BIM Birlesik Magazalar AS

IST:BIMAS.E

Earnings Call Analysis

Strong Growth Amidst High Inflationary Pressure

In the high inflationary environment of the third quarter of 2023, net sales soared to TRY 74.4 billion, marking an 81% year-on-year growth driven by vigorous back-to-school sales and enhanced customer traffic. Like-for-like sales bolstered by 66%, and the company's robust sales performance led to an improvement in gross margin, which hit a historical peak at 20.9%. However, increases in personnel expenses due to minimum wage hikes have tempered these gains, leaving EBITDA margins at 9%. Store expansion continued with 228 new openings, totaling around 12,000 stores, and the company adjusted its full-year guidance for capital expenditures to revenue from 2.5% to 3.6%, reflecting scaled-up investments in warehouses and a forthcoming chocolate factory.

Strong Sales Growth Amid Inflation

The company's third-quarter net sales surged to TRY 74.4 billion, depicting an impressive growth of 81% year-on-year. This leap was driven by high inflation and robust back-to-school sales. Although the inflationary environment buoyed sale prices, it also led to a strategic change; the company capitalized on advanced payments to suppliers as a hedge against rising costs, lifting the gross margin temporarily to a historical high of 20.9% for the quarter.

Expanding Footprint with New Store Openings

The expansion strategy remained aggressive, with 206 new BIM stores and 4 FILE stores opened in Turkey alone. Additional openings in Morocco and Egypt brought the total store count to 12,046. This reflects a roughly 7% expansion rate and a strategy that includes accessing city centers through mini stores and an emphasis on international growth. These efforts, although slightly below targets due to delays in recovering from an earthquake, indicate a firm commitment to expanding the company's presence.

Capital Expenditures and Revision of Full Year Guidance

Capital expenditures in the quarter amounted to TRY 2.2 billion, equivalent to 3% of net sales. Notable projects included warehouse constructions and a chocolate factory slated for a 2024 opening. A revision of the full-year guidance for capital expenditures from an initial range of 2.5% to 3.5% of revenues was nudged up to 3.6%, primarily due to slower than expected store expansions and delays in acquisitions and solar panel investments.

EBITDA Margin Beats Expectations and Guidance Adjusted

The EBITDA margin stood at 9%, surpassing the initial guidance threshold of 7% to 7.5%. The company responded by revising its EBITDA margin guidance upwards to between 7.5% and 8% for the full year. This positive financial performance owes partly to a higher gross margin, operational leverage, and lower capital expenditures. It's crucial to note, the executive team emphasized that some of the positive impacts on profit margins are temporary, warning investors not to consider the 9% EBITDA margin as the new normal.

Net Income and Cash Position Improvement

Net income for the quarter reached TRY 3.8 billion, corresponding to a net income margin of 5.2%. A robust cash position was bolstered further, increasing from TRY 6.5 billion at the start of the quarter to TRY 10.3 billion by the end, aided by strong operational performance and controlled capital expenditures. This improvement in liquidity sets a sound stage for potential investments and operational maneuvers.

Consistent Traffic Growth and Controlled Consumption

Like-for-like sales continued to prosper with a 66% increase in the third quarter. However, the company noted that the like-for-like basket growth was slightly below the rate of internal inflation, which stood at 63%. Traffic growth was higher compared to previous quarters, and despite expectations of consumption pressure, there were no signs of significant stockpiling indicating consumption patterns remained stable. This suggests the company has managed a balance between attracting customers and managing inventory effectively during inflationary periods.

Earnings Call Transcript 2023-Q3

[Serkan Savas, executive]

Welcome to our third quarter results conference call. I'm Serkan Savas reporting, an Investor Relations Director. We hope you have all managed to download our recent presentation on our website. And I now invite you to have a look at our third quarter results. And the questions about the [indiscernible] taking your questions at the end of the call via raising your hands.

And first, we will look at the [Technical Difficulty] for the third quarter. And top figures for the third quarter of 2023 are net sales or quarterly net sales were TRY 74.4 billion, reflecting 81% year-on-year growth. High inflationary environment and improving traffic figures and strong back-to-school season were the main drivers in third quarter and supported our top line growth. And supportive sales mix during the back-to-school season and price advantages coming from our advanced payments scheme temporarily increased our gross margin in this quarter. This quarter [indiscernible] striking the gross margin improvements.

The improvement in gross margin were then offset the pressure of minimum wage hike on OpEx. Thus, our EBITDA margin stood at 9% in third quarter and EBITDA grew by 130% year-on-year. We will be more elaborating the improvement in gross margin in the coming slides.

Net income was TRY 3.8 billion with corresponding to 5.2% net income margin. In terms of store expansion, in the third quarter, we have opened 228 new stores, and we had totaled around 12,000 stores on consolidated basis. And capital expenditures stood at 3% of our revenues in the third quarter, which was slightly below our full year guidance. Hedge generation also improved in the third quarter, along with the strong operating performance and a lower CapEx and cash generation improved in the third quarter.

And now let's move on to operational performance. And with the like-for-like sales figures. Like-for-like sales -- now we are at Page 6. Like-for-like sales increased by 66% in the third quarter. The basket -- like-for-like baskets increased by 60%, which was slightly below our quarterly average in terms of internal inflation. Our internal inflation in this quarter was 63% year-on-year. As mentioned before, we were expecting positive momentum in the traffic figures, we all disclosed in the previous quarters that we are improving, is in positive trends. And it has been almost realized in line with our expectation. Like-for-like customer traffic increased by 2.1% in this quarter. And in year-to-date figures, it reached the breakeven of zero.

And the post Q3 in October, the positive momentum in traffic figures continued as well. And on the store side expansion. In the third quarter of this year, we have opened 206 new BIM stores and 4 FILE stores in Turkiye. We have opened 9 stores in Morocco and 9 new stores in Egypt. In total, we had 12,046 stores by the end of the third quarter, consolidated across our operations. And store openings, for example, in the last 12 months period, 12-month period, we have opened 1,000 stores on a consolidated basis and closed down 425 stores due to archaic. I think this trend would likely to stay the same at the end of 2023. So at the end of the year, likely in the next conference call, we will have again 1,000 store openings for a 12-month period and made around 200 closedowns.

This is slightly below our expectations because we were targeting to compensate our store closures in case of the earthquake, but it's taking a little bit time for that. So -- but generally speaking, in gross side, we have opened 1,000 stores in a 12-month period. This corresponds around 7% expansion rates. A number of mini stores, which have 100, 150 square meter selling space and lower [indiscernible] range is approaching to 200 stores as of September. Many stores are also doing well and helps us to penetrate in the city centers.

And capital expenditures side, CapEx was TRY 2.2 billion in this quarter corresponding to 3% of our net sales. There were 3 warehouses under construction and one of them already opened, recently opened in [indiscernible], which is rented. And the others [indiscernible] Tuzla constructions are also going on. Additionally, our Marrakesh -in Morocco, Marrakesh warehouse is almost finalized, in 2-month period, it will open.

And our chocolate factory construction also continues, but it is approaching to the end now, and we will open at the beginning of 2024. And due to lower than expected store openings slightly lower than expected store openings in 9-month periods and delayed -- some late acquisitions and somewhat delayed in the solar panel investments, CapEx to sales is to 3%. Accordingly, we revised our full year guidance from 2.5% to 3.6% of revenues.

Moving on to our financial performance. It says about the sales progression on Page 10. Sales grew by 81% in the third quarter, reaching TRY 74.4 billion. As we mentioned before, there is a deceleration in sales in the third quarter, along with the back-to-school season and rising inflation. Coming closer to the end of the year, we revised -- we also revised our sales growth guidance to around 80% as our sales progression is heading to the higher end of our previous guidance. And post Q3 tradings, the sales also confirms our new guidance, which is 80%. And this quarter's tracking point is gross margin and gross margin progression, as you know. This quarter, our gross margin relied at 20.9%, which was higher than our general practice. This is the historic high, I can say that. And many reasons are some are temporary, for example, many reasons are: first, the benefits of advanced payments to the suppliers increased our gross margin temporarily in Q3.

As we have mentioned before, we have been paying in advance to suppliers to fix the price to secure ourselves from rising inflation since the first quarter. So we somewhat benefited. But of course, this is temporary because today, the advanced payments almost normalized. This is why you are saying that this is a temporary benefit. The first advance payments to suppliers is the first reason. The second is also supportive sales mix. The share of the basic products, which have naturally lower margins a bit down compared to last year because somewhat lower consumption and somewhat -- the basic products inflation is much lower than the general inflation, headline inflation or other products inflation. So the share of -- and also the strong base is the case. So the share of these basic products, which have lower margins is down. So it's a little bit helped our gross margin to improve. This is the second one.

The third one is also we will be coming later. The FILE contribution is getting higher. As you know, FILE's [indiscernible] operation has highest gross margin progression. So it's also as the share of the FILE increase to gross margin -- better gross margin contribution to consolidated basis. So to sum up on gross margin, in this kind of environment, we sometimes experience temporary improvements in gross margin. You have already the following team, for example, in the third quarter of 2018 or fourth quarter of 2001 to '12, we have faced the same progression. And our gross margin, actually the post Q3 is back to our normal levels. As I said, some are temporary, but we have also some structural improvements. But I can say that this big jump is generally temporary.

And next is about the revenue breakdown in Slide 11. We provide the breakdown of our revenues. The Turkey operation still has a majority share in total revenues, as you see. FILE is also contributing much better compared to last year and reached to around 6% share in Q3 compared to 4% same period last year. So there is a significant increase or contribution from FILE. In Egypt and BIM-Morocco contributions are nearly the same, somewhat dilution of new because it is nearly same as previous year.

Safe progression of the product categories, private label share decreased to 61% from 63% when compared to last year's same period. This change can be attributable to sales mix change as the share of the basic food categories, wealth tracking products are more dominant was lower compared to last year. In addition, we have been sometimes adding new SKUs as last -- actually, at the beginning of the year, we increased our SKUs from 850 to 900 and new SKUs added to portfolio were mostly branded and contributed to the share of the branded products share -- share of branded products.

And lastly, increasing our spot offerings and the spot products, Friday offerings and also in an out Tuesday offerings increased significantly. Those are also secured the private label share because Tuesday and Friday offerings are mainly [indiscernible] products. And the share is -- actually spot is around 8%. In and out is also more than 5%, 6%. So it is also -- that is squeezing profitable share. But these products Tuesday and Friday offerings are -- since they are mostly branded products, they are also somewhat contributing our gross margin as well.

And OpEx management. This graph on the Page 12 shows the change in operating expenses as a percentage of revenue by item. We see the impact of secondary minimum wage hike on margins. Personnel expense was the major contributor to the increase in OpEx item. But impact is realized less than our expectations due to better sales progression and operating leverage. In fourth quarter, operating leverage would work -- likely to work better since we don't expect any significant one-off cost pressures. Just elective tariffs increased by 20% as of 1st October but this is likely normalization that we can say that because in the last 1.5 year time, there hasn't been any increase in elective tariff tariffs. And total expense continue to contribute positively due to high base of next year and likely to continue even though the 20% price hikes. And if we ignore IFRS 16 accounting the revenue, cost share in sales is still progressing stable at historical low levels. This is 1.4%.

Now let's look at quarterly EBITDA and EBIT at 9-month period. In the third quarter, improvement in gross margin more than offset the negative impact of minimum wage hike. Accordingly, EBITDA realized at TRY 6.7 billion, and EBITDA margin was 9% in the third quarter. In the 9-month period, EBITDA margin stood at 7.7%, which was above our guidance of 7% to 7.5% for the full year. Accordingly, we revised our guidance to 7.5% to 8% following the better-than-expected results in 9 months period. As we discussed before, our gross margin got back to normal levels post Q3 with the help of the operating leverage and employee expenses are also expected to normalize in Q4. Therefore, the midpoint of the new guidance is most likely at this point. As I mentioned before, we don't expect any major cost pressures in the fourth quarter. So operating leverage would likely work better.

And as mentioned in previous calls, worst is behind after Q1 and profit margins has been improving after the first quarter. But keep in mind that this 9% EBITDA margin should not be taken as a new normal since there are some temporary impacts in this quarter, as mentioned in the previous slides. But of course, there are some structural changes -- structural improvements as that, but this can be taken somewhat temporary.

And moving on to net income slide on Page 14. Our net income was TRY 2.8 billion and net income margin was 5.2% in this quarter. There were no major one-offs in this quarter. There is only -- we can maybe one-off, we can say that negative impact from corporate tax rate increase in this quarter. In this quarter, effective tax rate increased to 27% because the first 2 quarters impacts of corporate tax rate increase are reflected to the third quarter. So this effective tax rate likely to come down in the coming quarters. And in the positive side, financial income also supported to our net income following strong cash position. Now we are also -- cash position slide on Page 15.

On this cash position slide, we want to show a more detailed picture of cash flow movements in Q3. As you know, the short-term financial assets are not assumed as cash item per IFRS or TFRS rules. However, they are cash like assets in our case because they are cash in banks. And short term financial assets, our liquid assets and a growth -- fixed income assets subject to books or lease certificate. So we prefer such investments for short-term financial return. So including short-term financial assets and total assets our cash position was TRY 6.5 billion at the beginning of the quarter and now reached to TRY 10.3 billion at the end of Q3. On top of the strong operational performance is in CapEx to sales, and rev expected sales ratio also contributed to cash generation capability in third quarter. Cash payments also normalized compared to previous quarters. So our cash position is going well. There is improvement in cash position in our sites. As we said before, this is the somewhat positive impact on our net income.

And the next is about our FILE foreign operations. Now FILE first. We opened 4 new FILE stores in Q3 and number of FILE stores reached to 223 at the end of the third quarter. In 9-month period, we opened 21 FILE stores. We opened 21 FILE stores. But in October, we speeded up the store expansion. So at the end of the year likely to approach to around 25, 40 stores at FILE -- openings FILE. FILE online shopping platform which was launched in May 2021, now available in the 26 cities in Turkiye and in a short period of time, online sales reached 5% of FILE total sales. FILE share in total consolidated sales is around 6% compared to 4% last year, thanks to its robust performance.

If you look at for our main operations, we have opened 9 new stores in the third quarter in Morocco and our number of -- total number of stores reached 668 in this country. The fourth warehouse of BIM-Morocco in Marrakesh will be opened in January. We are also working on finding warehouse location for the fifth warehouse in the north of countries. So we are trying to enlarge our logistic infrastructure and then also speed up openings.

In Egypt, we continue to open new stores, 9 stores we have opened in third quarter and the number of stores reached to 338. Operational improvement continues in Egypt. We are operational -- continues in Egypt. The operation is not fully cash positive yet, but progression is good. So we will continue store openings in Egypt for the rest of the year and try to improve our operations there.

And for operations contribution Page 18, delayed contribution of foreign operations was TRY 9.6 billion, 5.3% of sales. But it was 6% last year. There is EBIT dilution in the [indiscernible]. This is mostly because of the higher inflation in Turkey, higher inflation than Moroccan and Egypt. This is EBIT dilution, but it's almost nearly the same. And EBITDA contribution was TRY 561 million in the 9 months period, around 4% of total EBITDA.

And about the guidance revision. We already mentioned revisions in our guidance in the previous pages. To sum up, we now expect our sales growth to reach our high end of previous guidance is 80%. On EBITDA margin, we revised our guidance to 7.5% to 8% range from 7% to 7.5% previously. We started the year at a very low base, and each part of margins are better. And as we highlighted before, we expect that EBITDA margin bit a tough quarter as normalization is likely in the fourth quarter. On CapEx side, we revised our CapEx to sales guidance from 3.5% to 3.6% due to lower than initially planned store expansion and delayed acquisition and somewhat delayed solar panel investment. There are some kind of delay, delay, but there's not actually a cancellation because some accruals, maybe some negotiations would to take much more time in this environment. So we still frame our actually infrastructure of warehouse openings, land acquisitions and also because due to our sustainability efforts, smaller financing measures.

[Serkan Savas, executive]

And I would like to take you for your attention today. Now I want to open to questions, Q&A session. [Operator Instructions] [indiscernible]

[Unknown Analyst]

Thank you for your time, and congratulations on a great set of results and execution. I want to -- can you hear me. Hello?

[Serkan Savas, executive]

Okay. Can you go ahead please.

I think now [ Jamal Baig ] the floor is yours. Please go ahead.

[Unknown Analyst]

Congratulations for good results. My questions again about the trends so far in October and maybe November. How do you see the traffic trends? Or do you see any sensitivity on the consumer side in terms of consumption patterns. That's my question.

[Serkan Savas, executive]

Thank you, Jamal Baig. Actually, in terms of traffic figures, as I said, the traffic growth is in positive moment, still the positive momentum in October, better than the third quarter, our traffic like-for-like figures. But generally speaking, the consumption is expected is likely under pressure in the Q4 because of the minimum wage impact almost disappeared after the several higher inflation months. So it's likely the consumption will be under pressure in Q4. But we are not facing any significant pressure. Our traffic growth is higher than the third quarter and also stockpiling from the consumer side is not the case today because there's no rush to the product as last year.

Last year was -- there was a rush because of the Ukraine-Russia crisis and other rising inflation. Yes, today also inflation is rising, but there is actually more trust to actually at authorities and expectations. So consumption is likely to be under pressure. This, I think, we can little bit benefit from [indiscernible] take it down going forward. We will see it, we will see it, but trade-down will be -- actually, we can't face this. So -- but it sum-up, our traffic is good, better than the third quarter. People -- disposable income is coming down, is the [ trading ] of the people. This is the general trend in October and November and expected in December as well.

[Unknown Analyst]

And Serkan as a follow-up. What do you think about the inflation accounting to be applied next year? What should be the impact on BIM figures?

[Serkan Savas, executive]

Thank you, Jamal Baig, actually inflation accounting, actually, this is -- first of all, this is applied for tax financials, which is tax financial likely to be applied to IFRS financials maybe in the first quarter or last quarter. It's not starting yet. But generally speaking to the retailers are more highly leveraged companies. There is companies is -- the impact to the retailers will be less. And also actually -- inventory turnover days of the retailers are much lower than the others. Today, we have only 1 month inventory days. So it will just affect our gross margin, the 1 month inflation. That's it. But we do not have any actually very clear data at head right now. We are still working on it. But we will build this affected one compared to others. The retailers are -- this affected compared to others. But in gross margin side, there is likely to be some dilution, maybe 1 month inflation dilution in gross margin side.

And next question is with [indiscernible] Please go ahead.

[Unknown Analyst]

Thank you, Serkan, and congratulations on the good results. Recent quarterly results were volatile in terms of year-on-year revenue growth and margins. And this quarter, we see the core high margins. I was going to ask is this gross margin sustainable in the coming quarters what you already answered it. But my question is -- should we expect this gross margin to hold around normal BIM margins at 18%. This is my first question. And the second one, the most important, should we expect this volatility, especially in revenue growth in the coming quarters because there were some lackluster growth -- revenue growth in the recent quarters, maybe especially due to high base and maybe some other reasons. So that there was some management change recently. So is this going to change this?

[Serkan Savas, executive]

Thank you. Actually, as gross margin I already actually mentioned its normalization in the fourth quarter, which is normal is 18%, 18.5% something levels. So there are some kind of temporary impacts in the third quarter but it's gone in the fourth quarter, some gone -- some is still going up. So 8% to 8.5%, you can take as a reference for the time being as a gross margin slightly normal. You know that in the previous calls, if it is over 18% we are okay. So we are happy with that. But of course, we are always trying to improve day by day. We are taking some actions, negotiating with suppliers, advanced payments we are doing, but normal 8%, 8.5%, you can take the gross margin.

So on revenue growth, actually as we revised our top line to 80% and post Q3 also confirms this revenue guidance in October and also November, in the first week of November is almost in line with this guidance. Yes, you are right, this high base in November and December, but today also there's rising inflation. The inflation is going up in basic -- also in the food consumption food prices are going up. Yes, there is a high base, but today's high inflation actually makes the high base disappear right now. So we expect around 80% levels going forward in the fourth quarter.

There is not any strategic change. Of course, we are always improving our procurement negotiations with suppliers, improving our qualities, distinct new products, management. Yes, change. But actually, it will take time to actually reflect strategies. But today, it is going as is. So for fourth quarter, I can say that it's in line with our revised guidance. So the next year, I cannot say anything right now because we have finalized our budget yet. So next year, the guidance will be actually discussed in the next call. I hope all clarified your questions.

[Unknown Analyst]

I meant that your revenue growth was below the inflation in the recent quarters. I intend to ask are you going to grow above inflation in the coming quarters?

[Serkan Savas, executive]

Actually, for example, in the third -- of course, generally speaking we prefer to grow higher than inflation. For example, in this third quarter are -- actually the basket. You have to take a reference at basket growth. Our basket growth is 60%. Okay. In the third quarter, like-for-like basket growth is 60%, where our internal inflation is 63%, very slightly below than our internal inflation. So going forward, of course, we prefer our baskets to grow actually in line in the internal inflation or better than inflation. But the good thing is that we are generating positive strategy. So in general sense, we generated 80%, 81% top line growth in the third quarter where the internal inflation is 63%. So we want to keep this gap going forward, if your question is that.

And next question is from [indiscernible].

[Unknown Analyst]

Serkan, thank you very much for the presentation. I have a follow-up question about the basket growth. Yes, it is below the inflation. And how do you explain this? Is this due to lower quantity in the basket? Or you have done some price investments?

And regarding this, how do you see the competition shaping in the fourth quarter? I mean, do you have a strategy to lead the market with price investments in the next few quarters because you have been losing some market share. And I just wonder if there is a strategy to gain the market share again in the 4Q and also next year.

And finally, what is the pricing difference versus supermarket players on the branded category that you have been adding?

[Serkan Savas, executive]

Thank you, [indiscernible]. First, the competition -- of course, price investments, yes, in October and November, we have realized some price investments as all others, our retailers. And you know that there are some kind of actually initiations, price investments in all sectors, retailers and others to have this inflation process in Turkey. So we also contributed this by more promotions, more campaigns and more price investments. In the fourth quarter, yes, we have some kind of price investment. This is also a little bit somewhat a reason of the normalization in the gross margin because all the sectors are trying to contribute this inflation process of Turkiye. We also joined this journey -- this inflation process. So particularly, the price in the Turkey -- your last question, price differences between the branded. You mean that branded versus level of price difference between the other retailers.

[Unknown Analyst]

I think it is more or less same on the private label for every player now, but I wonder about the branded category that you have been adding.

[Serkan Savas, executive]

Actually, today, in share price difference is around 25%, 40% in our case. Our price levels are around 25%, 40% lower than the branded products. And in our case, our...

[Unknown Analyst]

I meant versus the competition.

[Serkan Savas, executive]

Competition, private label -- BIM and private label competition, right?

[Unknown Analyst]

Yes. Yes, because I think in the market now, everyone offers more or less the similar prices for the same private label category. And we know that some supermarket players are quite aggressive, and they take down the branded category price as well, some anecdotical I mean, experience suggests that they may be matching the prices with discount or says, well, on this category, but I try to understand if you are still at the lowest, I mean if you can offer the branded category at the lowest price or not.

[Serkan Savas, executive]

Actually, in terms of private label, actually, almost all the retailers, discounters and [ supers ] in basic quantity private labels prices are all same right now. You are right. You are right. The supers are also competing with private label and prices. This environment actually brings that the price sensitivity -- first the price is come first right now. But whenever this inflation process starts, then the [indiscernible] will come first in next year -- second half of next year. So then we will show our strong muscles there much more. But today, I remind, you are right, private label products, prices are all the same amount of retailers. But this is just a visible [ gag ] actually in terms of -- I don't mean that [indiscernible] gap, the [indiscernible] perception is much more different right now. And -- but in terms of branded side, we are, of course, the lower when we lease a branded product. The share price is lower than the supers, I can say that. So -- but in private label side, they are all the same.

[Unknown Analyst]

And so, in the branded category, I mean, is it like 10% lower or much higher?

[Serkan Savas, executive]

I don't have any data, but I can -- let me clarify and inform you my colleague or me inform you later on.

Branded get between actually BIM and others. And basket growth is 60% and internal inflation is 63%. So there is no big gap right now. And we are also closing the gap with our traffic increase. As I said, our traffic is increasing more in the fourth quarter in October. So 63%, 60% is almost the same -- the same internal inflation is also actually, we are happy with that. But the good thing is that we are improving our traffic growth day by day, month by month. So this leads our top line growth higher than our basket growth. So going forward, we want, of course, listing new products, taking some actions, somewhat promotions, some campaigns, limited site to improve our sales and investing in lower prices to improve our sales and so baskets. So going forward, likely, we will have basket growth, which is in line with our internal inflation.

I think there is not any question -- any of questions, and I would like to thank you for joining us in this conference call and hope to meet you again in the next conference call full year 2023 conference call in March. Thank you.