BIM Birlesik Magazalar AS

IST:BIMAS.E

Earnings Call Analysis

Company Focus on Branded Products and No Immediate Canadian Expansion Plans

The company is increasing its focus on branded products, which now represent 15%-20% of sales, despite a dilution effect on overall profitability due to lower commodity inflation. There are no plans to expand into Canadian markets; any future considerations will depend on communications from the Canadian government. Leadership changes were also announced, with a key executive moving to the BIM MAROC team.

Strong Sales Performance

In the first quarter of 2024, the company reported robust sales growth. Quarterly net sales were TRY 104 billion, reflecting a 17% year-on-year growth. This was supported by a 5% increase in customer traffic and the ongoing store expansion program. The company opened over 300 new stores, with 268 in Turkey alone, contributing significantly to the top-line growth.

EBITDA and Margins

The company's EBITDA margin was 4.3% when adjusted for inflation, but without this adjustment, it stood at a healthier 7.6%. Quarterly EBITDA was TRY 4.4 billion with inflation accounting. It's important to note that the company faced a 50% minimum wage hike, which increased operational expenses, yet it managed to keep EBITDA in line with its guidance.

Net Income

Net income for the first quarter was TRY 3.9 billion, yielding a net margin of 3.7% with inflation accounting. Excluding inflation adjustments, net income rose to TRY 4.4 billion, corresponding to a net margin of 4.4%. This is a significant improvement over the same quarter last year, which was impacted by several one-off events like an earthquake.

Store Expansion

The company has been aggressive with its store expansion. In the first quarter alone, it opened 268 BIM stores and 8 FILE stores in Turkey, 24 stores in Morocco, and 9 stores in Egypt. By the end of the quarter, the total number of stores had reached 12,791. The expansion plans are well-aligned with the company’s long-term growth strategy.

Gross Margins

Gross margin reached 17.2% in the first quarter, up 200 basis points from the same quarter last year. Without inflation adjustments, gross margin hit 20.6%, an impressive 110 basis points increase from the previous quarter. The company attributes this exceptional performance to its product mix and higher-margin branded products.

Operational Expenses

Operational expenses saw an increase primarily due to a minimum wage hike, which impacted the personnel costs. The OpEx to sales ratio was 14.8% without inflation adjustments. Despite this, the company expects operational leverage to normalize these expenses over the year, benefiting from cost efficiencies and better management.

International Presence

The company continues to enhance its international footprint. In Morocco, the company opened 24 new stores, bringing the total to 711. In Egypt, 9 new stores were added, making a total of 365. The expansion in these regions is progressing well, with plans to open 100 stores in Morocco and around 70 in Egypt this year.

Future Guidance

Despite a challenging macroeconomic environment, the company is maintaining its full-year guidance for top-line growth and EBITDA margins. The guidance aligns with the positive trends seen in the first quarter, where sales grew by 95% year-on-year to nearly TRY 100 billion with inflation adjustments. The company expects some normalization in gross margins and operational expenses in the upcoming quarters.

Earnings Call Transcript 2024-Q1

[Serkan Savas, executive]

We are very pleased to welcome you all to our first quarter results for 2024. I am Serkan Savas reporting, Investor Relations Director, and I present the results together with my colleagues, Fatih, our CFO; and also [ Atif ], our IR and ESG manager. We hope you have managed to download our presentation on our website. And in this presentation, we are providing both inflation, adjusted and unadjusted figures to enable part of the computation for investors.

I now give the floor to Fatih, our CFO, for introduction and highlights of the quarter.

[Fatih Meriç, executive]

Thank you, Serkan. And we will first look at our and highlights for first quarter. And before starting giving details -- before start giving details, please note that all the figures here in this slide are inflation adjusted. Our quarterly net sales were TRY 104 billion, reflecting 17% year-on-year growth. Our ongoing store expansion program at 5% positive traffic growth continued to support sales figures. Our EBITDA margin was 4.3% in first quarter without the inflation accounting -- I'm sorry, without the inflation accounting, the margin stood at 7.6%.

Net income was TRY 3.9 billion with a corresponding 3.7% margin. In the first quarter, we opened more than 300 new stores. As the final highlight, capital expenditures was 3.5% of our revenues in the first quarter, in line with our guidance. We will be elaborating the details in the coming slides.

And moving to the operational performance starting with like-for-like sales slides, please note that all numbers are without the inflation -- inflation readjustment here. Like-for-like sales increased by 74% in the first quarter, while like-for-like basket size increased by 66%, which is higher than our internal inflation of 62%. As a side note, in the first 2 months of the second quarter, our internal inflation increased further to 66%. Positive momentum in traffic continued in the first quarter, and like-for-like customer traffic increased by 5%. We expect positive trends to continue in the second quarter with a lower pace.

Moving on expansion details. In the first quarter of this year, we have opened 268 new BIM stores and 8 FILE stores in Turkey. And we have opened 24 stores in Morocco and 9 new stores in Egypt. In total, we had consolidated number of 12,791 stores by the end of Q1. Our store expansion program was in line with our plan so far.

When we come to CapEx slide. Our CapEx with inflation accounting was TRY 3.6 billion in the first quarter, corresponding to 3.5% of net sales. Excluding inflation accounting, quarterly CapEx was TRY 3.5 billion, corresponding to again 3.5% of net sales. We are progressing in line with our expectation. The second phase of our business chat with factory, solar energy investments and strong store openings are the main investment expenditures items in the first quarter. This is the end of my part in this presentation, and I'm handing over to Serkan again.

[Serkan Savas, executive]

Okay. And thank you, Fatih. Starting with the sales progression. We are on Page 10 and the sales slides. If you look to sales with our inflation accounting, sales grew by 95% in the first quarter year-on-year and reaching around TRY 100 billion. This is fully in line with our full year guidance. We already have expected the top line growth momentum to be started at the higher levels in the first quarters and gradually come back due to the high base effects and lowering inflation in the coming quarters. So now we are keeping our top line growth guidance for the time being, which is in line with our guidance. The realization is in line with our guidance.

And including inflationary accounting, sales increased by 17%. This is a real-term increase with inflation accounting and the store openings around 11% and plus the second positive traffic supported the sales growth in the first quarter.

Now let's discuss about the gross profit and gross margin progression in the first quarter. Including inflation accounting, our gross margin reached to 17.2% in the first quarter, which is 200 bps higher than the same quarter last year. As you remember, last year, the first quarter was the earthquake year, and we had some negative impact on the gross profit margins first quarter of the last year. So this is mainly because of this negative impact is kept. And if we exclude to the inflation accounting, our gross profit increased by 124% in the first quarter when compared to last year's same quarter and gross margin without inflation accounting, reached to 20.6%, which is 110 bps higher than the previous quarter. Well, this is -- we can say that this exceptional gross margin performance was in Q1 was temporarily and we expect a normalization in the remaining of the year by investing in lower prices.

So generally speaking, over 20% is a little bit exceptional in our case. What's the normalization today is 19%, 19.5% is the normalized gross margin for the time being. So we expected EBIT normalization in the coming quarters about the gross margin profits, gross margin, excluding inflation.

And about the OpEx. Now in the next slide is about the part of the trend of the OpEx. In the first quarter, minimum wage hike temp OpEx to sales ratio to 14.8% without inflation accounting. This corresponds around 170 bps cost increase compared to previous quarter. I can say that it's almost a good start for the year, considering 50% minimum wage hike and we expect the OpEx sales ratio to be normalized in the remaining of the year through a better operating leverage.

If we elaborate the details of the OpEx in the next slides, the graph you see in the next slide, Page 13, which shows the change in operating expenses as a percentage of revenues by item. As I mentioned in the prior slide, personnel expense was the major contributor to the increase in OpEx items; minimum wage increased by 50%, as you know, and negative impact on OpEx in the first quarter. We assume that there will be no second minimum wage hike this year. And so we will be starting to benefit from operating leverage from Q2 to the yearend.

On the other hand, utility expense continued to contribute positively due to high base of the previous year. So we are benefiting from -- due to the expenses, but somewhat definitely from -- due to the excess Internet cost of sales, it corresponds is 1.4%. as our first part.

Now let's look at the EBITDA figures, quarterly EBITDA figures in the next slides. Including inflation accounting, EBITDA was TRY 4.4 billion, and EBITDA margin was 4.3% in the first quarter of 2024. It is 90 bps higher than the first -- same quarter of the last year. As you know, there were some negative one-offs in the first part of last year, such as earthquake. So one-offs either -- excluding inflationary accounting, EBITDA was TRY 7.7 billion and EBITDA margin was 7.6% in the first quarter of 2024.

On adjusted EBITDA margin, is the comparable details in the last quarter Q4 to Q1. This is already expected to 50% minimum wage increase. This is already within our expectations. No, I can say that its EBITDA margins, and we are happy to start 2 year with an EBITDA margin in line with our guidance despite the change of the minimum wage hike. So we keep our EBITDA margin guidance as is.

And we are moving on to net income slide. Including inflation accounting, our total net income was TRY 3.9 billion corresponding to net margin of 3.7%. Excluding inflation accounting net income was TRY 4.4 billion in the first quarter of 2024 and net margin was 4.4%, which is 180 bps higher than the same part of the last year. In this quarter, this 2024, there is not any one-offs this year since the all negative one-offs were recorded in the first quarter of the last year, like earthquake impact, the time scheme impact on the slide decks.

[Technical Difficulty]

[Unknown Executive]

I think we have some technical issues, but I hope you can hear me now. We were talking about quarterly cash flow bridge. Including short-term financial assets, our cash position was TRY 9.4 billion at the end of first quarter, higher than last quarter. There is an improvement in working capital cycle in the first quarter, but negative net working capital day is still lower than our normal level. As inflation expected to normalize, we plan to improve our inventory days throughout the year.

On the next slide, looking at the revenue breakdown by format and geography. BIM Turkiye forms 87% of total sales, while FILE share in consolidated revenues increased to 7%. The remaining 6% is coming from our foreign operations. In Turkiye, we can see that our private label share has declined to 60% due to SKU expansion and more offerings in the in-and-out category.

On FILE side, we opened 8 new stores in the first quarter and a number of the stores reached 244. FILE's online sales account for 5% of FILE's total sales. FILE's share in total consolidated sales exceeded 7.4% in the first quarter compared to 5.5% previous year same quarter, thanks to its robust performance.

If you look at first quarter of 2024 in Morocco and our total number of stores reached 711 in this country. Fourth warehouse of BIM MAROC in Marrakesh opened in March. Our plan is to open 100 stores in Morocco this year. In Egypt, we continue to open new stores. We opened 9 new stores in the first quarter, and the number of stores in this country reached 365. The operational improvement continues in Asia. The operation is not cash-positive yet, but the progression is very good. So we will continue opening stores in Egypt this year. Our plan to open around 70 stores this year.

And now this is the end of our presentation. And now we can take your questions.

[Serkan Savas, executive]

[Operator Instructions]

[Unknown Analyst]

Yes. It's [indiscernible] Asset Management. So at the very end of your presentation, you have mentioned about Egypt and your plan to have 70 new stores, but how about the Morocco? Do you have any plan for Morocco?

[Serkan Savas, executive]

Thank you. And generally speaking, Morocco, also, we speed up our openings and around 100 store openings this year. We are planning to open. So today, we have around 715 stores in Morocco right now. So likely for the full year, we are opening around 100 or a bit higher than 100 stores at the end of the year.

Okay, [indiscernible] floor is yours.

[Unknown Analyst]

Thank you, Serkan. I have a question about your margins. You highlighted that you are looking for your sustainable gross margin to be around 19.5%. Actually, this was previously 18% and 18.5%. So I noticed that you step up in this sustainable margin guidance. Can you please explain the drivers? I mean, is it the SKU mix? Or you are constraining more contribution from international markets into our margins? And the second question.

[Serkan Savas, executive]

Yes, you are right. It looked.

[Unknown Analyst]

Serkan-Bey, you can continue. I can hear you now.

[Serkan Savas, executive]

Okay. Sorry for interruption. There is some technical problem here. But now I think it's okay. Yes, you are right, a little bit improved our gross margin. The first is coming from the product mix, the product mix are in and out, and spot in and out, weak products and margins improved well in the last few years and also the sales ratio of these products in and out. Fridays on Fridays and on Tuesdays, we have some in and out to improve our customer traffic. So those kind of products ratio increased well, and this also increased the customer traffic. So this exhibit to our gross margin in the last few years.

The second, of course, you know that the FILE operation contribution is rising in the last few years. For example, a few weeks ago, it used to be around 4% of total revenues, now in the first quarter, it is 7%. And today, in May, it's around -- approaching to 10%. So FILE operation margins is a bit higher. The gross margin is a bit higher than our general margins. So this is also contributing to our gross margin permanently.

So step-by-step, also our negotiation power is rising, and we are more diversifying our supplier base. We have a new procurement team. They are working to improve our cost levels, for example, sometimes we are getting the packages of truck levels reorganized or procurement of the packages. So we have some kind of cost projects in terms of procurement. So to sum up, coming from all these projects and initiations, gradually EBIT improved our gross margin. So generally speaking, it's trading around 19% levels right now.

[Unknown Analyst]

Okay. And you highlighted that there is a positive trend in traffic continues in the second half, but at a slower pace, I understand. Do you see a higher competition in the second half from your peers? And have you also invested in prices in the second quarter?

[Serkan Savas, executive]

Yes, of course, in the second quarter, this point value is positive. And we are also investing in second -- we also invested somewhat in this first quarter as well. And in second and the coming quarters, we were also doing some investments in lower prices, but generally speaking, it wouldn't dilute our expectations, EBITDA margin expectations. And this is also one of also reasons, the normalized EBITDA, normalized gross margin in the coming quarters, over 20% to 19% levels. So yes, competition is maybe tough. Now the competition is based on the promote, is very high promo life, promotions campaigns because so we are also somewhat responding that.

Ilya, I think the floor is yours.

[Ilya Ogorodnikov, analyst]

Congratulations for strong results. I have a quick question on your store innovation program in Turkey. And specifically, what's the percentage of renovated stores now? And if you continue to see around 10 percentage points positive impact on like-for-like post conversions, which I think you mentioned in the past? And very quickly, my second question is about competition, particularly for new locations, considering your expansion pace. Are you facing any issues here with finding good quality locations, just mindful of the pace of other players as well?

[Serkan Savas, executive]

Ilya, the renovated stores is almost approaching to half of the stores right now, half of the stores. So it's around approaching to 6,000 stores already renovated as of May, let's say, today. So -- but of course, it will take a few years to renovate the old stores. We don't rush to renovate old stores. Whenever a store is under renovation phase and renovation cycle then renovated. We don't actually rush for this. So today, it's almost half of the stores are already renovated. About the new store openings, we don't give any official guidance, but generally speaking, today, it's running around 100 opening per year in 12-month periods and likely to continue going forward in the following quarters.

Is there any problem finding store location? No. We are not finding because cities are growing, and we are opening smaller stores, 300, 350 square meter stores and cities are growing, new building, construction is actually improving in Turkey. So we are not facing any big problem and we don't expect any problem in the near term.

[Ilya Ogorodnikov, analyst]

Great. And maybe just to clarify on like-for-like impact post-store renovation. So is it still around 10 percentage points?

[Serkan Savas, executive]

Sorry, like-for-like contribution to?

[Ilya Ogorodnikov, analyst]

Not contribution, but the impact of store renovation on your like-for-like performance. You mentioned previously that renovated stores see around 10 percentage points of like-for-like uplift post-renovation. So is it still the case?

[Fatih Meriç, executive]

It is. We haven't seen -- we don't do a similar -- another is on that, but it is roughly 5% to 10%, up to 10%. There is a positive impact on the traffic family renovate the old stores.

[Serkan Savas, executive]

[indiscernible].

[Unknown Analyst]

Congratulations for good results. And I also appreciate the transparency of your disclosures. I think you have been a very good example in time for hyperinflation. I really appreciate, and I am optimistic at least for the future for there may be the other companies, you can be a good example even under any country. So thank you very much for that.

And that's why the market continues to give premium so those qualitative factors are all very important. So just my comment. And then if I turn to my question, I would like to understand in first quarter, you had impressive performance, but was it parallel to your guidance? So in your guidance, you made some, maybe assumptions for the first quarter. Do you see upside risk to your guidance after first quarter results? That's my first question.

The second one is about the cost side. I see increase in the employee personnel costs made the higher than their peers. But when I look at the other items, like, let's say, utilities and others, you have very efficient maybe because of higher base or anything, but I see efficient OpEx management. Do you see those things sustainable or were they specific to third quarter?

[Serkan Savas, executive]

First of all, thank you for your good words. And we are very happy to hear that about transparency and you like our presentation. So we're always a company to be transparent, and we will continue this. Thank you for that. And in the first quarter, of course, as I mentioned during my presentation, the first quarter result is in line with our guidance. We already expected this kind of trends. We already expected that the sales growth is starting to high levels in 95% and like that and it will come down going forward.

So it's actually a little bit early to actually say about our guidance. But generally, in the first quarter, and in the 5 months, also the post first quarter results are also in line with our guidance, all kind of guidance, the sales growth, EBITDA margin and the CapEx. So today, there is no reason to actually revise our guidance for time being. So -- but of course, we were following the cycle in the following -- in the second half of the year how actually the sales trading would occur in the retail markets because the purchasing power is EBIT tightening right now in the second half of the year rightly.

But today, everything is on track. There is no reason to change our guidance for the full year. And the cost side, yes, actually in the first quarter, we have some kind of cost pressure coming from minimum wage hike and wage hikes. But I think it's a good start. We were expecting a bit higher cost in the first quarter so I can say that we already started to benefit from operating leverage, maybe late first quarter in March, maybe. So assuming that there will not be any second minimum wage hike in the seconds -- in the first of July, again, like last year. So we are benefiting more from the operating leverage, but of course, if there is not any second minimum wage hike, it doesn't mean that we would not actually give anything, maybe we will have some side benefits on the debt, but it wouldn't have any major impacts on our costs. So largely, we will have what's going on in the coming quarters. the OpEx to sales is likely to come down. And also gross margin is also a bit -- slightly to come down. So we are keeping the EBITDA margin stable going forward. This is general, it's not we expect going forward.

Like last year, actually, in our OpEx slides, we have given the trend of the OpEx, first and third quarters are high, but coming quarters, they have operating leverage. So coming quarters, we will have more efficiencies in OpEx side as well.

[Unknown Analyst]

And Serkan-Bey, there's another question. When we compare your inflation accounting standard base financials, we see higher effective tax compared to pre-IFRS 29. What this effect is? And what should we think for the following quarter? Because the effective rate comes to around 39%, and in the pre-inflation accounting numbers, we see 19%. So how could we elaborate this for the future? I know it's very difficult, but at least, do you have any comment on that?

[Serkan Savas, executive]

Yes, together with the inflation accounting, there are lot of things changed, actually. But I can say that this is most -- all coming from deferred tax losses. As you know, through inflation accounting, we are generating monetary gains, around TRY 6 billion for monetary gains benefited from that. So from these monetary gains, we are recording some deferred tax asset Turkish liabilities. So this is generally coming from deferred tax assets, but in pre-IFRS 29 figures, it's almost 20%, 23% is almost in line.

Going forward, yes, maybe we will have -- till year-end, we are likely to have some kind of deferred tax liabilities going forward. But of course, this is very difficult to say about this inflation accounting. We are -- everybody is the very near. It's not very familiar yet, but likely to have some kind of this deferred tax liabilities going forward.

And [ Dominic Leon ], please go ahead. The floor is yours.

[Unknown Analyst]

Yes. Thank you so much for having us. And congratulations on strong results. My first question is regarding the increase in branded labels as a percentage of the mix of your products. If you could give us a little bit more color there. Do you expect that to continue? And then secondly, would be a quick question regarding rumors of a Canadian expansion and if there's been any highlights on that front.

[Serkan Savas, executive]

About the first question, the increased brand products. Yes, our branded products is EBIT up and craft level is down, but this is not actually on the performing of the price tables, not coming, but this is a some type of dilution. Dilution, as I said before, spots and group spots. We -- in and out, which are in and out. This is a kind of tools, kind of SKUs, we are responding to the market in campaigns and promotions these kind of tools to compete in the market. So we improved well to share of this sales total in and out increased to around 15% to 20%. So this is mostly our branded products.

So this dilutes our product labels products as well and also, actually, the product table products, which we are selling, the basic commodities, the basic commodities inflation is much lower than the headline inflation, maybe 20%, 30%. So technically, the dilution is coming from the price wise, the price increase of these commodities, which we are only selling private labels is very much lower than the headline inflation.

So the total nominal value of these profitables are relatively down to others. This also dilution impact so and also, we are in and out, we are a little bit focusing on the branded products to attract newcomers, join us to the stores and competitive, to be more competitive in the market. So -- but our priority is still 5 years. So business model doesn't change. We are still focusing on the private labels.

So we are doing as much as we can to improve our private labels. But of course, there is a -- of the brand life in the markets. We cannot sell the private labels in the market. So -- but this is just a very small share loss, but it is not -- it's just a dilution. But first of all, I can say that. It's okay for you?

[Unknown Analyst]

Yes.

[Serkan Savas, executive]

And the second, Canadian expansion. We do not give initiation to expand the Canadian markets actually. I think as we are CEO, also announce something to Reuters. And if -- and there is not any touch. There is actually a communication from the Canadian government to us right now. So -- and we do not have any agenda right now. But if they actually have some kind of communication, of course, our board and high-level senior management will consider to the market, just the market. But today, we do not have any agenda to expand any third country right now.

And I think there is not any further questions. Thank you so much. I will give the floor to Fatih-Bey for the closing remarks and also -- by the way, I would like to say that this is my last call. And I'm still within the group, but I will be joining the BIM MAROC team starting from the 1st of July. This is -- I would like to thank you for the last 18 years. I'm very glad to work with you and I'd like to actually talk with you, communicate with you going forward.

So my colleagues, [ Atif ] and other colleagues will actually run the business in BIM Turkiye, but I will be actually adding value to BIM in MAROC. And Fatih, this floor is yours for closing remarks.

[Fatih Meriç, executive]

So we are congratulating Serkan for this new role. So he's moving tomorrow. So he's played his role very well. So in new markets, actually, as you know, we actually saw MAROC -- in MAROC so we are growing there fast. And so thank you. Thank you for your attendance to the meeting. And so this is my second quarter, the second meeting actually saw in presenting quarterly results actually. And I hope so this is consecutive better results. And so I hope so this will continue. So we'll make you happy about it. So this is the end of our call. So again, thank you for your participation.