OVS SpA

MIL:OVS

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the OVS First Quarter 2023 Financial Results Conference Call. [Operator Instructions]

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

[Stefano Beraldo, executive]

Thank you, and good afternoon to everybody. I cannot start this conference with -- without some comment on the surprising drop in the share price that we suffered yesterday and also this morning. And maybe also we can take advantage from your competencies and ask you some questions and some explanation about the reason of this very strange market reaction. It's really hard to me to understand what happened yesterday and also this morning, if I consider that.

We are delivering one of our best first Q ever, only EUR 1.8 million lower than first Q 2017 when the full year EBITDA has been EUR 196.5 million. We are delivering an EBITDA LTM of EUR 187.5 million versus the full year '22 EBITDA of $180.2 million or 12.1% versus 11.9%. We overperformed the average EBITDA consensus by EUR 2.5 million and the highest EBITDA expected by one analyst by $1.5 million.

And finally, we reiterated our confidence in a better '23 compared to year '22, either at EBITDA and also at cash generation level. I can't imagine what should have happened if we shouldn't have performed so excellent.

On another side, our customers as many of our investors are aware because during the investor meeting, we are exchanging information with them, our customers are in love with our brand like never. The new customers that has been attracted by our new strategy with brand, with Piombo, are spending 40% more in terms of average ticket than the existing customers, which means that we are in the right spot where people coming or being forced to trade down because of recession and inflation is looking to OVS as the ideal solution.

During our meeting with investors, our equity story and our great momentum is well appreciated. Our management and our employees are committed to the company and to deliver good results. Our vendors has never been so keen to work with OVS right now. That's why I hope that the explanation of what happened there yesterday is the behavior of some players, which is speculating without any regard to the real result of the company. This is what I hope. This is the only logic explanation to me, and that's why in any case, we will continue managing the company with the same passion and confidence, with the same commitment that we already had to deliver good results, and with a commitment to deliver in '23 the better financials ever.

So that's why I hope that during this Q&A session, maybe I can receive not only questions, but maybe 1 or 2 of you might help me giving to me some answer to my question, what happened yesterday and why? But we cannot do other than managing the company better than we can. And I hope that also during this conference call, you will receive evidence that the situation is pretty good, and the outlook is pretty good.

And I hand the word to Francesco entire to comment the slide.

[Francesco Leoncini, executive]

Thank you, Stefano. Let's start with Page 4 that synthetized the result of a quarter that actually is a clear path that starts with growth in store traffic that delivers plus 12.2% in net sales. And this growth is slightly better. It's better than the market one, and this needs to further increase in the market share to 9.5%. This increase in sales was achieved even further increasing a little bit the initial retail prices due to the last part of the tail of the inflation that affected the raw materials and cotton last year.

And again, with a very limited discount rate, low promotional pressure to the consumers. This allowed us to keep a very solid gross margin. And then thanks to the operating leverage, we are able to increase the EBITDA by 36.3% to $27.5 million. EBITDA almost doubled to EUR 12 million. And this then happened in a context of a very strong financial situation with the leverage ratio that goes further down from 1.7 last year, 30th of April 2022 to 1.23.

One quick comment on year-to-date sales. As said by Stefano, the sales are still positive or positive versus 2022 despite the month of May characterized by unfavorable conditions. And if we compare current May with a May with similar bad weather 2019, then our like-for-like sales show a plus 20%. That is -- we are really moving out from a pure weather dependence to a more normal situation where people comes to our stores to see even the new collections and not just for -- on a needed basis.

I move to Page #5, where most of the points were already touched, I just put a quick highlight on the interest expense that reduces from EUR 5 million in Q1 2022, EUR 4 million. And this is in a scenario where all of us know that interest rates are increasing by the fact that we have a bond, EUR 160 million bond with a fixed rate. And so for the majority of our net debt, we are not suffering any increase on the interest rate.

Page #6 provide some more details by channel and even more interesting, let me say, by brand. Both OVS and Upim increases above 10%. Then we are -- there is also the growth on the other brands, Stefanel, GAP, et cetera. OVS benefits more from this increase in sales given the business model more based on directly operated stores, so with an embedded higher operating leverage, while Upim that has a business where franchising has a relevant weight has a result in line with the sales trend. So in a nutshell, sales and EBITDA growing in all brands and in all channels.

Page #7, we move to a quick view on the net working capital. Net receivables are increasing but normally due to the growth in the franchising business. Some more comments on inventory. As I said also in previous calls, we made a decision to anticipate the intake of the spring/summer '23 collection in order to avoid any risk of late delivery, like, unfortunately, we suffered a little bit last year. And so we have now in a higher level of stock but with a much better quality, having, at the same time, being able to low to reduce the amount of old stock that we had 1 year ago. Trade payables are, let me say, in line with last year like other assets and liabilities.

On Page #8, the trend of capital expenditures. We are more or less in line with last year with a partial shift of investing on the investment on the network from new openings to refurbishment of the projects of the current network, always with very positive results then in terms of increase in sales after the reopening of refurbished stores. And then we see an increase in logistics since we are now in the middle of a big investment in automation in our Central DC in [indiscernible].

Page 9 is a summary of the cash flow that, as usual, in the first quarter, see an absorption of cash, but nothing special to comment on that. We -- then we will say we confirm our view on the full year in terms of cash trend.

Page #10, as commented at the beginning, showed a reduction in the net adjusted debt that, of course, is expressed also after having paid in the meantime in the last year, more than EUR 30 million between dividends and purchases of -- on shares and a leverage ratio that even looked to the spot or on the last 12 months is below 1.4.

So I leave on Page 12 on the outlook. I give back the word to Stefano to comment this -- what we have ahead of us.

[Stefano Beraldo, executive]

Thank you, Francesco. Well, as we said and we declared that we are still in a like-for-like position in spite of a very rainy and cold, the month of May. And we don't really see any signal of consumer spending attitude decreasing. The only reason why our huge sales increase at like-for-like that we experienced until the end of April has been driven by the floods and rain.

But as normally happened in this beginning of summers, what you lose in the beginning of summer, which is May, you can recover in June. And even if weather is not entirely stabilized, we have clear signals of good sales increase during this month of June. And in every region where the weather has improved more materially, the sales increase in terms of current trading is really huge. So we do not have concern as of now in terms of consumer attitude driven by inflation or recession. We confirm that the mood of our customers in front of OVS brand is positive like never.

And also in terms of cost, we are sitting on very good news, better than the ones that we incorporated in our internal budget. We didn't expect in our assumptions for the full year to understand and to realize that the drop in energy costs has been so material. And also, we didn't expect that the cotton cost, which represents 70% of our raw material cost, is reducing so much. So we will benefit in the second half of the year of higher-than-expected cost reductions.

One word about what we thought to write about landlords. There is no problem with landlords. There is an opportunity with landlords. We mentioned in the public statement that this comment on landlords just in order to make the life of our real estate department easier in front of landlords. We need, we want to mitigate the automatic inflation-linked increased, which are incorporated in the rent agreement by negotiating because we do believe that the increase in inflation has been generated by unusual condition and must not be entirely incorporated in the rent.

And that's why, for instance, just today, I signed a very successful negotiation with one of the most important landlords one the biggest and most important OVS store, which is in Milan, and we obtained a reduction of 15% in the rent from now to the end of the agreement, even if we are making profit on that store. This just as an examples.

That's why, all in all, we feel comfortable that -- thanks to the present sales trend, thanks to the projects that we are about to launch in the second half, thanks to the fact that the company is probably the only brand in the Italian market, which is improving so much in terms of quality of the store, windows, merchandising compared to all our competitors, that's why we continue having a solid confidence in increasing our economic and financial performance compared to last year.

Thank you, and I leave it to your question.

[Operator]

This is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Alibrandi Daniele from Stifel.

[Daniele Alibrandi, analyst]

Yes, I have a couple of them. So the first one, I understand the commentary about the adverse trading conditions in May. But can you please add more granularity on the categories or brands? Maybe commenting where you've seen the biggest slowdown? Which were the most resilient months or maybe say widespread across the business. This is my first question.

And the second question is on current trading. If you said that year-to-date trends are positive, so can you please maybe quantify the magnitudes of these? Are we talking about low single-digit up percentage or a mid-single-digit percentage? And related to this, if you have seen -- as I was understood, maybe if you have seen a positive trend in June strengthening week after week of -- if there is no clear pattern. This is my 2 questions.

[Stefano Beraldo, executive]

Okay. Thank you. On regarding the categories, mostly impacted by the weather, as you can imagine, this has been the kid. The kid is normally the one that is more weather dependent because mothers are not buying kids because they like it, but because they need it. Surprisingly -- not surprisingly, but noticeably, I would say, women continues to be the better-performing category, which means that we are really attracting new categories of customers, not only mothers visiting OVS because they like to buy for the kids, but also women, younger or adult, which are preferring OVS because of the quality of the assortment.

In terms of brand, I would say, very, very similar behavior across the network. It means that weather has been the real reason for the May performance.

Second question, I think, was regarding the current trading. The current trading is positive mid-single digits today and is growing day after day, which also gives you a partial answer to what is happening in June, basically. If I understood, you asked what is, with some more granularity, the performance of the sales in June?

As I said, it has been so dependent from regions that a few days ago that again, that was like yesterday in Florence, it was like flooded, was full of rain. And you can imagine, was negative. And in regions where the weather has been much better, like in the Northeast of Italy, for instance, in the last 10 days, sales are double-digit growing. So we are confident that based on our knowledge of the market, starting from the end of this week, once weather will stabilize across all the country according to the weather forecast, we will assist to a strong increase of sales, which will enable us to, not entirely, but partially recover what we have lost in May.

But considering that we were much ahead of our budget before May, that's why we are pretty confident that even if we will have lost forever some opportunities in May, which will not be entirely recovered in June, in terms of profit and loss, this will not be an issue. And we expect also a very positive sales in July and August this year.

[Daniele Alibrandi, analyst]

Okay. And maybe if I can squeeze in just another question. In terms of the initiatives that you presented at the strategy presentation like in the last conference call, I was curious to hear which are the -- let's say, the initiatives where you are seeing more concrete signs and the contribution?

[Stefano Beraldo, executive]

For sure, the one which is performing the best is the perfumery, beauty care. And that's why we -- that's because we changed the -- we improved several aspects of our operating model, on one side, introducing new items and new segments. And on the other side, because we drastically improved our logistic and CRM activation and processes.

Today, we are almost 40% like-for-like, both in Upim and OVS perfumery without space increase, which is also surprising to me because the market is up. The perfumery market, according to NPD data, is about plus 20%. So we are overperforming the market as a result of 1 year of strong work and effort in order to improve all we identified as subject to be improved. Also, also Piombo kits is doing well, not in all the locations. But in the North Italy locations, Piombo, it is doing very well. Then these are the most important ones.

[Operator]

The next question is from Federico Belluati from Kepler Cheuvreux.

[Federico Belluati, analyst]

Can you hear me?

[Stefano Beraldo, executive]

Yes, yes.

[Federico Belluati, analyst]

Can you hear me? Okay. Thank you.

[Stefano Beraldo, executive]

Yes. Hello.

[Federico Belluati, analyst]

My question is regarding the market share gain, as I see it's a -- the market share has grown from 9.3% to 9.5%. And I was curious to know if also something related to your competitors like Zara or H&M in the market as overall market pressing down. And the second question I would like to ask you is regarding the evolution of the Stefanel and GAP, what are the trends you are seeing there.

[Stefano Beraldo, executive]

Okay. Market share increased to me, to my figure has been from 9.4% to 9.5%, but...

[Federico Belluati, analyst]

Yes. If I'm saying year-over-year.

[Stefano Beraldo, executive]

In any case, it has been driven by a mix. I think that we outperformed again most of our competitors. I think Zara did well even if it's difficult to know it from market share analysis, but Zara remains the only competitor, in my opinion, which is performing well in the Italian market.

H&M to me, based on our information, is down. Benetton is down and all the other are basically down, with the exclusion of Primark, which is still up because they open new stores, but they remain very, very small and also relatively far from our customer base because they are privileging only super low prices, and we are a bit changing our positioning as we explained.

In term of performances across the brand, I'm happy to say that all the brands are performing well. Stefanel is the one which is performing better compared to last year with a plus-20% increase in this moment. GAP is increasing as well, more than OVS and Upim and the other brand. And OVS and Upim are performing, as you have seen. But because Stefanel and GAP are still small, the higher increase of sales of both Stefanel and GAP is not generating a material effect on the total group sales.

[Operator]

The next question is from Andrea Bonfa from Banca Akros.

[Andrea Bonfa, analyst]

My question here is related to, let's say, the lower inflation environment. And if it's possible, if you can share with us, let's say, what are the additional point, the gross margin that you can -- you are expecting to extract with the autumn/winter collection. So if you are, let's say, at 50% in H1 with spring/summer, which you bought last year, how many additional points can you gain on the autumn/winter one, just to have an idea.

[Stefano Beraldo, executive]

It's a difficult question because you are very detailed and very granular in this question. And we normally do not share these amounts so precisely. What I can tell you is that compared to the first half, when we decided not to continue to transfer entirely to final customers, detail of the cost increase that we suffered in the raw materials, in the second half, we will keep our prices stable. And in the kids, we will reduce partially our prices. But we will benefit and higher margin because the cost reduction is going to be higher than the price reduction in kids. I don't have a final number to share with you, but the gross margin will be better than in the first half.

[Operator]

The next question is from Luca Bacoccoli from Intesa Sanpaolo.

[Luca Bacoccoli, analyst]

Everyone, can you hear me?

[Stefano Beraldo, executive]

Yes.

[Luca Bacoccoli, analyst]

First of all, I don't have any explanation for the share price drop yesterday, unfortunately. So I have all the questions for you again. So one is really is a follow-up related to the profitability trend. Based on what you just said, if I'm not wrong, it's fair to assume that the savings on cost, even taking into account the -- its reduction in kids, it should be enough to drive the EBITDA margin in the 2023 and above 2022 level. Is that a fair assumption. And secondly...?

[Stefano Beraldo, executive]

Yes.

[Luca Bacoccoli, analyst]

Okay. Good. Nice. And the second question regards the first quarter top line growth. So I was wondering to what extent this comparison related to last year war, so invasion of Ukraine from Russia, has powered the strong starting to the year. And the last one is just a curiosity to understand how the DOS opened in New York, so the Piombo flagship store is doing after maybe 1 month or something like that from the openings.

[Stefano Beraldo, executive]

Okay. To the first question, I already answered that. The second question was, yes. Yes. I can be very transparent. We assumed in our budget to have a very positive first quarter with almost double-digit growth. So this was the way we set up our budget. We overachieved this amount by several points.

So basically, we already expected to have a stronger first Q, because of the war, and the consumer trend that was a bit steady last year, the consumer mood, but we overperformed compared to our very aggressive, very positive top line increase.

But as Francesco pointed out before, it's worth mentioning that the first period, and also the month of May, has been stronger compared to a period, which was 2019 where the month of May has been similar in terms of weather. So all in all, I think that this element demonstrate a solid momentum in the sales. Anyway, the answer is clear with our budget was positive, largely positive, and we overperformed compared to our budget.

The third question was...

[Francesco Leoncini, executive]

New York. Piombo.

[Stefano Beraldo, executive]

New York. So we opened 3 stores, Piombo stores, 1 in New York, 1 in Paris, 1 in Madrid. The reason for opening this store is that we would like to see this store as a small flagship in order to start penetrating the e-commerce and the department store market in those relevant markets. The performance of the Piombo store in New York is in line with our expectation. So an important turnover on a daily basis, an important trend, as you can imagine, and a small loss as we expected.

The store in Madrid is generating more or less our budget, something less. And consequently, the profitability will be very small, but we don't have too much about it because these are marketing costs, in my opinion, in my strategy. And surprisingly, the store, the small store we opened in the Rue Saint-Honoré in Paris, is generating 2x our budget in terms of sales. So it's -- we opened 20 days ago, more or less, and it is performing super well. As a matter of fact, we are about to receive in the store the visit of the [indiscernible] buyer because my goal would be to enter with Piombo [ parlors ] in department store in France.

All in all, we expect that from the store, we will receive a huge marketing effect. We had a lot of -- how can I say, positive rebound Italian customers, which are coming back in Italy after having visited those stores and making congratulations to OVS because they have seen those small flagship around the world. And I think this is one of the reasons why we are attracting a new kind of customer in OVS.

And in terms of profitability, we might end up with either a zero balance or a few hundreds of thousands of -- a few hundred thousand euro loss, which is much lesser than buying one good out-of-home advertising in Milan for 1 year.

[Luca Bacoccoli, analyst]

So basically, based on what we have seen so far, do you think there's room for developing an independent network-branded Piombo abroad?

[Stefano Beraldo, executive]

Now this is not the strategy. The strategy is to position Piombo as the flagship of OVS, the teaser of OVS and then to open OVS full-format eventually, this is the strategy, or to open Piombo corner in department store. It doesn't -- I have not in mind the idea to open hundreds of Piombo store because, at the end of the day, they are small. And I prefer to consider them as these are marketing tools to facilitate and to make easier for the customers to appreciate how interesting is visiting an OVS store with the Piombo corner inside.

[Operator]

The next question is from Luca Orsini from One Investments.

[Unknown Analyst]

Stefano, I just questions for you. One is on working capital. Let me go back to the page. But essentially, you have a growth in inventories, and you have a small growth in payables. And are you paying your supplier quicker in order to get better terms? Is that your strategy? And also -- and essentially not trying to finance yourself on your suppliers, but using the bonds and turn the balance sheet...

[Stefano Beraldo, executive]

No. No, Luca. It's only a time effect. As said, we anticipated, compared to normal our intake because we prefer to avoid the risk of late deliveries that impacted our industry last year. And that's why having anticipated by 2 or 3 months, the intake, we have been forced also to pay some of those vendors because we -- in order to remain in parallel between stock increase and payable increase, we should have also delayed the payments, which we couldn't.

So basically, we pay at the same payment term than 1 year ago. But because we anticipated that the intake of the inventory, some of those payables has been paid, and they are not still outstanding. Now this will be fully compensated during the year. So in the second half -- in the second quarter, this effect will almost disappear.

[Unknown Analyst]

Okay. And then I have a second question. Because the season started late, are you also going to delay the sales period?

[Stefano Beraldo, executive]

If it is in our hand, the decision, the answer will be yes. Because it is not in our hand, there will be only -- and this is good news, in any case, call it, natural delay because according to the calendar this year, the sales will start 5 days later compared to last year. So this is good news for us. We have 5 full -- 5 more full price days compared to 1 year ago in July.

[Operator]

The next question is from Francesco Brilli from Intermonte.

[Francesco Brilli, analyst]

A couple of questions. Several questions has already been answered, but I have 2 additional ones. The first one is, if you can provide us with an idea of the magnitude of in terms of weight on sales of the beauty and personal care segment so far as of today and in the first quarter?

And then the second one is on the profitability of the other brands, if you are -- if and when you are projecting a positive contribution in profitability from these brands?

[Stefano Beraldo, executive]

Sorry, when you mean brands, you mean from these segments of perfumery and jewelry, I imagine.

[Francesco Brilli, analyst]

No, I referred to GAP and Stefanel.

[Stefano Beraldo, executive]

Okay. Okay. some more information about the perfumery. I can tell you that the market increase has been 24%. And OVS, as of now, is generating -- look, I'm reading now because I don't have all the numbers in my mind, is doing more than I said. So is making almost 50% sales increase compared to last year.

Out of this 50%, Perfume is doing 20%; Skin care is doing 40%; and makeup is doing 60% in OVS, while in Upim, which is performing similarly in terms of growth, makeup is making, as in OVS the highest increase. And this is due to the post-COVID habits. So basically people are looking to buy things to improve the face while, during the period of end mask, people were maybe buying more fragrances. I don't know if this was the question which you asked regarding perfumery.

[Francesco Brilli, analyst]

Yes...

[Stefano Beraldo, executive]

In term -- okay. In terms of profitability, let me add that in perfumery, profitability is a little bit lower compared to the other segment. But because sales density is much higher, we end up with a higher EBITDA per square meter in perfumery compared to the other segment and also with a higher cash margin zero compared to the other segment.

Differently, for jewelry, jewelry has also higher profitability and not only a higher sales density. So jewelry combines higher profitability in terms of gross margin and higher sales density.

Regarding Stefanel and GAP, the profitability of GAP is largely positive. The profitability of Stefanel is getting close to breakeven because I remember that when we started, we had to invest in a new business that had to be relaunched. I think that this year, we will be at breakeven and plus 20% in sales, in my opinion, must be only the beginning of the recovery of the brand. And we hope that we will be able for next year to project another similar growth rate driven by collections.

[Francesco Brilli, analyst]

Okay. And if I may add, is it fair to assume the beauty and personal care segment, all the segments that you mentioned, very low single digit on sales overall?

[Stefano Beraldo, executive]

May -- I need you to make a question again because the 2...

[Francesco Brilli, analyst]

Weight on total sales.

[Stefano Beraldo, executive]

Weight on total sales, a little bit more. Weight on total sales is going to be between 5% and 7%.

[Operator]

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

[Stefano Beraldo, executive]

Okay. So I conclude. I have not received any answer to my question. Unfortunately, this means that CEO are only can then to provide answers and never to ask questions. Nevertheless, I thank you for your attention, and I hope we will meet again sitting on better share price results. But this will depend from you guys. Thank you, and good afternoon.

[Operator]

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