OVS SpA

MIL:OVS

Earnings Call Analysis

Positive Growth Amid Weather Challenges and Strategic Expansion

Despite weather-related challenges, the company reported net sales above EUR 760 million for the first half of 2024, with a gross margin near 60% and EBITDA up to EUR 89 million. Strong like-for-like gains drove growth across segments, notably a 7% increase in Upim sales and a 2.5% rise in OVS sales. Upcoming store openings and a favorable weather outlook, showing a recent 80% sales surge, promise continued success, with full-year gross margin forecasts to improve due to a weaker dollar next year. The EBITDA for the second half is expected to remain strong despite a decline in gross margin from perfumery sales.

Strong Performance Despite Weather Challenges

OVS reported a robust performance for the first half of the fiscal year, ending with net sales above EUR 760 million and a gross margin exceeding EUR 450 million, translating to approximately 60% gross margin percentage. This is noteworthy as both the month of May and June faced unfavorable weather conditions, which historically weakened sales numbers. However, the company managed to achieve a solid like-for-like growth, indicating that their strategies are effective even in challenging environments.

Earnings Growth and Operational Efficiency

The company's EBITDA rose to EUR 89 million, a growth compared to the previous year, and representing a percent close to 12%. This increase is particularly impressive given the seasonal nature of the business, where the first half is typically weaker than the second. Moreover, despite rising sales, OVS overall reduced working capital needs by EUR 11 million, showcasing operational efficiency even as they expanded.

Segment Performance Insights

OVS's brands showed different performance dynamics. Upim saw a substantial growth of 7%, focusing on men and kids, capitalizing on its positioning as a neighborhood-friendly store. On the other hand, OVS itself saw a modest growth of 2.5%, attributed largely to increased marketing investments. Notably, Upim realized a 26% growth in EBITDA, fully benefiting from sales volume increases. This segmentation reflects diverse growth potential within the company.

Impact of External Conditions and Future Outlook

Positive shifts in weather conditions towards autumn have led to remarkable surge in sales, with August reporting a 7% increase and preliminary September showing a staggering 70-80% growth in sales. This turnaround reflects an optimistic outlook for sustained growth moving forward, which is critical for investors to note given the significance of seasonal trends in retail.

Cost Structure and Margin Guidance

OVS compared its gross margins from the first half, which improved significantly by nearly 200 basis points, to expected margins for the second half. They anticipate further growth, albeit at a slightly lower rate due to an expected increase in product categories with lower margins, such as beauty items. However, a strategic reduction in markdowns and a weaker dollar positioning for sourcing is likely to mitigate some of these challenges, leading to overall solid gross margin performance for the entirety of 2024.

Focus on Store Expansion and Future Investments

The company plans to expand its footprint by adding 10 stores for both OVS and Upim, with expectations for similar growth next year. Upim has identified over 100 additional locations suitable for expansion. This proactive approach in enhancing operational scale can strengthen market presence and revenue streams, providing significant growth potential.

Financial Positioning and Investor Benefits

As of the latest report, OVS has a net financial position showing a slight deterioration of EUR 20 million compared to last year, largely resulting from the distribution of EUR 80 million in dividends and share buybacks. However, their leverage ratio remains comfortably below 1.5x, indicating a stable financial health conducive to potential investor confidence. The presence of over 50 million shares in reserve adds an extra layer of flexibility moving forward.

Final Remarks and Strategic Vision

With an optimistic sales trajectory bolstered by improved product offerings and strategic marketing initiatives, OVS is well-positioned for an advantageous second half of 2024. Investors can take note of the anticipated continued growth, diversified revenue streams from multiple brands, and an active management approach to capitalizing on favorable market conditions.

Earnings Call Transcript 2025-Q2

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the OVS First Half 2024 Financial Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Stefano Beraldo, Chief Executive Officer of OVS. Please go ahead, sir.

[Stefano Beraldo, executive]

Good afternoon to everyone. Thank you for being with us for this 6-month result of OVS. As you have seen from the press release, we had, I would say, a more than decent quarter and a good 6 months. And the quarter has been still again. So I will say once more penalized by negative weather. And this means that weather is something that cannot be missed when we comment our results. The month of May has been similarly to last year, very rainy and cold compared to normal. The month of June has been much worse in terms of rain and temperature compared to even last year where -- when it was much worse than normal. So at least we have in front of us soon or later and weather normalization in spring that soon or later, will benefit our results. In spite of it, July has been neutral in terms of weather.

In spite of this very negative weather conditions, we have been able to generate a positive growth, almost entirely generated by like-for-like and only in a small part by new opening. First, ending up the full 6 months with a very solid like-for-like growth. And this growth has been achieved across all segments. Once again, this growth has overcome the market because the market performance has not been of this size, market has been basically flat or slightly negative.

Worthwhile spending, a few words about Upim, which is our second brand. After years of fine-tuning, I feel that today, Upim is close to achieve its run rate, let's call profitability level. Still, some improvement can be made in terms of gross margin but sales has been up by 7%, which means that the format -- the idea of proximity store, small price department store almost entirely driven by house brand is working, offering to the mid and lowest part of the population in terms of spending power, a good opportunity to have regular spend in the neighborhoods. Margin of booking has been up. So similarly to OVS, Upim benefited from a better intake this year compared to last year.

Global gross margin for the group, up almost 200 basis points, means that the group has achieved, in my opinion, a very good level of gross margin that is solid and subject to remain in place also next year, when we will be benefited from a weaker dollar that we are buying today at better condition compared to the condition of 2024. There will be a slight decrease in the second half because of dollar compared to last year but the decrease will be related to the 200-basis point increase. So we expect in the second half to generate still a gross margin increase compared to the second half of last year, generating for the total 2024, a solid gross margin growth.

A couple of words about cost. In the first half, the great improvement in gross margin has not been entirely affected in term of EBITDA, simply because we had the 2 elements to keep into consideration. One is that EUR 2 million of marketing cost. And for those of you which are -- who are Italian, maybe you might have seen Mare Fuori, which is a very successful TV series where we invested with our product placement and also in terms of TV advertising for about EUR 2 million. So there is a phasing of marketing cost mostly in the first half compared to last year. So you will see a benefit in the second half year. And this marketing cost, I think, is more than justified by the great performance of B.Angel, which is growing at double-digit growth compared to last year.

The second reason for some cost discontinuity is that last year, we benefited from certain contribution related to labor which was supposed to be maintained also for year '24 but the law changed and this contribution has not been confirmed. But good news, we are obtaining a similar amount of contribution in terms of CapEx contribution that will be visible next year for a similar amount. So once we adjust the figure for these 2 aspects, the like-for-like EBITDA growth would be above 10% compared to last year.

Last, some comment on sales and weather finally in favor after many, many quarters where we are forced to explain you that results, even if positive, has been penalized by weather. Finally, now we can tell that weather is a tailwind. Starting from 7, 8 days ago, with a change of temperature in Europe and Italy, our sales are booming. So if in the last 7 days, last year, we had, on average, minus 20%, minus 30%, this year, in the last 10 days, we have plus 80%, plus 70%, which is driving the today like-for-like for the group year-to-date at already more than 5%. And crossing finger, we feel that even looking at the weather forecast, temperature, we remain in the range of what they are today. And we expect to continue with posting great sales increase.

Interesting, noticing that this sales increase is, first of all, generated by kids, which is the most weather-sensitive in the segment -- compared to the other segment but also great double-digit growth we are assisting on men, women and all the categories, perfume and et cetera. So an excellent start of the second half. A month which is very important in terms of sales because in absolute term is one of the most important month of the year and in terms of margin because it's a month where we don't have a markdown. So basically, good news for us and good also the result that all the collections are generating. We have many new [ stories ] in the stores. So if you go in the store, you will see new [ stories ] like B.Angel Man, like PIOMBO Hitech -- PIOMBO Tech and also a new fitness collection that was not present last year. So I invite the one of you that are, also this client to see our store now because you will see interesting number of new initiatives that are already contributing to the good result of the starting of the season.

So thank you for now and I hand the word to Francesco Leoncini.

[Francesco Leoncini, executive]

Thank you, Stefano. So I will drive you through the pages of the document that has been put on our website, starting with Page #5 with a synthesis of the key income statement. Most of the items have been already commented by Stefano in that. So net sales in absolute value above EUR 760 million. Gross margin above EUR 450 million with this close to 60% gross margin percentage. EBITDA, up EUR 89 million, growing versus last year and with a percentage, again, close to 12%. We remember also that by seasonality, the first semester is slightly weaker than the second one, that has even higher percentages in terms of EBITDA margin. Net income is also growing at close to EUR 35 million.

I move to Page #6, that provides some more details about the sales breakdown by channel. Franchising is growing less in OVS, mostly due to phasing of arriving goods of fall/winter '24 due to the continuing issues at the Suez channel. But basically, the 2 channels are growing at the same path over a long period of time. EBITDA, as said, is growing 3% in total.

Moving to the view by brand. As said, Upim, that is -- has more growth potential, especially on men and kids, compared to OVS is doing great with a 7% growth. OVS is more linked to the kids and already also with a higher role in the market is growing by 2.5%. And it's basically flattish on the EBITDA results, discounted the higher marketing investments. While Upim benefits of the growth in sales to transform thanks to an operating leverage, this into a plus 26% EBITDA growth.

I move to Page #7 to the financial side of the semester, which in total sees an improvement versus last year despite the growth in sales, so we are able to reduce the working capital by EUR 11 million. On trade receivable, we increased the DSO. And this is a policy of OVS to support our partners during the difficult sellout months as they experienced as us in May and June due to the weather. But now we are quickly recovering thanks to the sales season and a good start of September. This, of course, has a long-term value in strengthening the partnership with our franchisees.

On inventory side, we see an increase, which is partially due to the normal growth of the business. But more in the detail, is linked to the fact that we need to account for a longer transit time between Far East and Europe due to the Suez crisis. We did -- we'll revert, of course, as soon as the situation will normalize even if we still don't know when it will take place. But the quality of inventory is even slightly improving net of this stock in transit.

Stock in transit, that as of 31st of July is still to be paid and this accounts for the EUR 30 million increase on trade payables together, let me say, with the normal growth of the business. Move to Page #8 on capital expenditures. As commented many time, OVS, during these couple of years, '23, '24 is under its period of particular investments both to renew the stores and to automate their logistics. This drove to an increase in the investments to EUR 46 million, which is, let me say, high for the first semester in absolute terms. The comparison with 2023 instead is mainly driven by seasonality in store refurbishing. There are stores, like in Milan, that fits more to be refurbished in August, when the city is empty, other stores that maybe are in Naples or in a seaside location that, of course, fits more to be refurbished in February month. And this year was the turn of location more suitable for the February month. And so we see this increase in refurbishment in the first semester, while in the full year, the numbers should be slightly above but basically in line with last year.

I move to Page #9, to comment the cash flow, which is driven by the normal seasonality of OVS with an absorption in the first semester. The absorption is slightly higher than last year but as said, mostly due to this CapEx effect. And also, we are discounting the normalization of tax payment, after that until 2023, we still benefited from the carryforward of the losses related to COVID. An important element is that we then use them, our lines, our credit lines to finance then dividends and buyback payments that accounted for over EUR 60 million in the semester and over EUR 80 million in the last 12-month period. So overall, the flow was negative but most of it was due to actions towards the shareholders in terms of distribution of cash.

I move to Page #10, on which we see then the results in terms of net financial position, which is EUR 20 million worse than last year but I said after the fact that in the 12 months, we distributed EUR 80 million to the shareholders. And remaining, let me say, under 1.5x as leverage ratio, that means that we are full under investment grade and with no tension at all. And needs to be commented the fact that in the meantime, we accumulated over [ 50 million ]of shares in our wallet. And accounting for them, then the ratio would decline to 1.09x. So again, a number that is fully positive.

I move for the last page, Page 12 on the current trading and outlook. Connecting, again, with the introduction of Stefano, August marked a 7% increase that -- in a market that was basically flattish. OVS is recovering, is becoming also a destination for people that during the month of August are looking for sales. And this is the element of having become more attractive for the customers that during the month of the sale is not looking just for brands but also for OVS and Upim. September benefited from -- for people that lives in Italy, it's quite obvious looking outside the window. But from this turning -- changing weather conditions towards autumn that had a huge benefit in these last couple of weeks. And all of that brings us to be optimistic for sure, in the growth in the results of this quarter. And also, of course, in the growth on the full year results.

So I think that we can leave now time for the Q&A session. And we are ready to answer. Thank you, everybody.

[Operator]

This is the Chorus Call conference operator. [Operator Instructions] The first question is from Andrea Bonfa of Banca Akros.

[Andrea Bonfa, analyst]

I got 3 questions, essentially. One is, I would like to -- if I understood correctly, Stefano, you mentioned that the last few days, we're up 78% like-for-like and double digit for the full whole month of September. But if I do the average of 7% growth in August and, let's say, double digit in September, I will get more than the 5% like-for-like growth that you mentioned, if I understood correctly. If you can just repeat those numbers, please?

And there's 2 other questions. One is related with the treasury shares. If your intention is to cancel them sooner or later? And the third one, an update on Goldenpoint, if you may.

[Stefano Beraldo, executive]

Sorry, sorry. We had the microphone in mute, sorry. We had a mistake. No, I was about to tell -- sorry, because of this stop. I was about to tell that if August has been 7%, I think, like-for-like, the beginning of September, the first few days has been still positive at a modest level. Then once weather changed, we started experiencing on the last 6, 7, 8, I don't remember, days, figure like plus 80%, plus 70%, et cetera. So I don't have the complete mathematic now but probably, you are right, we are more than 5% like-for-like today. This is the first answer. I hope I have been clear.

[Andrea Bonfa, analyst]

Yes. That's clear.[indiscernible]

[Stefano Beraldo, executive]

On treasury share, we are thinking about what to do. We have a material amount of treasury share. We have also an important capital gain on this share, if we make a mark-to-mark of this share compared to the average price that we paid for them. We don't foresee big need for disposal of those shares in terms of exchange of paper against paper, paper against company. So we are thinking also about what you mentioned. So this is a topic that we are discussing internally and with our Board in these weeks.

On Goldenpoint, basically have no news because still we are in a preliminary phase. The only good, I would say, very good news is that based on our -- you might remember that the business plan of Goldenpoint was based on 3 main pillars. One was cost synergy on the cost of goods sold; two was increase of like-for-like performance, thanks to the new merchandising introduced by us, like accessories, like makeup, like bags, like flip flop, et cetera -- like pajamas. But this cannot be demonstrated because still we are in -- before the season where we will start introducing those new categories in the store. And the third was expansion of network.

On the first aspect, I can say that because the sourcing is being made during this month, I can tell that the amount of intake which will be commanded will be sourced through our merchandising channel, through our supplier base, which represent in this moment, a portion of the total that could represent about 50% of the total cost of goods sold of Goldenpoint. It's already achieving the expected synergies in terms of cost reduction or even more. So on the cost side, synergy side, in terms of cost of goods sold, we are very happy about what is happening.

On the like-for-like performance, I already mentioned, it's impossible now to make any comment. On the third pillar, which is the store expansion, we have already identified more than 30 new locations that our franchisees already committed to open in the first month of next year. The plan for the year, if I'm not wrong, was about 70 stores. We have found already, almost 50% of this amount just right now and we are still discussing with our franchisees which are looking for other locations. So we are very, very happy being in line with our expectation in terms of new opening for next year, Goldenpoint.

[Operator]

The next question is from Daniele Alibrandi, Stifel.

[Daniele Alibrandi, analyst]

Yes. I have 3. The first one, if you can give us an idea of the gross margin trends for H2? Maybe you mentioned something at the beginning of the call but I was curious to know, given the strong current trends and the, say, savings on the cost side that you can achieve, what can be in the cards for H2? And maybe if you can comment also on the EBITDA, given that you have mentioned some, I'd say, unwinding of the headwind that you had in H1.

The -- and the second question is on an update on your network. So network, if you can give us an update basically on what are the plan of store openings by adding some granularity in the U.S. in franchise for this year and next year. I remember that you commented last year in May quite extensively. So just an update on where we are. And final question. Yes, it's just a boring question but just to understand the tax, maybe if you can give us a guidance for the tax rates for this year?

[Stefano Beraldo, executive]

Okay. Gross margin, second half. There will be a mix of aspect. All in all, we expect that if in the first half, we had a gross margin increase of almost 200 basis points, we expect for the second margin -- for the second half another -- a margin increase compared to second half of last year, a bit lower. But still a gross margin increase. Why a bit lower? One reason is the percentage of the beauty items, perfumery, makeup, et cetera, in the second half is higher compared to the first half due to the fact that the peak season for this segment comes in November and December. And because the gross margin in perfumery is lower compared to apparel, this will generate an impact on the gross margin, which would be negative.

But there will be a positive effect on the EBITDA because typically, the perfumery generates twice or even more sales density compared to apparel. So a lower gross margin, maybe 52%, 53% compared to 60% or 62% on a much higher sales density generates a higher EBITDA per square meter. So the first effect is positive. Even if apparently, it's negative, negative on the gross margin, positive on the EBITDA margin.

The second negative aspect is the dollar. The dollar strengthening caused to the sourcing of second half to be a bit less competitive compared to last year. And third, we have a positive effect on the gross margin, which is represented by the lower markdown that we expect to make in the second half. Also on the ground of the very good performance of August, where we had lower markdown and the initial, I might say, explosion of sales in September with much higher sell-through than expected, will cause us to have less markdown during the end of the season, basically.

So 3 effects but the only negative one, which is the dollar, will transform into a positive one for next year because next year gross margin will benefit from a weaker dollar. Today, the dollar level is better than even last year and much better than this year, average dollar that we utilized for our sourcing. So I would say, all in all, good news, I think. In terms of network expansion, we have another 10 -- more or less 10 stores, OVS and even next year, Upim, more or less 10. And I think next year on the ground -- on the basis of the good result, makes me more comfortable for looking more locations for Upim. In principle, Upim has identified another more than 100 locations where we have an interest to open an Upim store in Italy.

OVS franchising, there will be another 20 to 30 stores this year and probably also next year and same for Upim. So we might end up this year with another 50, let's say, store and next year, hopefully, even more, thanks to the increase of opening rate in Upim that makes me more comfortable than ever in having found the kind of a ideal balance in this formula. Tax rate, Nicola? I hand the word to Nicola, the CFO.

[Nicola Perin, executive]

Tax rate for full year 2024 will be on a range similar to last year on a range of 26%. There has been a peak in the first half and will be completely recovered in the second half and the projection for the full year is 26 -- 25%, 26%.

[Operator]

The next question is from Domenico Ghilotti, Equita.

[Domenico Ghilotti, analyst]

A follow-up on the organic performance. If you can give us a sense of what is the price/mix contribution on one side and the volume on the other side in the first half? And how do you see the trend going forward in the second half? And just a clarification on the cost side. So you were mentioning EUR 2 million higher marketing costs. I wanted to check if this first half and how are you planning for the second half? If I'm not wrong, rents were about mid-single digit up or so if it is something that you are seeing moving in the same direction. And on the personnel, trying to elaborate on how much was really the one-off in order to understand what is the underlying trend? And maybe if you have the per capita, so what is the per capita growth? And what is, on the other hand, the increase in full-time equivalent, if any?

[Operator]

[Operator Instructions]

[Stefano Beraldo, executive]

Okay. Organic performance, Domenico, mostly is volume because I would say, more than entirely is volume because prices has been remained more or less flat in the adults. And we decided to reduce by about 2% in kids, which has been positively accepted by the customer. So all the growth is volume. On cost, on rent, I have nothing particular to say. On labor, the size of this one-off effect of last year has been about EUR 4 million. And the expectation for the second half in terms of cost of personnel increase is plus 6%.

On marketing, this EUR 2 million of TV which has been made in the first half and will not be repeated in the second half generate the expectation for the year to remain in line with our budget. If I'm not wrong, the budget was about EUR 1 million more than last year, more or less. So basically, the total marketing cost will be slightly higher than last year and in line with our expectation. I think it's all. I don't remember if you made other question? I think I already answered.

[Domenico Ghilotti, analyst]

You've already answered. Okay. No, it's been okay, fine.

[Operator]

[Operator Instructions] There are no more questions at this time.

[Stefano Beraldo, executive]

Grazie. Thank you to everyone and have a good weekend. Bye-bye.

[Operator]

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