OVS SpA

MIL:OVS

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the OVS First Quarter 2021 Results Presentation. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Stefano Beraldo, CEO of OVS. Please go ahead, sir.

[Stefano Beraldo, executive]

Thank you, and good afternoon to everyone who are joining this conference regarding the first quarter 2021 results. I am not in my office. I'm traveling today. So I also asked my team composed by the CFO, Nicola Perin; our Investor Relations, Andrea Tessarolo; and our business development, Francesco Leoncini, to support me and to present some of the slide.

So let me start by saying that this conference will be maybe a little bit more limited in our disclosures compared to other period given that we are in the final period of our discussions with the public authorities regarding the next coming capital increase. And so we are closer to the approval, we hope, to be held in the next weeks regarding the prospectus, so the memorandum regarding the capital increase. So we ask your understanding if maybe we are a bit less open compared to other moment. Nevertheless, I think that from this conference, you will be able to appreciate the situation of the company, which I start announcing, I think, is quite satisfactory.

So we are very satisfied, first of all, in looking at the market, starts reacting to the long period of apparel -- consumer apparel decline which started more than 1 year ago with the first lockdown and lasted for the entire 2020 and also for the beginning of this year. But finally, after the last -- new measures introduced at the end of May, which allowed even shopping mall to remain open, combined with what we believe is buying power in the pocket of Italians, mostly in the middle class, which didn't suffer so much from an economic point of view from the lockdown given that, thanks to the measures introduced by the government, they didn't lose their job. And I refer to the public workers, to the middle class, the one that works in the big companies. So I think there is a lot of liquidity in the pocket of this kind of consumers, which are our typical consumer, so the real family -- the real daily buying power.

As a matter of fact, having been able to increase materially our market share in -- during the year 2020 and also for another quarter in the first quarter of 2021 of a material amount means that our positioning is really appreciated by Italians, so I believe that this means that once the market will finally restabilize, our company will restart its own performance from a position that has been achieved just before the recovery. And we believe that our position is today better than 1 year ago, 2 years ago, thanks to our strategy.

I believe that -- and I can also tell you that the strategy of opening in smaller catchment areas is working. As a matter of fact, from the figure, you can see that, for instance, the growth of Upim has been even higher than the growth of OVS or better to say, the recovery. And this is because many locations that we opened recently in Upim are at second-tier city or villages. In general, this strategy is working, and we had a lot of request from Italian and also European small entrepreneurs to open our formats, particularly the kids, also out of Italy and in Italy also, small Upim and kids and home decoration.

So part of the strategy is already, in this month of recovery, generating good results. And this part of the strategy I'm referring to is the part of the growing through franchisee store in smaller catchment areas.

Another part of the strategy is also providing good results. And I refer to the introduction of brands in our assortment and also in the higher characterization of the existing brands in our merchandising offer. As a matter of fact, the recovery has been -- this time, has been a very strong not only in kids but also in men and women. And also, the recent month of May that we announced as being a very positive month with a double-digit growth is performing so well, not only -- or not mostly because of kid but also because of the excellent performance of men and women and particularly women.

What is generating the better growth are the new brands that we introduced recently. So this means that we are becoming a bit lighter in terms of capital investment because these brands in certain amounts are made -- are sold under a consignment agreement, which means lower stock. And also, they generate new interest in visiting our stores.

So all in all, I think a good quarter with market share increase, means very well offset our positioning, either for OVS and Upim; good margin, as expected. So since a couple of half years, we are insisting in saying that we don't want to push too much on markdown. We are reducing our markdown. And as a matter of fact, thanks to the lower markdown, we have been able to increase materially also our gross margin. Again, this quarter, cost control means a stronger EBITDA recovery.

In the month of May, all these drivers are working in the same direction, so positive sales, higher gross margin and lower cost. We expect that this combination will generate an excellent May result. And the same trend, I hope, I believe we will be able to maintain for the next coming months from a financial position point of view. So we'll generate more or less what we expected before the unexpected period of closures, which unfortunately impacted the month of March, when, for several weeks, we had also 75% of our network closed.

In spite of the turnover that we lost because of this, the lower volume of intake that we very prudently decided to buy, thanks also to a more and more flexible sourcing mechanism and the cost control and the margin increase, we have been able to end up this quarter with a net financial position which is more or less in line with what we expected. And for sure, the excellent performance of May will enable the financial position to improve. And in general, we can say that thanks to this, we believe that we are, at the end of May, with results which are better than our expectations.

So having said that, I'm happy to hand the word to Francesco Leoncini for a better clarification on some of the slide that you already have.

[Francesco Leoncini, executive]

Okay. Thank you, Stefano, and good afternoon to everybody. I will quickly guide you through the document that is published on our website. Starting from Page 3, where we have the usual representation of the key economics.

Net sales more than doubling versus last year, plus EUR 127 million. That allowed us, on one side, to strongly increase the market share from 8.1% 12 months ago to 8.7% this year, so more than 60 basis points of increase. On the other side, delivered a plus EUR 40 million in terms of EBITDA. That allowed us to come back to profitability already in Q1, which is due to the seasonality of the business, the weakest quarter of the year. So all together, these are bringing back to a very sound situation. The net financial position is worsening by EUR 46 million, but following, let me say, the usual path of cash absorption in Q1.

I would then move to Page 4 that gives an interesting view on the impact of this Q1 on last 12 months EBITDA. In January, we closed the fiscal year with EUR 73 million EBITDA. Let me say the mechanism of removing the first quarter of last year that was negative for EUR 34 million and adding the Q1 of 2021 which is positive by EUR 6 million delivers us the 120 -- EUR 113 million EBITDA for the last 12 months view, so the run rate basically.

How we have reached this improvement, as said, we had an increase in sales that delivered a EUR 70 million increase in gross margin. We improved the gross margin percentage thanks to a better and a lower markdown pressure. That accounted for additional EUR 6 million. And on the cost side, of course, we have a rebound versus 2020 when the stores were closed. But we are still midway, plus EUR 36 million versus 2020, minus EUR 28 million versus the baseline of 2019. So all together, we delivered a plus EUR 40 million that we were before discussing.

On Page #5, we have some additional views by channel and by business unit. All the numbers are extremely positive. As anticipated by Mr. Beraldo, Upim in Q1 performed slightly better than OVS, but even OVS was more than doubling its result. And this is due to the fact that Upim as a franchising channel has a higher weight and also that Upim was less impacted by the closure of the shopping malls that, on the contrary, had a negative impact on the OVS potential because of the closure of the shopping mall during the weekend that are the days that the shopping mall works better was prolonged until the mid of May. But in any case, very positive under -- [ on the aggregate ].

I then move to Page 6, where we start to have the financial view of the Q1. You have the prospectus of the working capital. Trade receivables are increasing EUR 14 million versus 1 year ago. And this is not due at all to an extension of payment terms that are instead reducing but simply to the fact that we are normalizing the deliveries to our franchisee versus the stop that we had in 2020 due to the lockdown. And so basically, we are back to the normal levels of trade receivables in a situation where we have no particular criticalities because, as said already by Stefano, our franchisee being focused on kids, being focused on small catchment areas suffered even less than the big services -- or the big stores in the main cities.

Inventory is showing a decrease of EUR 4 million. We planned to have a significant stock reduction in Q1, basically cleaning the stock that was accumulated during the lockdown of 2020. We are partially achieving it. But unfortunately, the third wave, of course, blocked us from achieving even a better result. But as said, the good sales in May has a consequence, also the fact that we are cleaning more stock than originally expected. So there is some delay in the cleaning, but the process is going ahead.

Finally, the trade payables, that are reducing by EUR 36 million but the value that we are tracking on 12 months ago was, of course, impacted by the longer payment terms that were granted by our suppliers in this exceptional period. The number that we have today, on the contrary, is underlying a payment schedule which is 100% in line with the due date, so no overdue at all.

I move to Page #7. That represents the investments that the company started again in Q1. Here, the comparison with last year, of course, is uneven because, last year, we had, on one side, the physical block. It was not even possible to work on the stores. And on the other side, of course, the focus was on liquidity. This year, we are back normal or even more than back to normal because we want to be ready to gain the wind that would come from -- that is coming from the reopening and somehow the normalization of the economy.

So we had, in the Q1, a lot of refurbishment that are delivering us incredible results. If someone is in the area of Treviso, I really invite you to come and visit the new store that we have down there, which is really the flagship of the company. But you can find renewed OVS stores basically in every region of Italy. We are going ahead with our new openings plan. And we are, again, restarting all the digital transformation projects and logistics and in any case, operational improvement projects that were stopped due to pandemic last year. We also recorded a purchase of the Stefanel brand and the Piombo brand for overall EUR 5 million, and these projects will show their potential across the full year of 2021.

I move to Page 8. I focus on the bar chart on the right where we see that in Q1, that is normal. The company always has a cash absorption. In a normal year like Q1, as the case, of course, was -- like in 2019, the cash absorption was EUR 70 million. In Q1 2020, of course, extraordinary. We had EUR 120 million cash absorption. And this year, we are basically back to normal EUR 74 million cash absorption despite the EUR 20 million investment. So we are really back to the normality in terms of cash management. And just to remember, the EUR 70 million that we achieved in 2019 are then matched with EUR 65 million cash generation across the full year. So the seasonality on cash is even higher than the one that we see on EBITDA level.

Finally, I move to Page 9, where we have a view on the debt and the leverage. The -- again, I think that the graph on the right is even more explicative. 1 year ago, we were at 4.4 but still leverage in, let me say, the last 12-month EBITDA of 2019. After the 1 year, the 2020, fully impacted by the pandemic, the ratio increased to 5.5 end of January. And now it reduced to 4.2, so even better than 12 months ago despite the fact that the LTM EBITDA is improving, but still has the second wave and the third wave inside.

Then we have some word on the outlook. But maybe here, Stefano, I give back the word to you so that you can a little bit give some more colors on how the month of May is performing. You already said are many things, but if there is anything -- any more comments to do. And then we have time for the questions.

[Stefano Beraldo, executive]

Thank you, Francesco. I would extremely fast because most of the points which are included in Page 10 has been already covered basically. Only I would like to underline the great success of several brands which have been introduced in our range, either in digital. Yesterday, we started with Napoli child, which is also distributed in the U.K. in Selfridges, for instance. A couple of weeks ago, we launched a young talent -- a young designer in the web with a lot of social media talking about him. And the result has been incredibly high with out of stock in 4, 5 hours of 6, 7 different SKUs.

In general, the brands which we invited in our playground are performing very well. Piombo is performing extremely well. So I believe that this -- I call the bit of change in continuity, introducing a discontinuity element in our assortment, which doesn't mean that we stop being vertical. We continue being a vertical company. But if we really want to be an inclusive brand, democratic brand, we believe that opening our boundaries also to unexpected talent or international brand like Everlast, which is made by us, by the way, under license, or like GAP, which obviously is made by GAP, of which Italians are loving particularly the logo products, means that OVS is gradually transforming and opening its door also to clients which are wanting to experience different positionings and different brand. Piombo is a great example of it.

We have evidence from our CRM that we are receiving a lot of new customers, men, in this case, which were used to buy other brands. But given the advertising, given the quality of the product at incredible price, because the prices are really low or really attractive, we are experiencing a higher number of new customers visiting OVS. I think that this strategy is quite promising, and we will continue in this direction.

So I leave the space to question now. Thanks for listening.

[Operator]

[Operator Instructions] The first question is from Domenico Ghilotti with Equita.

[Domenico Ghilotti, analyst]

My -- a few questions just to start. In particular, when I look at the lower cost that I see in Q1 compared to Q1 '19, I'm trying to understand how much of this can be really structural saving, how much is still affected by restrictions and temporary savings.

And second question is on the payables. If I understand properly, so you do not have any more any kind of, let's say, overdue payables related to renegotiation of rent.

And the last question, you are talking about the gross profit -- gross margin quite favorable. And so should I expect to see this trend also in the second quarter? If I understand, you are still quite confident that promotions will stay lower compared to, say, 2019.

[Stefano Beraldo, executive]

Yes. Thank you for the question. As regard to the first one, difficult to say how much in a mathematic term. But what I can tell you is that part of the cost reduction is temporary like the cassa integrazione support, for instance, or the fact that in the shopping mall, during the day of closures, we didn't pay the extra salary that normally we have to pay for the Sunday working time, which is -- which normally is higher than normal by 30%, 40%. On the other side, there are other costs like rents or headquarter which had been reduced to a new lower level. So without a mathematical answer, I tell you that 50% of the cost reduction more or less is the new normal, and the rest will not be repeated because -- as a result of what I told before.

Regarding the rent -- or sorry, regarding the gross margin, yes, we believe that the gross margin will continue to remain healthier and higher compared to last year reference period as a result of the prosecution of the strategy of lower markdown basically. In some case, we have increased modestly prices. We believe that it was appropriate to do it also in conjunction with some more quality that we introduced in sustainability and recyclability, et cetera. But most of the gross margin increase comes from lower markdown, and this approach to lower markdown would be maintained also in the second quarter, to answer to your question.

Can you please repeat me the third question because I couldn't take note?

[Domenico Ghilotti, analyst]

It's just related to the overdues on the payables and the rents in particular.

[Stefano Beraldo, executive]

The overdue has been completely absorbed.

[Operator]

[Operator Instructions] The next question is a follow-up from Domenico Ghilotti with Equita.

[Domenico Ghilotti, analyst]

Well, I have additional question. And first is related to the situation -- so I'm not talking about quantitative indication, but I'm trying to understand if June is still another -- if that started with the same pace and same positive trend compared to 2019.

And second is a bit strange, but there is now -- we are looking now at the dollar -- potential strengthening of the dollar. And I'm trying to understand what's your position now on this in terms of hedging.

And well, let's say -- and the last question -- very last question is on the competitive environment. So maybe I see in The Street that there is less competition; that you have competitors that are struggling, in particular, the smaller one. But you have much better view also on the market share of competitors, so you can give us maybe some color on what's going on.

[Stefano Beraldo, executive]

Thank you for the question. June is doing well, and I ask you to be patient. I would like to avoid telling more. But we are very happy also about the June performance. And most importantly, the structural drivers that characterize the recovery are continuing, all of them to be in place: sales, margin, cost.

On dollars, we are not concerned about it because of our amount of hedging which we made. We covered a material amount of the future needs at very favorable exchange rates. And I believe that at the end of the story, any season has its own issues, sometimes dollars, sometimes raw materials, sometimes logistic cost. But at the end, all these element are part of the global competition drivers. So all our competitors are suffering or benefiting the same terms and are reacting accordingly. So I don't expect that because of the dollar strengthening, we would assist to a margin decrease. And this, in any case, will not impact the year 2021, and also, part of '22 has been already hedged.

Regarding competition, yes, I have to say that I believe, based on the market share comparison that we have a look monthly, the super positive performance of OVS in term of market share increase tells clearly that there are other brand which are suffering. The last quarter, we have assisted to a market share increase of OVS, which is even higher compared to the market share increase of Amazon and Dalahome. In the last 3 months, we have achieved higher increases compared to the winners of these years, which are the pure player, the digital players.

We are looking at other companies, Italian and also non-Italian, which are suffering particularly. I prefer to avoid mentioning the ones which are suffering the most. But some of the international key players are reconsidering their strategy of maybe opening big stores in big city, and they are removing part of the -- or closing down part of the network, exiting from smaller city because maybe the smaller city are less appropriate to their positioning. So there is a kind of a mix of different behaviors. But I believe that in this, there are only a few winners.

Segments -- regarding segments like underwear, which are still performing well, and you can imagine the brands which are performing well in Italy but they are not real competitors for OVS. Generally, weakness in the kids segment, where we are really being not only the category killer but it's incredible how much we are still growing in spite of birth rate decline and we are increasing market share more than in the other segment, we don't see strong competitor there. So all in all, the competitive scenario is more favorable than ever, I would say.

[Operator]

[Operator Instructions] Next question is from Marco Baccaglio with Kepler.

[Marco Baccaglio, analyst]

Two questions from me. The first one is if you give us an update on Stefanel and what you are doing and what could be the contribution.

And the second is you are planning to expand in franchising. And also, there is the plan of Conad -- of stores in the Conad space. Maybe if you just help us in modeling that kind of contribution. Let's say, all these projects, what level of sales could they generate, let's say, on a 2-, 3-year basis from now?

[Stefano Beraldo, executive]

Thank you, Marco. Honestly, the second question to me is very difficult in this moment because giving you prospective figure about future is, in this moment, which is where we are particularly sensitive even more than normal, I prefer only to give some color about it. You can consider that each store is generating on average from EUR 40,000 to EUR 60,000 EBITDA for us as normal. So this is normal. You can easily find that this reference is also in the historical performance.

So we gave some number also 1 month ago, I think, regarding new openings of franchises. So basically, you can easily create, I think, your model from information which are already available. What I can give you as a color is that more than ever, we are really assisting to renew the demand from small players, small entrepreneur, which are in retail with several brand, to have access to our portfolio of brands.

So never like today, we are receiving a request from a partner to open a kid store; to open Croff, which is home decoration store. And this means that our positioning there is appropriate and that the market shake which is happening with certain shopping mall under trouble, weak, forced to close stores and a general reduction of the real estate value related to retail locations is making the opening of smaller store cheaper, more easy to be managed by this local entrepreneur. And we are taking advantage. Remind me the other question, please.

[Marco Baccaglio, analyst]

On Stefanel.

[Stefano Beraldo, executive]

On Stefanel, nothing really important to say, other -- because what I can tell but it is not very important for you is that I'm very happy with the quality of the collection which I have seen. The samples has arrived, and the quality which I see is really, really promising. So I have a good feeling about the appreciation of Stefanel collection from our -- from Stefanel customer base.

What I can tell you is that more than 20 Stefanel stores will be reopened -- will be provided with the new assortment starting from September. Another 15, 20 stores will be open, as I told, thanks to carving out part of the existing OVS store. We have a good pipeline of requests from Italian and international franchisee to open a Stefanel brand.

But everything is based on expectation today because no one has seen the final collection. So everything must be postponed to the second half. What I can tell you is that we are not making big investments in this moment. So we are renewing only 3 stores with a completely new image, and this is because we want to test this image today in a prudent way before rolling it out. So let's cross fingers here.

[Operator]

[Operator Instructions] Mr. Beraldo, gentlemen, there are no more questions registered at this time.

[Stefano Beraldo, executive]

Thank you. Thank you very much for attending this meeting and looking forward to seeing or speaking to you next. Thank you very much.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.