about stock levels as a result of last winter cycle, because sellout sales were weaker. And naturally, this led to a more conservative behavior in the summer showroom that happened during the second quarter. And naturally, because of this, we have a selling of this collection that -- of the summer collection that is a little bit lower than what we expected.

In franchises, we had an increase in selling revenue of 2.3% versus 3Q '22. Franchise sell-out grew by 3.6% in the period, and compared to the period of last year, above selling levels. But I think it's good to remind you, as Roberto mentioned, we had a significant dispersion in relation to the performance of company-owned stores.

We see a positive sign for next quarter with improved wholesale performance in the high summer showroom that was done exactly between July and August, and which is mostly invoiced for 4Q '23. As for the franchise, the acceleration of sell-out from mid-September onwards combined with the better supply of summer, it enabled a better perspective, creates a favorable outlook for growth in the same stores and less dispersion of results in relation to own stores.

Hering's gross profit grew 7.4% versus 3Q '22 with a gross margin that we say that is one of the main indicators in this year that follows a growth trajectory very much in line with our expectations. Gross margin for the quarter reached 43.6%, a gain of 1 PP versus 3Q '22. In the first 9 months of 2023, gross margin was 43%, a gain of 1.4 percentage points compared to September of last year. This gain was due to a number of factors that have been mentioned in recent quarters, including better negotiation for cotton yarns and utilities that we have been executing, greater efficiency process in the industry, better distribution of production between sourcing and outsourcing, exploration of new suppliers outside Brazil, for example, in Paraguay that has more competitive costs, and finally, an increase in full price sales on the digital channel and in on stores.

Throughout 3Q '23, we have made progress on the strategy project in Hering's industry, reviewing and evolving the costing process, measuring margins and returns down to SKU levels. We hope that this work reinforces the important role of this business unit in the brand strategy as an enabler of the B2B margin chain with good operational efficiency. And we understand that the industry will be and is without a question of fundamental pillars, so we can guarantee the competitiveness and the cost of Hering in the long term.

Even so, we found opportunities to optimize the structure with better use of capacities and improved processes that should generate additional gains in the units or OAC in the future.

Slide 18 and coming to a very important block at this moment. In the 3Q '23, commercial, general and administrative expenses totaled BRL 567.9 million, representing 41.6% of the net revenue for the quarter, an increasing of 0.4 pp compared to the same period last year. The increase in expenses, mainly third-party services, freight and marketing, is explained by the impact of pre-operating expenses associated with the start of FARM Global's operation in Europe. In the period, the brand invested significantly in marketing, and, as Roberto said, faced negative impacts of fiscal and operational nature with the acceleration of this operation that we are quickly trying to correct.

There are some important impacts in Europe because of the efficiency in the operational part because our brand distribution center is in Netherlands and is currently being transferred to Belgium. And it's better for us, it's a better location for us, so we can operate and where we can find better logistics operator. So, this is going to make it more viable, the operation in Europe. And we believe that it's quite important to this movement of transferring of the geographic transfer.

It's important that in Europe, this change was already mapped. We understood that the Netherlands place was not going to be sustainable. But I think that we have achieved the volume needed much faster than we forecasted. And this is important for this acceleration of the processes that we're going to do in the second half of 2023.

In the short term, this inefficiency has led to duplicate expenses. We are paying for 2 places. And also, we have higher freight costs that we are in the process of implementing. As Roberto has already mentioned, FARM Real has been very well received in the European market, especially in London and Paris, and we are accelerating our efforts to make the operation increasingly efficient like happened in 2009 when -- 2019. And all these challenges are expected to be resolved by the first half of '24.

And it is worth noting about the expenses, also preoperational, about the application of expenses. We had impacts in the fiscal term and especially in [indiscernible] because of tax importation in the United Kingdom because of the Brexit, and we end up paying 2 taxes so the product could arrive to U.K. And this will be solved with this new operation that we'll have, from a new store in London that we'll open now at the end of this year. And this store will be kind of like a DC, a small DC. That's going to be very important so we can make this more appropriate in terms of fiscal operation, and we increase the margins of the operations in Europe.

Additionally, given the e-commerce in the U.K., something that we have been talking for some time, the U.K. is the second largest digital retail outside Brazil, behind only New York, and there were temporary difficulties in recovering VAT from e-commerce returns that are not small in the international market. This impact should not affect the result from 2024, as I said. And we hope that we are going to have 100% clean operation.

And now talking about the expenses of the group, which is the topic of the central slide, we excluded also expenses related to FARM Global, general and administrative expenses, and they only have risen 0.9% versus 3Q '22. So, we see in the Brazilian operation, a dilution of 1.9% if we compare with the same period last year, and presenting BRL 38.9 million of the revenue, of the net revenue, of this quarter. So this is an important message because we have a very -- a temporary impact on the operation in the FARM Global in Europe. And in '24, we hope that is 100% normalized.

Now in Slide 19, in 3Q '23, the consolidated adjusted EBITDA, excluding the impacts of ILP that we adjust all the quarters totaled BRL 213 million, in line with 3Q '22. That was BRL 214 million. And adjusted EBITDA margin was 15.6%, down 1 percentage point versus last year, which mainly reflects the pressure on gross margin and the impact, the preoperational impacts, of the FARM Global operation in Europe.

As I commented and aligned with what I have commented about the Brazilian operation, and just taking a look at the Brazilian operation, it would be 17.8% in this quarter. So, a growth of 1.3 points if we compare with 3Q '22 where we delivered 16.5%. This is an important factor and demonstrates our discipline to navigate in a moment of greater uncertainty when revenue is not coming as easy as previous years, and it's an important direction for the next year.

Now the next slide. In the quarter, we have the adjusted net income that totaled BRL 96.1 million, down 6.7% on 3Q '22. And it's worth mentioning that in addition to the ILP and mais-valia adjustments that we do, in this quarter, we also adjusted negatively BRL 15.7 million related to the monetary restatement of tax debt with a positive impact on the financial result line and also on the cash flow. So that is why we said the adjusted net margin is there. So, the adjusted net margin reached 7.0%, a contraction of 1.0 percentage point versus the 3Q '22.

Going to Slide 21. We see the company's cash generation and we had an amount of 40.4%, almost doubling compared to last period. And also we have the cash flow here. And 3Q '23, the financial cycle in 3Q '22 was 225 days vs 235 days that we had presented, and this a reflect of our disciplined that evolved 8 days in this quarter as we had signaled in the last quarter, something that we would do, we would have hard work to also normalize the stock as soon as possible.

About the previous year, the increase in the level of inventory is explained by Animale, NV, and suffered from delays in the supply chain recently. We're talking about the 3Q of '22. And we had also lowered plant sales, and we had more inventory levels than the ones that were planned. But we are working very hard with all of the brands so we can make sure that the inventory level is controlled, and we are going to have healthy levels of 2024. We are not going to measure our efforts so we can have more and more collections and also with more inventory.

Also, for the end of the year, we are very good with our plan, very aligned with our original plan. We had some procurements also for the first semester of next year. And we hope that this will reflect in good opportunities for the capital of the company in the next quarters. And again, we put the stocks in more healthy levels.

On the last slide, we present the net debt and EBITDA. We exclude the IFRS indicators, and we can see a look for 2024. And one of their greatest focus is generation of cash flows and also healthier levels for the company and always having as our focus to communicate and have our adjusted EBITDA.

Now I'm going to give the floor to Mariana for the Q&A. Thank you.

[Unknown Executive]

Let's start our Q&A session. Our first question comes from Joao Soares from Citi. First, about pharma. You say that the brand is going through a creative evolution process, and this happens historically. Can you say how the process has worked in the past? Do you have a concrete step that you can share with us? And we can see that you are very optimistic about the brand next year.

[Unknown Executive]

Correct. What I think it's important because we're talking about creative evolution. Creative evolution is not something transformational that will put FARM in another level of revenue. This is not the goal for the creative evolution. I think that this -- the focus that we say internally is to put this as a desired brand, something that we do normally. But as we said, we have a series of tests, a series of options, exchange the shape, new ships for the product, new selling points, a series of things that we put this to run into a new operation.

And part of the modifications, we understand that they are quite well absorbed by the market. Part of the initiatives are not well absorbed by the market. We put this in a funnel, we filtrate. And then we have a FARM that is more contemporary, more modern. And this is necessary to be done throughout time. We have done this in '11, '17, and we are doing this in '23. Probably we'll do this in 2030 and other years, and this is the behavior of a brand like FARM, a brand that has, well, the privilege of being a dear and desired brand. And we're trying to anticipate some other movements.

We would never wish to touch FARM or to make some transformations in FARM when we see that the revenue is dropping. We're not -- we would have to do like a transformational revolution that we would not like to do that because sometimes its quite unstructured. So this process, so we review the longevity of the brands and it's in the history of the brands. And when we think, oh, are you optimistic for '24? Yes, we are. I think that FARM leads this process of tests. And it’s a more normalized production, and we are not hoping that FARM will completely change their aesthetics.

So there are some fine adjustments, new proposals of products. But '24 anyhow, we are more optimistic about FARM in '24. And in '23, we have tested a series of products and data that we were not familiar with. So I believe that in '24, we'll be able to go back to the growth of FARM.

[Unknown Executive]

Second question, Joao. He wants to understand a little bit about setting up [ Hering ].

[Unknown Executive]

We made a comment about safety of the product. We asked us to elaborate a little bit more on this. Well, I think this is an important point. I think [ Hering ] has a tradition to sell products. They are very focused on the prices. We have an agenda for the brand. And it, of course, is natural because we want to improve the product of the operation. Eventually this has a price point that is higher than the history of [ Hering ], and this generates a kind of insecurity by the franchisees.

Of course, we have a lot of confidence in this movement, and this is being materialized. We see a great dispersion in the channels. Well, and we don't expect -- we expect that with time, we're going to show this. I think this is easy. We are going to show the results. And we're going to show the franchisees and teaching the franchisees maybe they will have a more fragile capital where we can give them some kind of incentive. So they will improve the characteristics of the product.

[Unknown Executive]

Thank you, Roberto. Our next question comes from [ Sispai Danig ]. Thank you so much for answering my question. First, I think it would be good to share with us, how can we see the evolution of Hering for the 4Q and also for '24.

[Unknown Executive]

I think Hering is a company, it's a big company, very well distributed. There is not a leverage that is -- the leverage here is important because we can open new investments. We are trying to gain market share. And with the migration of the goals, I think that the growth here is much more with the shares of shopping centers, malls. So, I think that we can increase the assortment, and we understand that this will come over time.

Of course, this is not an accelerated growth. We think about Hering in the long term and will deliver under, in my opinion, a high single vision and will give a lot of profitability for the fourth quarter. We don't have any kind of insecurity in this sense. And also the margin, it's good in the year. So we have the expected profitability that we expected for the market.

[Unknown Executive]

And she asked about FARM Brazil. You are in a process of creative evolution. Why was this necessary? Is there an increase of competitiveness or deterioration in the market? How can we think about the normalization of the brand for '24?

[Unknown Executive]

I think we have answered this a little bit in the previous question. It's not a significant change process that we see it's necessary. We are getting ahead. We feel that the brand is so powerful in the national market, domestic market that it's only natural that people will -- sometimes people are trying to get closer to the products of FARM. This happens over the last 20 years. And for the last 20 years, we get ahead for a new cycle products, more contemporary products, so we can oxygenate the mix of products with the objective of making the brand as a desired brand with new things, more active in the market.

So, we understand that this is a fundamental mechanism for the brands in Brazil. People who think that we'll see a brand of 30 years doing the same thing since the first year until the 30th year, they're going to be wrong. So I think this is one of the greatest factors that make the brands in Brazil sometimes have shorter periods. If you don't oxygenate, if you don't bring new proposals, the brand is older.

I think it's important to talk about this creative evolution. Actually, this is a simple change in the process. We're not going to have a complete shift of the product. What we want to do, and we are executing since '23, since the beginning of the year, it's basically an adjustment of how the creative field of FARM, how they organize to create news, the desire, this permanent desire in a consistent way and not something just particular for one collection.

So, we are reorganizing the creative parts of FARM, and this is what we are calling creative revolution. But we don't have a complete shift. I think this is a key point and probably at the level of the client, this will be perceived organically. There will not be a specific moment where the client will notice a complete change at FARM. This is not going to happen. This will be perceived organically. And of course, in sales, we hope this will have consequences, this will have results.

[Unknown Executive]

Another question about FARM Global, Global FARM. What do you expect of growth and profitability? And can we expect an expansion of the consolidated EBITDA in Europe as well with the consolidation of the sales in Europe?

[Unknown Executive]

I think that top line is quite obvious for us. We are very confident that we still have a good market to expand and to conquer. We had a showroom with a growth of 25% in the U.S.A. market. So, the active base is they are always growing. They never stop growing. FARM is a very recognized brand. They are speaking a lot about the brand. We have invested a lot to get into Europe's market, and our expectations are clearly of expansion of the top line.

So, we -- when we talked about the inventories and the profitability, this was somehow harmed because of double taxation and things that we haven't known about the Europe's market, and now obviously, we know. And these are easy solutions as a whole. So, we expect that 2024, the normalization of the margin of the EBITDA with FARM Global operations.

[Unknown Executive]

Next question is from Pedro Pinto and he asks a question about FARM Brasil. If it's expected an expansion of stores and how this will impact the sales in the short term for 2024?

[Unknown Executive]

Well, I think that, especially in the last year's period, when we saw FARM growing a lot, and it was very important, and we didn't see the need to do the openings of stores, we understand that although this is quite positive, we -- these stores, they come to smaller markets. So they don't have a leverage that is so big in the short term for the fourth quarter.

And part of the stores, they are going to be inaugurated in the fourth quarter. So, I think that in the short term, I don't see such an importance of the stores that will make a transformation for the fourth quarter. But around that period, of course, without a doubt, we have exceptional returns on the operations. And I think they will deliver quite interesting articles. But if we sum all the stores' profitability, I think they will positively impact for next year in FARM.

Also just adding I think Pedro is that in the fourth quarter, we're going to open 7 stores. These stores are going to be open -- we're open actually in the end of the 3Q. It's about 1% rate of growth. And for next year, between opening stores and new stores projected for the next year. And we say that this is a priority for us. We hope to get 3% of growth for next year coming from these organizations and new stores. We're talking about BRL 35 million to BRL 40 million coming from the additional stores.

[Unknown Executive]

Second question from Pedro about adding the franchises. The base of the stores is dropping. I want to understand when this is going to become a normal level and also the healthier level for the franchiser -- franchisee, sorry.

[Unknown Executive]

I'm going to disagree about this drop that stores are dropping sequentially. Actually, we are getting almost 20 franchisees every year. We are focusing on mega stores. So it's -- in Brazil, it's a difficult market. So taking a look at Hering, we've seen profitability, and we want to operate with the stores of Hering.

I think in my opinion, there's not a fragility about distribution of franchises. I don't see this kind of danger. On the contrary, I think that we're doing what is right. So, we can make our franchisees more profitable. And when we see the health of this channel according to the profitability and also their stock coverage, we understand that in this moment, maybe they don't have such a good profitability, but it's in line with the fragile market that we have now.

So I don't think there is a problem with the franchisees. I think that, of course, there are some stores in shopping centers and sometimes the shopping center thinks they charge less and the franchisees, they think they pay more. It's a little bit of what we listen from the franchisees. But the level of the coverage for the stocks is okay. Unfortunately, the more desired products they don't have in stocks right now.

[Unknown Executive]

The question now is from Santander. And if you could comment what we observed the channel, sell-in and sell-out channels for this quarter at Hering? And how can they expect to mitigate the performance at Hering, mitigate the mixed performance at Hering?

[Unknown Executive]

We have seen in Hering trying to get this product. We are trying our best, but this will not be enough to solve about the dispersion. There's mismatch. I think this is something that is really positive. And I have -- I want to test in my own channels. And I wanted to give to the franchisee something that was tested, and we don't want to make some new operations, something that is different than we are used to.

So the sell-in and sell-out for the fourth quarter, we understand the sell-in was harmed, especially -- when we take a look at the wholesalers channel, we are a little bit more comfortable. We are growing 4%, but we see some franchises that have a little bit more difficulty. We expect now -- and I don't know why, but we expect a very accelerated November. So I don't know, it's something in the market that we don't understand, but it's very accelerated. It's hard to preview what's going to happen in this quarter as a whole.

The stocks are normalized in line with what was expected. But in the first days of November, something happened that we're still trying to understand. It was very accelerated just 8 days. We don't have enough information to know, but it's positive. We faced this as a positive thing.

[Unknown Executive]

[ Eric ] talked about FARM Brasil. We have already answered but for the most part, but I'm going to ask again. From the -- about FARM, if you can comment to the first results about the adjustments and how these changes will reflect for the clients, in the perception of the clients?

[Unknown Executive]

No. The results are not going to be captured this year. They're still being tested. We are at the end of the test. So, we're not going to have any kind of data from this -- and we have to actually establish expectations here because this is not a transformation. This is an oxygenation. The clients probably will not notice a big change. There were some news, some proposals, new products. I don't know how much the client can perceive that FARM and will be able to say, oh, FARM has changed. No, FARM has not changed. They will bring new products.

[Unknown Executive]

And the third question from Eric. He asked about NV. If we can detail what is the process of sourcing and we observed the demand from the side of the clients. His idea is to understand how is the health of the brand and how can you capture, how can you resume the sales.

[Unknown Executive]

This a question that has been done quarter after quarter. And I'm going to resume, go back a little bit. Well, first, we acquired NV and it grew a lot. We were afraid of getting in the way of what is being done right at the first moment. And we noticed that the suppliers of NV wouldn't handle this growth. So we acted effectively in the opening. This probably should have done.

I think that this was one of the things that were never going to make another exception. We're going to do a mapping since the beginning for sure. When a group comes to Grupo Soma, we expect this sophistication of management to look ahead, and we did this. It was asked for us to do that, and we're never accepting this anymore. We did the outsourcing. And we started to understand that the problem was not just that. The problem was that we had a very tight deadline in the set dates.

And why was this bad? Not just because of the sourcing, but all the creative processes and the creative calendar was completely out of pattern. It is impossible for you to do this in 45 days and the suppliers give you the product in 10 days. So it was a problem of assessment in NV. So, we put a lot of people in the company, we fixed all the creative processes, the calendar. And this brings overload to the style team because this is a change in the calendar, it's not so obvious. The team works with smaller periods of time, but we don't see any kind of problem now with the brands instead -- sales of the brand. It's a completely different sale from the other brands of the group.

The sale by square meter is very high. We only have 17 stores of NV, and we see a lot of growth. When we talk about the brand, we can see clearly that the products come to the -- there on the right date, and they have a great sale completely different from the other brands in the group. And NV works with blocks, blocks of interest. So when this block is broken, for example, the top part enters, but the bottom part doesn't answer, it's a problem. But when we go with all the parts, we see that there's a huge sale. So, NV will still give a lot of joy to Grupo Soma after everything is solved. We hope to have a very strong growth for NV.

And this is in -- we are going to resume the expansion agenda, and we're going to normalize the supply chain for NV next year.

[Unknown Executive]

Our next question comes from [ Achako Matusi from BBVA ]. And I would like to explore a little bit about the perspective for the fourth quarter for the profitability of Hering. How do you evaluate the quality of stocks for the 4Q? And what is the expectation about the poor segment?

[Unknown Executive]

Well, we have a very big doubt here because we have a little bit more -- we have this 2 sides. We cannot forget about the stocks because of the lack of sales of the semester, of the first semester. We decided to prioritize this, and we are very demanding about this. So probably, the level of stock will be higher, and this cannot offend the margin. But this depends on the economy. We had a very positive year. And naturally, the level of the sales on Black Friday, sometimes they get lower. Sometimes, we are going to see because we have to be very aggressive about the stocks in this year.

And I think that this is something that we haven't seen. We are doing this about the stock. We talked about this in the previous call, and I would like to reinforce now. We have seen this as a priority agenda for the company until the end of the year. We want to close the '23 stock with 100% of healthy stocks with appropriate stocks and healthy margins. Looking ahead for this quarter and also for November, in the first 8 years -- 8 days of the year of the month, I think this is a very positive sign. We are in the right path of the cleaning of the stocks.

We are expecting to have the new collection for the summer. We're going in stronger with the stock, and this will contribute for the quality of the closing of the year.

[Unknown Executive]

The next question comes from also BBA. They asked the same question about the franchises of Hering. We saw the performance of the sell-out in comparison to their own stores, and what are the main challenges to boost the sales of the franchisees?

[Unknown Executive]

Well, we said it, right? The challenge here is much more to be able to demonstrate with facts and data that this product is increasing the sales by square meter in the stores of Hering. It is pulling the growth in the stores, and we have to show the facts and data and information, and we're going to have them testing. So of course, if you have a franchise that have a price point that is a little bit higher, probably will have to do some kind of -- we'll have to help somehow, we have to give some kind of incentives to help.

[Unknown Executive]

Next question comes from [ Leonardo Cavalcanti, BBVA ]. Congratulations on the certification and the results. Thank you. And he says yesterday in the Senate, it was approved the possible tax reform. How is the company preparing for this?

[Unknown Executive]

I think the tax reform -- honestly, I think it comes in a lot of phases and it ends up in 32. So, the companies can restructure their model of business. Probably we'll -- this will impact partners, we're going to import more. So probably this will change a lot in the Grupo Soma. This will impact other operations, other retail operations as a whole -- other operations as a whole. But I think that it's like we see, we have 9 years to have this process, and we still don't know. We're still going to work in this sense.

But -- at Grupo Soma, we have adapted with so much and so much has happened, and it's not a tax reform that will somehow impact in a relevant way. We are 30 years old, we've gone through a lot. And I think that this is the talent of the Brazilian entrepreneur. And now we're having a good tagline actually. We're going to restructure the operations, we're always thinking about the increase of EBITDA, increase of margins and growth.

[Unknown Executive]

Next question, Vinicius. He asks, can you comment about the financial differences of the brands and the different channels?

[Unknown Executive]

I think that the financial health of the wholesalers, it starts to slow down. They are the first one to signalize this is slowing down, and we understand that probably with the share for the wholesalers -- because we are not achieving our revenues for wholesalers, this comes maybe from wholesalers that have suffered a lot with interest rates that are really high. So, we see a mortality of wholesalers that is quite big. This is historical when we have high interest rates, a lot of wholesalers quit. And we see this scenario. This is normal for the Brazilian market, and we have absolutely no surprise about that.

But the growth of the wholesalers depends about a drop in the interest rates. And we see this positively. So, in the beginning of the cycle of the interest rates, we don't know where this is going. So we are going to see the interest rates in the United States, in Brazil, but we are confident because when we go from 13.65 to 11, this will give us a little bit of room to breathe.

[Unknown Executive]

He asks for you to comment what is the concentration of big franchisees and smaller franchisees.

[Unknown Executive]

Well, how can I answer this question? We have a concentration, and how can I answer that? Well, the big franchisees, they have an attribute that is important. We have a structure -- their capital structure is better. They have a lot of franchisees in the group, but they work with the fiscal regime in the tax model and they lower their margins. On the other hand, they have a less sophisticated discussion, and they are benefited by a national cycle. I think this is a natural thing.

We have these studies they are stronger, they are more simple. And we, of course, the more sophisticated, they are more benefited. And the ones that are not so much sophisticated, they have a lighter benefit.

[Unknown Executive]

Well, how can you use the Hering -- how can you use the goodwill of Hering to improve the fiscal benefits of the brand?

[Unknown Executive]

So I think that goodwill, it's an important reserve for us to use when we incorporate Hering's operations or vice versa. We can follow both paths, but we must conclude this process of incorporation until the end of '24, and we can use these goodwill to reduce the fiscal basis in 2024. And if in 2024, NV, the provisional measure is approved, we have some reserve. We have some cash to pay IRS and social contributions for next year, and we are very much covered when we talk about the short term. In the future, after '24, after the incorporation, we are going to use goodwill for the fiscal purposes.

[Unknown Executive]

Thank you. Our question comes from BTG. Please can you talk a little bit about the tenancy of volume and if you see space for negotiating prices in Hering?

[Unknown Executive]

It's a little bit more complicated. We have lots of brands that are decreasing their average price, the others are increasing their average tickets, they are increasing volume. So, we don't look very much at this indicator for resending the prices, resending the cost, passing the cost onto the price. So probably we're not going to alter this.

We here at Soma, we don't see any alterations in volume and the space to pass on the prices, we have never had problems at Soma. So, I think that the desire by the brands, the quality of the collections, they actually are better than when we do that.

[Unknown Executive]

He asks -- and we have already answered -- what is the effect of the opening stores, open stores at FARM in this quarter, and Gabriel has answered this question. Next question. Thank you for asking me a question. Can you talk about FARM in Brazil? What made you decide to do this reformulation at this moment? Can you do -- can you talk also about the plans for opening new stores next year?

[Unknown Executive]

Well, what made us get into this creative evolution process was already mentioned. So, to make the brand more permanent, this is important. It's a very dynamic brand. We've talked a lot about it. And I think something is that we get ahead of the movement. So we are anticipating the movement. It's important to say that we wouldn't have to do this right now. We are going really well, but we are foreseeing, and we're not going to do this in a moment where the brand may go bad, may do bad. Well, for example, we had some examples of that brands that stopped growing. And sometimes if we had anticipated somehow, and we had updated the brand, I think it would be better. So any brand that doesn't make this, they will stop selling at some point.

Static brands don't work. And we're always trying to test, provoke and testing new things. And talking a little about the performance of FARM Brazil of the stores, we said we understood that it was not worth to accelerate. We still had a wholesaler channel to grow, and we have another option. So we have 96 points of sale, we want to get to 104 points of sale and to capture the market over the next years. And we were talking about a screening of 150 points of sale at that time, and we're going to execute this plan in a more structured way, at least 15 to 20 stores per year. I think it will be very interesting.

[Unknown Executive]

She asks about the wholesalers of Hering. What are the expansion plans?

[Unknown Executive]

Well, to have more presence in the stores, we are investing a lot in furniture so we can have like a mini Hering in other wholesalers. And obviously, it's a lot of strategy, a lot of work in the commercial area. So we can expand this channel in Hering.

We always say that we have this expectation, and to grow the wholesalers is quite more challenging because we have the fragility in the capital structures for the wholesalers. But we've seen this happening a lot. A lot of wholesalers closed and now they are coming again. So qualitatively, it doesn't -- qualitatively, we're talking about expanding the brand in the wholesalers, almost like a store inside of a store.

[Unknown Executive]

And the last question she asked is about FARM Global. Can you talk about the increase of prices of FARM Global for the next year? There will be an increase?

[Unknown Executive]

Well, it will -- we'll have a correction because department stores asked us to increase the prices of FARM Global. We have never seen this before, the market working like this. They had this view that we didn’t incorporate inflation. So, we don't see the need to do this increase of prices. But the department stores signalized that and we did a correction of about 10%.

[Unknown Executive]

Great. Our next question comes from [ Talis from Safra ]. My question is more about what can we expect for the growth in 2024 and how Roberto is in the competitive scenario, especially for the core brands?

[Unknown Executive]

Well, for 2024, I think that we are ready, and we have a great question. Well, we have a certain discomfort to put the responsibilities of a performance that is bigger and better. But unfortunately, life is like this. When you have an event that is against as much as much as you are, try to be efficient, well, you have to prepare for positive moments and you have to prepare for negative moments and create mechanisms that you can adjust. And I think the risk lies when you are more optimistic and you buy more and you have always cash. And the level of stock and cash is very important, and we created mechanisms for adequacy and to prepare for a low that we might have in '24. So we hope that '24 surprises, especially the first semester. I don't think we're going to have a terrible '24, honestly, and we're prepared for both scenarios.

About the FARM and Animale. I think that we've always had competition. I don't see any news here in terms of competition. And we see clearly that if the market is bad in 2024, FARM and Animale certainly will have less competitors for 2025. Our player is to generate cash just-adjusting stocks and to bring our G&A more normalized levels, and we saw a very important cycle of growth of our top line. We see all the brands, the series of projects, the aim to grow in the long term.

Of course, these are structures that are set. So, this happens at the long term. And we prioritize that. We actually changed some strategies to have discipline for generation of cash, which shows the best ones, and we're going to continue for 2024.

[Unknown Executive]

I think we have answered this, but it's good to reinforce. He asked us to show how was October and what can we expect for December and also for the next quarter.

[Unknown Executive]

Well, it was really bad from what we foresaw. And these first few days, it was a really good surprise, but we don't know about stability. It is not a long time for us to say that there's something positive in the market coming.

[Unknown Executive]

Great. Our last question. He says, from the expenditure side, can you quantify the impacts of double running of Global FARM? And then I'll ask the other question. Well, can you answer?

[Unknown Executive]

Well, we had an impact of about $8 million this year because of all the inefficiencies, operational, fiscal inefficiencies about the Europe operation. And next year, next quarter will be mitigated like Roberto mentioned, and we will come back to a margin that is called sustainable 14%, at least for next year. This year was a point outside of the curve, of course, and we're going to work a lot with this -- to this.

[Unknown Executive]

Last question. Taking a look at Brazil, what are the main leverages for the SG&A flat? And how can they behave ahead?

[Unknown Executive]

Well, let's see. With everything that we said -- and then the wind is getting weaker, and we're taking a look at other opportunities. So, since the beginning of this year, we're seeing a more effective way, looking at the G&A, actually, this will be an agenda that is a priority for next year. And this is an agenda of the company, all the brand directors, executives, everybody is looking at their structure to understand what generates value at this moment and what may not generate value in the medium and long term, maybe we don't have -- we're not going to do it.

So we'd have to take a look at new opportunities. We're going to get at least 1.5 pps compared to the last year. And our G&A is something that is fundamental for us to improve cash generation. And at the end of the day, we want to deleverage the company and put the company at a healthy level. So, we are going to inorganic agendas and taking a look at the future M&As, and this is what we are thinking about.

Yes, I think Brazil leaves the cycles, and we have to be super intelligent, super smart. Again, we don't have a clear vision if the market is slowing down. We had just 1 month. And for me, it is still a big question what's going to happen in '24. But what we know and what -- from what we have learned in the past 20 years, it's not worth to buy and try to sell it through forced sales. Discipline in the expenditures generation of cash, so because when the market comes, it always comes very weak, and we have to think about the exceptions.

We have this expectation, and we see a few assets with acquisition possibilities. But after a crisis, some of these assets, they are more fragile, and we see positive results for new acquisitions. So, we really hope that this will happen as of 2025 given that we have more hope about Hering, and we are going to be prepared for new acquisitions and to continue the normal flow. We are a wholesaler platform, and we're going to continue doing M&As that generate value.

[Unknown Executive]

Thank you, Gabriel. Thank you, Roberto. I would like to thank you for all your questions. Unfortunately, we had to read questions from the -- then we are going to open next time, Q&A sell side as well. So all questions were sent and we are available to all investors. Thank you so much and good afternoon.