OVS SpA

MIL:OVS

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the OVS First Quarter 2022 Financial 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 each of you to announce the first quarter results of OVS. I think that it has been a good quarter with the market share stable. But what is interesting is that we are gaining -- still gaining some market share in men and women and the only reason why market share is stable is that basically kids market evolution has been more modest compared to the men and women category in the market itself. So because of the mix, we are not increasing market share as a whole, but worth noticing that especially in women, we are increasing market share gain.We are happy with the top line as well because even if negative compared to 2019, modestly negative compared to 2019, in the first quarter, we had plenty of small or big negative aspects that impacted the consumer spending like the war, like the revamping of Omicron, the increase of electricity and gasoline cost. And last but not least, we had, again, some delay in the beginning of the season in the new intake. So some bottleneck in the supply chain -- in the worldwide supply chain determined also some delay, which has been entirely recovered as of today.It was also the first quarter as I had the opportunity to write in my comment, like a first test about the reaction of the consumers to the inflation, to the price increase. And this first test, in our opinion, has been very favorable. So the volume increase has been modest as expected. And in the period from March to today, we are experiencing sales growth at like-for-like compared to 2019. So the first quarter has been impacted by a weak February, but February has nothing to do with spring/summer. February is the last month of sales period. So having very little amount of good to be sold because the stock decrease has been material compared to the year before, we didn't -- we were not aggressive in pushing the stock out given that we had very little stock to push out.And the margin at the gross margin level, very well, and this is because the combination of higher prices and lower markdown generated a gross profit improvement. Basically we are continuing to benefit from being a very good alternative to -- compared to other brands or other chain to those customers, which are forced to trade down because of the general economic issues. And we have evidence that we are gaining new customers, thanks to this coming from higher spending levels.When we look at today, things are even better because also weather stabilized. And after normal-negative weather in April, we had a very good start of the hot season with a very good May and the sales, as we announced in May, has been absolutely satisfactory and very positive.One last aspect, we opened in Naples, probably the most beautiful OVS store across Italy. We -- and the reaction to the consumers, it has been a relocation from a second-tier location to a great location. And the reaction of the customers is impressive with many, many new customer visits in the store with figures which are surprising also according to our past expectations. So means that the strategy of moving stores, adjusting the network, refurbishing store is still very rewarding.So I hand the word to Francesco Leoncini for a more precise comment on the slide. Thank you.

[Francesco Leoncini, executive]

Thank you, Stefano, and good afternoon to everybody. So I will start with Page #3, where we have the summary of the profit and loss for the first quarter, where we can easily see that all parameters are in strong improvement versus last year. Sales are growing 30%. EBITDA is growing by almost 4x and also the profit before tax turned to positive again. So a very -- a context of very good results for the first quarter.Moving to Page #4, we can see that these positive results are across all channels and all brands with, in particular, the EBITDA of the OVS brand growing 4x, thanks to the higher operating leverage that the main brand of the group has. I will maybe spend more time on Page #5, which is a comparison of the 2019 results with earlier last 12 months. Finally, we had 12 months in a row without major blocks, major closures imposed by the government to contain the pandemic. And so we can compare the period of a full year.And in this case, we can see that overall, there is a EUR 5 million improvement that would become a EUR 10 million improvement in consideration of the marketing investment that was increased by EUR 5 million over the period. And this EUR 10 million improvement by the operations is driven by the positive effect, the overall positive effect of the actions on margin, on prices and margin vis-a-vis the reduction of quantities that we are experiencing.So the total -- the algebraic sum of these 2 elements is positive by EUR 10 million. On outside the like-for-like perimeter, we have the development and the growth in the franchising channel that is able to fully offset the pressure on cost in terms of store cost and increased perimeter. So we are in a situation where, overall, we have a EUR 5 million bottom line EBITDA improvement versus the pre-pandemic level.Moving to Page #6 and to the financials, the working capital is significantly improving versus 1 year ago. Trade receivables on one side are growing, so absorbing cash by EUR 9 million, but this increase of 9% has to be put in relation with the coming back of the business, plus 26% on franchising versus last year -- versus the first quarter of last year. So we are, as we commented also in the year-end results 2020, in a scenario of reduction of day sales outstanding.Inventory is slightly higher, but the quality of this inventory is completely different. In particular, the EUR 440 million of April 2022 includes some anticipation of shipments that we are making in view of the back-to-school and the arrival that we should have in the -- at the beginning of the full winter season in order to secure the goods in a scenario that is still uncertain in terms of transit time from the supplier to our warehouse.In parallel, we had a normalization of trade payables. In 2021, we were at the minimum in terms of purchases because we were in the middle of the clearance of the October of 2020. And after this normalization, we are back to the EUR 360 million level that should be a normal one for the company.Page #7 provides a view of the investments with some nice picture of the store of Napoli, Scarlatti that Stefano described in the introduction and the total amount is EUR 15 million, EUR 5 million below last year when we also had the purchases of the brands Stefanel and PIOMBO.Moving to Page #8, we have a summary of the cash flow of the first quarter. Due to seasonality, the first quarter is always a negative period. But even in this case, we have an improvement in the cash profile versus 2021 with a cash absorption of EUR 62 million versus EUR 65 million. Also to be noticed that part of this better cash flow was then invested in the buyback. And in case we can even comment later on on this element.Moving to Page #9. We have a deep dive on the financial position, which is more than EUR 200 million better than 1 year ago. A portion was due to the capital increase, of course, but EUR 120 million relate just to the cash flow generated in these 12 months. So also the leverage ratio are improving significantly -- dramatically, I would say, versus last year with both views either on the net debt of 30th of April or on the average over the last 12 months being in the range of 1.6%, 1.7%.By the way, this value of net debt is still gross of the treasury shares that we purchased that amounts to about EUR 7 million, and that would further improve the financial view into consideration.Then I give back the word to Stefano to provide then a further comment on the outlook, remembering on Page #10, nonetheless, that the acid test of having -- of the price increase provided good results. And after the month of May, we are even more comfortable in stating that the price to quality ratio in OVS is still outstanding, and so the customer is recognized it to us.We have the comfort of the actuals of the month of May and the first 15 days of June that sales are back to -- not just back to pre-pandemic level, but even above that level. And so we can conclude that we are looking to the remaining part of the year with confidence.

[Stefano Beraldo, executive]

Thank you, Francesco. I think that Francesco has also covered as I asked him to do the outlook for the year. So we are ready for your questions. Thank you.

[Operator]

This is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Francesco Brilli of Intermonte.

[Francesco Brilli, analyst]

I have a few questions. The first one is on the working capital. And specifically we saw a robust increase of trade payables and almost the same level of inventories of last year. Just wanted to ask if the amount of inventory we see at the end of April already includes all the merchandise relative to these payables or not? And if not, if you can give us a rough indication how much inventories would increase. And if I may, can you confirm the target for working capital for the year is something in the range of 10% on sales?And then I have one on Stefanel, GAP and other businesses. I saw profitability of these businesses in the first quarter improved significantly quarter-on-quarter. And when are you expecting the breakeven in terms of adjusted EBITDA? And then the last one, if I may, on prices. Can you remind us when the process of price increases actually started?

[Francesco Leoncini, executive]

Okay. Thank you. I would start with the first answer on trade working capital. In fact, this -- the picture as of 30th of April includes all the shipments that we had already started because the cutoff for us is when the goods are put on the ship. And these goods are, of course, still to be paid and so we can see the value in the -- in parallel in the payables.The picture as of 30th of April due to seasonality is at a sort of a peak in terms of working capital, in terms of inventory, that would then decrease in the second half of the year. And so it is normal that we have as of April an higher inventory compared to end of January. So we expect some reduction at the end of the year on the working capital due to seasonality.Then on Stefanel, I give the word to Stefano.

[Stefano Beraldo, executive]

On Stefanel and GAP, your second question, I will say that we are now in the something more than half of the season. And in Stefanel, the results in terms of sales are a bit below our expectation. And that's because we are noticing political commercial policy, which is more disciplined with much less markdown compared to the former use that Stefanel was giving to his customers that will get too used to discount in season, we are noticing that part of the customers are still waiting for discount to buy. And this is why we are a bit low compared to our expectation.Nevertheless, the indication about the quality of the assortment and the brand remains quite positive. So our customer reports that they are happy with the brand and the store and the merchandising. We are working on the cost, and we believe that in any case, the full year result will improve compared to last year and the breakeven will be achieved next year in Stefanel.While in GAP, we are quite happy. So all the stores which are located in the outlet park are generating good results. There is still the Milan store, which is weak, and we know that it will be weak until the end of the year when we closed the store as per our agreement, but we have a full compensation provided by GAP to sustain and to cover all the costs that we are incurring in managing these stores. So basically our forecast for the full year is a breakeven for Gap and hopefully even something positive.And regarding prices, the question on prices, the change of prices has been impacting the March, April and May figures. So basically the real period when we can evaluate the impact of new prices and the effect on volume and margin is the period starting from March. And what I can tell you is that the year-to-date sales starting from March, excluding February, which is still, as I said, characterized by a very high level of markdown because of the end -- because being the end of the sales period are largely positive, I would say surprisingly positive.So all in all, if I have to evaluate, and this is what I'm doing obviously, the impact of the price increase in the consumer habits with reference to our brand, I would say that as of now the result has been more positive than expected with higher sales compared to the lower volumes. So the balance is a very good positive number.

[Operator]

The next question is from Domenico Ghilotti of Equita.

[Domenico Ghilotti, analyst]

Good afternoon. I would like to have some color or some elaboration on -- specifically on the consumer habits, as you were saying, in the most recent months or in the spring/summer period. I wonder can you share the traffic data and what is -- how can you say that really you are getting new customers and you were saying that you are able to get some clients trading down. So some comments on this. And in particular, if you can give us a sense of what is the contribution of prices in the, let's say, first quarter or as you want, so March to May? Just to have a sense of how much has already been passed to customers.

[Stefano Beraldo, executive]

Thank you for the question. The first answer relating the consumer habits comes first of all from the CRM data. We have almost 5 million of clients, which are used to give us the permission to monitor their behavior, being frequent customers, which are using the OVS application when they buy. And we are realizing that we have new customers, new enrolled customers, and those customers are buying higher ticket and those customers are buying more PIOMBO than other brands, and those customers are buying more women and men than the kids compared to the other baseline of our customers. So basically we have pretty objective data, which are confirming us that we are attracting new customers.In terms of traffic, the general trend of lower traffic and higher conversion rate is still in place. It has been more severe, this traffic reduction during the month of February and March, when population -- Italian population was still a bit scary and in many cases, more than scary was forced to stay at home because of the revamp of the pandemic. Then there has been a second reason why customer reduced more than expected their desire to walk in the street, which has been the war.We know pretty well that when we have big political events, the population goes at home and look at the TV more than thinking to buy consumer goods. When the combined effect of a lower concern of COVID and get a bit used unfortunately, to this bad news on the war in conjunction with a much better weather, also traffic increased. So during the month of May, traffic has been positive. During the month of February, April -- February, March and April traffic was negative. But in all the 4 months in a row, also including the 15 days of June, there is still this evidence lower traffic, much higher conversion rate and positive net result -- final net sales.

[Operator]

[Operator Instructions] The next question is from Federico Belluati of Kepler.

[Federico Belluati, analyst]

My question is related to the customer credits and behaviors. As you said, there are some new clients coming from higher segments. So my concern is are also some usual clients from OVS moving to UPIM and the second one is regarding the difference in the EBITDA between OVS and UPIM and the underlying ASOS.

[Stefano Beraldo, executive]

No, we have not evidenced that we are obviously losing customers in favor of UPIM. As a matter of fact, we have good evidence that the 2 brands can survive one each other without cannibalizing too much. We have, in some cases, new openings UPIM and OVS together in some shopping mall like in Rome and they are achieving results above budget, both in the 2 situations.Then we have also a different strategy regarding franchising because UPIM is more dedicated to franchising and more local, more smaller and local in terms of store size and locations, while OVS is more city shopping mall. But at the end of the story, we don't have evidence of this concern that you are raising.Then the second question was getting a different EBITDA. At the end of the story, the EBITDA is similar. On a full year, OVS has 1% or 2% higher EBITDA compared to UPIM on a full year normal year. Then once we look to the quarters, the quarters are not that significant to evaluate the profitability of the 2 brands because of the different mix and much higher weight of home decoration and perfumer in UPIM compared to OVS makes the quarterly comparison not easy, and also the different weight of franchising, which is much higher in UPIM gives a different comparable. But in any case, when you look at the 2 brands on a full year perspective, you can assume that OVS can have 1%, 1.5%, 2% EBITDA higher at the bottom line EBITDA level compared to UPIM.

[Operator]

The next question is a follow-up from Domenico Ghilotti of Equita.

[Domenico Ghilotti, analyst]

I have a question on the capital allocation. So can you give us the priorities in your capital allocation for 2022? What are the priorities in terms of investment opportunities also looking, say, external opportunities, if any?

[Stefano Beraldo, executive]

As you know, we are continuously looking at opportunity to continue consolidating the market. We know that the market is still fragmented and with our brands, we can take advantage of it. And we can also take advantage from onboarding new brand or new contents in our platform. The initial evidence is that we have with GAP tells us that we can become a retailer for other brands as well. And also, we have the evidence that with PIOMBO, which is a brand that we decided to buy besides OVS or with other brands like Hybrid or Baby Angel, we are attracting new customers.So we want to continue to allocate our investments in leveraging this brand and making them more reputed and known by the customers. So we are continuing to plan higher marketing investment as you have seen in the last 12 months compared to the '19, for instance. We have some potential acquisition on our table. We are looking very carefully.And basically, we are also investing in buying back our shares because we believe we are convinced, our Board is convinced that based on our actual results and full year perspectives, there is no reason to keep the shares in the market where we can buy the share at a very affordable price. So these are the major direction. We continue to believe that in this multichannel economy, having attracting stores is important in order to give the customer one more reason to privilege our brand compared to other competitive -- other competitors, and we will continue also to refurbish stores on the back of the very good results that we are experiencing in the last 12 months.

[Domenico Ghilotti, analyst]

Okay. And the second question is on the comments you gave on PIOMBO and the contribution in general, the market share in women and men. Can you give a sense on how much is really affecting the performance and how did you perform in these 2 categories?

[Stefano Beraldo, executive]

Basically as of now about 20% of our women sales are generated by brands, which 3 years ago, we didn't have not only PIOMBO, but Hybrid or [ Mina Tendosa ] or [indiscernible], Apricot October, Baby Angel, 70% -- 60%, 70% of those sales are represented by brand that we own and another 30%, 40% of those sales are represented by brand that we manage under a concession agreement.So in women, the presence of new brand is the reason for the increase of market share. And interesting to notice, as I mentioned, that the sell-through, which we are experiencing in this part of the year is higher with reference to the higher prices items compared to the lowest one. So it seems that this is another good indication, in my opinion, that we are attracting new customers, and they like to find OVS an interesting alternative to other brands, which are more expensive, and this is going to continue, in my opinion, also in the second half.

[Domenico Ghilotti, analyst]

Okay. My last question is on the consumer spending. So do you think that -- so let's say that the situation -- the job rate situation remains stable. So do you think that the worst in terms of sentiment is already in place -- sorry, in the mind of consumer or do you think that -- so the inflation -- inflationary pressure is still to be perceived fully by clients and consumers?

[Stefano Beraldo, executive]

I have an opinion, and I don't pretend that this opinion is correct because when I speak with analysts, bankers, et cetera, everyone has a different opinion regarding the risk that in the second half, there will be a situation that will be tougher in terms of our consumer spending, et cetera.Personally, I hope and I believe that most of the price increases has been already experienced by the customers. As I said in the beginning, the worst period of the gasoline increase is over, there was period of electricity bill increase is over. The world is over and every element is now embedded in the new behaviors. Only one aspect has still not changed, which is the salary. So the power of the salary. But in the next coming months, there will be an automatic adjustment also in the buying power because all the employees will start not only to suffer as they did as of now, but also to recover because the salaries will increase because there are mechanisms which are inflation-linked.So basically, from a pure economic point of view, a country which is not living on a consumer, which is borrowing money to buy a house because the Italians are putting their money in savings, shouldn't generate too much, too many constraint or concern in terms of cost of demand increase. So interest increase like it would happen maybe in the United States, where every family is heavily in debt. So if I have to look from this perspective, I think that hopefully, obviously, and I cross my fingers and you have more indication than I do, the worst is over. So I expect that situation will continue remaining challenging for families.But the most important aspect to me is that at the end of the story, I sell commodities. I'm not selling dreams, I'm selling commodities, things that people need. And in my opinion, we are selling the best quality -- price-to-quality ratio commodities, very well done in a good store experience with a good website at a very affordable price with a higher approach to sustainability and circular economy. And we are attracting new customers, thanks to the improvement PIOMBO brand and not only.So at the end, I think that even in a negative scenario, we should be preferred compared to many other companies. And that's why, in my opinion, we are overperforming the market in terms of market share and also, I believe, in terms of economic performance.

[Domenico Ghilotti, analyst]

Okay. If I may, very last question on an update on the supply chain issue and cost inflation because I saw freight rates coming down more recently. I'm wondering if you are starting to see some lower bottlenecks in the supply chain, but you were mentioning that still in spring/summer you had some issues until April. So can you give us a comment on how do you see the situation?

[Stefano Beraldo, executive]

Apparently the situation is improving, as you said. We experienced still delays up to now. Basically we started our month of January, February deliveries with about EUR 50 million delays. And this EUR 50 million delays has been entirely recovered at the end of May. We don't expect in the second half to incur the same delays also because we decided to anticipate by 1 month order. So this is why maybe we have some temporary increase in working capital for maybe 1 month, if everything will be on time.We are noticing some relief in freight and logistic costs, but nothing really super material also because we are already benefiting from a much lower cost, thanks to medium-term agreement that we finalized one year ago. We had a combination of spot and forward. And that's why we are paying our container much less than the average of the market. That is an important aspect.The lockdown in China has still penalized the trading, the worldwide trading. Apparently now Shanghai is finally opened. And if there will be no further lockdown, this will generate an overall improvement in all the global supply chains.

[Operator]

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

[Stefano Beraldo, executive]

Okay. So thank you. Thanks to everyone, and have a nice rest of the day. Thank you.

[Operator]

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