OVS SpA

MIL:OVS

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the OVS 9-Month 2022 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 everybody, and thank you for being with us for this conference call. I'll try to be faster, saying that the quarter has been pretty good, in my opinion, in term of sales because it has been severely impacted by an unusually hot weather in October that penalized all the market. And being sensitive to kid, we suffer even more than the general market because kid is the most sensitive part of the market to weather.

In spite of this, we have been able to generate a good level of sales, even keeping into account the very challenging comparison with the third quarter of last year. Excellent results in term of sales we achieved in November once the weather condition normalized, and the good performance in term of sales still is undergoing.

In term of margin, we decided consistently with our policy in the last 24 months, basically, not to follow customers if customers doesn't want to come in the store with markdown and discount policies. So we have been very disciplined even in this quarter, and that's why in term of gross margin, we are generating good results.

We have been able to manage the negative sales of October in term of cost with some reduction of labor cost. Labor is not really rigid in term of cost because we have several agreement like part time, which we can -- and also holiday period. So we can work on the manager, the cost of labor, in a way that we make it partially variable. So we have been able to reduce during the month of October the labor cost in the store according to the lower traffic.

It has been a period characterized by a heavier investment in marketing. Maybe some of you might have seen the Piombo Van campaign, which we made on last Sept with a very important effort in term of visibility. And we are benefiting from this because we are realizing that traffic and sales of Piombo started reacting immediately after the first days of TV ad in a very positive way.

Piombo in general is performing extremely well. We are super happy about how Piombo is performing, men and women. And we recently opened a Piombo store in one of the most important shopping area in the holiday resort in Italy, in Cortina d’Ampezzo in Cosala Italia. And it has been an incredible success. It is only 1 store, but the quality of customers that we have been able to attract tells us a lot a bit the potential of Piombo even in the next coming quarters and years.

This is a bit generic. So I prefer to leave the word to Francesco to give you a more quantitative view of our quarter. Thank you.

[Francesco Leoncini, executive]

Thank you, Stefano. I will start on Page 3, so the focus on the results of the third quarter, that sales substantially flat versus last year despite, as said, the hot October that prevented us to reach, let me say, the few potential of the quarter. Sales that I said were almost completely recovered in the month of November with the change of temperatures.

The gross margin remains basically stable versus last year. And due to the -- on one side, the high cost and the increased perimeter; but on the other side, as pointed out by Stefano, by all the actions that we implemented on cost savings, the impact on EBITDA is close to marginally, just a couple of million euros lower than last year.

An element to be remarked is that the interest -- the financial charges reduced a lot, so much, let me say, that they probably [indiscernible] even despite lower EBITDA is increasing versus last year.

Moving to the view of the 9 months on Page 4. The performance of OVS confirms to be very strong with sales growing double digits and with EBITDA growing about EUR 20 million in absolute terms versus last year, so landing us at EUR 124 million.

Similarly, the profit before tax increased even more, thanks to the effect of the lower financial expenses that the company is having in this year, thanks to the improved financial structure implemented in the course of 2021 with the capital increase and the refinancing.

I move to Page #5 to give some color in the view by channel and in the view by brand with, let me say, overall, every sign is positive. The growth encompass both the franchising and the DOS. Over the 9 months, of course, in the DOS, the driver was the growth of the like-for-like performance. While on franchising, we also -- we're also benefiting of the expansion.

We are able to -- we are continuously able to attract new partners that some are entering completely new into this venture of being a franchisee. Some other arrives from other players that do not deliver performance as OVS. So globally, we are increasing by EUR 50 million over the 9 months on the franchising.

The EBITDA, as said, is increasing also percentage-wise. While in the view by brand, we see, of course, the different status of maturity, let me say, of the 2 brands. OVS is growing 5.5%, being already a relevant established network and growing, thanks to the like-for-like performance. UPIM has on the sales an increase of 20%, which is the combination of a positive like-for-like and the perimeter growth.

In terms of EBITDA, both signed grow double digits. OVS leveraging the operating leverage of the fixed cost of the stores and UPIM [indiscernible] similarly to the sales, thanks to the high weight of the franchising channel in that -- in this business.

I move to the financial part on Page #6 that show a trade working capital improving, so freeing up resources of EUR 26 million compared to 12 months ago with trade receivables that are growing by 12%. But as said also in the previous meetings, this is nice-to-have growth because it's less than half of the one that we have on the state. So we are in a scenario of declining DSO.

I have to spend some more words on inventory and trade payables, which are strongly linked to each other. In inventory, we see a robust growth, but this is on one side, temporary. Because end of October, as I said, was the moment in which we had already in the store the goods for the winter season, season that started only in November. So the peak of October was something that at the end of the month of November was already absorbed a significant portion.

And the other element we discovered also data, the class we have done in the same way, is to anticipate the income '23 arrivals in order to completely avoid issues on the supply chain, issues that we suffered on summer '22 and somehow even penalized the results to date. This is supposed to be an element that in the course of 2023, of course, will give more a critical point.

And so the peak of stock that we have today, which is, let me say, all connected to the new season, we do not see a problem. Moreover, all of these additional stock is still to be paid, and that is the main reason of the growth in trade payables. That also benefit of the general normalization of the business after that in 2021, we are just -- we were just exiting the pandemic peak.

Let's move to Page #7 to provide some view on the capital expenditure, which is in line with the overall spending of 2021 after EUR 57 million with a different mix between new openings and refurbishment. This year, we prefer to focus on refurbishing the stores, in particular, the OVS stores in order to provide consistency between the collection that is including every season, let me say, layout of a store with more good, more quality of the materials that is a combination to attract the new customers that are allowing us to achieve these results.

In parallel, we are going ahead with the investments in IT and digital transformation. On the logistics, we see an increase because we are investing in automation in the continual distribution center, and this is the reason of the increase in that item.

I move to Page #8 to provide a full view on the consolidated cash flow statement. And I -- we added also the column of 2019 because the comparison with 2021 is a little bit misleading. Last year, we were destocking after the cash absorption we suffered in 2020 both in terms of trade working capital and in other working capital. So the comparison is not viable while it is viable with 2019.

And we see an increase in the operating cash flow and in the net cash flow of about EUR 20 million. Despite a significant increase in CapEx, 2019 was a year with lower-than-average investments. And despite that, the ability to keep the working capital under control and to generate the EBITDA allowed us to close the 9 months basically with a 0 balance.

Then in terms of net financial position, of course, we have to account that we invested about more than EUR 30 million in giving back to the shareholders some cash, either a dividend or a buyback of the shares.

I move to Page #9 to comment the continuous decline on the leverage ratio that was last year, 1.9, 1.86 up to the point of 31st of October; and in the view of the last 12 months, was 2.8. And that now is 1.3. And given the, let me say, ability of the company to generate cash over the last quarter, we expect to reach a leverage ratio around 1 -- just below 1 by the end of the year. That would be, let me say, an achievement. I just remembered that in 2020, we completed the year with a 5.5 leverage ratio, and now we are -- we start with a 0 for a few months.

I leave to Stefano to comment the outlook. I just need the opportunity to remember that the pictures below are the nice store of Cortina that Stefano mentioned in the opening.

[Stefano Beraldo, executive]

Thank you, Francesco. I have not that much to add, basically. We are already at mid- of December. So we are almost at the end of the normal sales season. The quality of our stock is pretty good in term of mix because we have the same level of stock of current season and former season. It's in absolute term. But within this amount, the share of new goods is much higher than last year.

So in term of quality, we approach the sales season, but even before the sales season, the Christmas season, the better quality of stock. And we expect that, unless we discover unexpected change in the consumer attitude in the next coming weeks, given also that weather is less important in this part of the year because it is -- we are not in the mid- of the change of the season, but we are clearly in full winter, we don't expect to suffer from seasonal variability.

So basically, quality of stock is good. And we expect that also we will be a little bit pushy on the sales because what has been lost in October can also be recovered during the month of January in term of cash. So basically, in my opinion, we have a good expectation for the remaining 45 days.

Thank you. And up to your -- up to you with your questions. Thank you.

[Operator]

[Operator Instructions] The first question is from Andrea Bonfa with Banca Akros.

[Andrea Bonfa, analyst]

I hope you can hear me. My main question is related to your attitude on cost of labor next year. I would find this year, the year of inflation driven by energy prices and commodities in general, logistics and so on, so forth. But next year, I think maybe the main actor is this cost of labor. And I would like to know what's your attitude toward that and how can you manage that.

And as far as your appetite on, let's say, restocking after the -- also winter '22, is this an attitude to have a lower amount of stock or to be as normal as ever? Or what's your view on that? Because my view is that -- I mean the conversion is increasing, and you need a structurally lower stock about selling is my view.

[Stefano Beraldo, executive]

So Bonfa, I have not understood the last part of your question. Your perception is that...

[Andrea Bonfa, analyst]

My perception is that you got less traffic and higher conversions or things that you don't need to fill up your shops with a higher -- let's say, with -- I think your shops would need a lower amount of stock compared with what we were having before, at least in my personal view. I don't know if you share the view.

[Stefano Beraldo, executive]

Okay. Well, labor, yes, you're right. Labor will be the cost component that for sure will be subject to increase in terms of trying to recover, at least partially, the inflation that has been suffered in term of impact on the gaining power also. So basically, cost increase is something that we need to expect and that we need to have in a country which is suffering for a high inflation rate.

Based on what we know, a couple of days ago, agreement has been achieved among the main association of employers and the main group active in the retail industry in Italy. And the increase of labor in term of inflation recovered will be even too small. Basically, there will be an impact in our accounts, but much lower compared to the one that we should have suffered if the index of inflation should be applied to the salaries.

So we expect to have a 2%, 3% of cost increase in term of salary that will be managed also with a lower number of hours that will be worked given that compared to '19, the traffic in the store is still lower. So what we will try is to compensate the rate increase with a number of hours that will be lower compared to the pre-COVID situation.

In term of energy, we expect to be still impacted by the higher cost of energy, even if we are adopting some solution that will provide a reduction to this impact in term of self-production of electricity through seller fields, so photovoltaic yes.

And on logistic and commodities, we are starting to experiencing a lowering of the cost. Logistic particularly is getting very similar to the pre-COVID situation and is going to benefit the account for next year. Commodities are going down. Dollar was a bit tougher for our orders, but now dollar is a bit weaker again. So overall, there will be a modest impact -- negative impact of currency, but nothing that we cannot [indiscernible].

On the stock aspects, I think that I don't see this issue, the issue that you are looking at. Our level of stock is fine, in my opinion. Some stock is also owned by brand which are introducing their goods in our store under concession. So you might see this stock, but we don't own the stock in some case. But all in all, I think that we are not suffering about overstock or we are not missing the right stock. So we fight -- we feel that we are okay with the stock.

[Francesco Leoncini, executive]

Also, let me say that the additional stock I said, maybe I was not enough clear, is on the full spring/summer '23 season. The full winter '22 has basically the same level of last year and somehow, given the price increase, has also some lower pieces in the end in the store. So it's okay that we need less stock in season. And in fact, we are test. We need to offset that through summer '23.

[Andrea Bonfa, analyst]

And if I may, just to try to understand, I mean you disclosed to us that the first 45 days of the Q3, Q4 are performing very wide with a plus 10%. I'm wondering if you can share with us your thoughts or is the -- let's say, the kind of operational leverage that we should expect if these numbers are concerned. Because I -- and my opinion is that if you are able to confirm these kind of numbers by year-end in the last quarter, your operational leverage should be very strong and potentially much higher than what we are -- or I am basing in my numbers.

[Stefano Beraldo, executive]

Right. I don't think this is the venue where we can enter so much in the dates. I think you can continue your discussion with our IR, and he will try to give you all the information that we can provide to you. But all in all, I think that we are in front of a -- we are still in front of a challenging situation from a market perspective. So I wouldn't be too optimistic.

So I think that already what we told the, that we feel really comfortable in achieving a good increase compared to the result of last year. I don't think this is the venue if -- to say if it will be 159, as some of you expected, or 65 or 67 or -- let's see what happen. We have still another 45 days. The good thing is that the situation is, in my opinion, extremely solid. And the visibility on the near future is pretty good.

[Operator]

The next question is from Domenico Ghilotti with Equita.

[Operator Instructions]

The next question is from Luca Bacoccoli with Intesa Sanpaolo.

[Luca Bacoccoli, analyst]

I hope you can hear me. Is that right?

[Stefano Beraldo, executive]

Yes.

[Luca Bacoccoli, analyst]

Okay. Good. First question is on advertising because in the last, let's say, 6 months, it happens more and more that your brand is visible on traditional media. So I'm referring to TV broadcasting but also on newspapers. So I was wondering, how much are you spending on advertising in the first 9 months? And what is your approach for next year? So if you are expecting -- willing to increase the advertising expense and also to fire or, let's say, the shift towards Piombo.

The other question in regards the fourth quarter, I understood that you are not so keen to share with us what could happen. But it seems that the volatility now should be much lower. So I was wondering if the cash flow generation in the last quarter could be similar to what we have seen in the fourth quarter 2021.

And my last question is on next year. Most of the, let's say, moving parts which are going to shape up next quarter were mentioned during your comments. I was just curious to understand how we have to see to the prices, if you intend to increase further prices as we have this year to offset the headwinds that you mentioned on U.S. dollar and on the energy side.

[Stefano Beraldo, executive]

Okay. Thank you for the question. On advertising, I don't have an excellent number to share with you about the quarter. I tell you that part of the advertising will be spent also in the fourth quarter, like the TV that you are looking at in this period.

I would say that in general, in the full year 2022, there is an increase of advertising cost of about 30% compared to year '21. And this is mostly generated by the TV campaign and the effort of increasing also the presence on the social network advertising. These are the 2 element that increased the most.

In term of cash generation on the fourth quarter, I would be prudent because on one side, it's true, we are experiencing, as of now a very solid sales dynamic, which means cash in. But on the other side, we -- as explained by Francesco, we decided consciously to avoid the risk of incur in further supply chain disruptions, which penalized our spring/summer 2022, mostly in kids. And we decided to anticipate some deliveries.

So that's why the level of stock is higher compared to last year, not because of the current season, I repeat, but because we decided to anticipate deliveries related to the spring/summer. Part of which has no reflection on net financial position because we'll be compensated by increased amount of liabilities versus suppliers, but part of which will be paid.

So basically, I think that there will be a compensation between the higher cash in generated from the sales and some higher payment for this increase of anticipated deliveries. In term of price evolution, it's very delicate, if I can say, very sensitive and very difficult. This year, we increased prices materially. And I think that this is one of the reason why we have been able to generate, I think, very good results as a combination of a certain amount of customer that we have lost in the entry level maybe, but another important amount of new customers that we attracted, thanks to Piombo and thanks to the brand strategy.

We don't want to lose other customers in the low-end part of the price pyramid. So next year, we'll be very, very careful in managing prices. There is still room to increase prices in the mid- or high-level items. And the proof of it is that this year, the sell-through of items which were priced the -- in the higher range has been higher compared the sell-through of items that have been priced lower.

This means that the brand is achieving the attitude of being able to stretch the prices up in the product, which are more qualitative or more fashion like Piombo. But also we needed to remain prudent in continuing giving to our base of kids customers also the proper level of entry level.

So it will be a combination of maintaining prices in the kids and increasing prices in the adult. By the way, adult is performing better than kids for the first time in maybe 15 years to my memory, which is good news, in my opinion. And we hope that the balance of this -- we believe, not we hope, we believe that based on our assumption, the balance of these actions will allow us to maintain a more than decent margin.

[Operator]

The next question is from Domenico Ghilotti with Equita.

[Domenico Ghilotti, analyst]

I have a few question. The first is related to Q3 performance in terms of same-store sales. I'm trying to understand the UPIM same-store sales because I presume that OVS is more or less in line with the total results for the division. And if you can help us understanding what -- how was the, say, the price mix contribution, the volume contribution?

And also to explain the different performance in terms of profitability, you were mentioning the gross margin is stable at consolidated level. I wonder if this is the case also for the 2 division or if UPIM was a more difficult for open to raise price to have a price mix positive contribution. And that's the first question on Q3.

And then I have a question on Piombo. So I'm trying to under where are you in the penetration of Piombo in the stores, if you have still room to increase the floor dedicated to Piombo and if you see a risk of -- more fashion risk for Piombo, so some risk of obsolescence compared to the core proposition that proved very, very resilient and not affected by this risk.

[Stefano Beraldo, executive]

Okay. Clear. On the Q3, if I understand, you want to have some color on the breakdown between the performance of OVS and the UPIM ones. Let me say that the 2 brand has been -- first of all, has been able to increase prices. Both of them increased prices. OVS increased prices more than UPIM, but both of them increased their prices.

The reason why OVS, I decided -- we decided to increase prices more is related to the fact that we have introduced more element of innovations in OVS than in UPIM. So new customers has been attracted, thanks to higher quality of the items, namely Piombo or Hybrid or Gap, et cetera.

While UPIM has been more stable in term of offer proposition with a good exception, which is perfumery. So UPIM increased the perfumery. And because perfumery market generated a good plus this year, the performance of UPIM in term of sales in the third quarter has been higher compared to OVS because of this. So the presence of perfumery, which is higher in UPIM than in OVS.

The second reason why the performance of UPIM in term of net sales has been higher compared to OVS is that UPIM markdown has been higher. So OVS basically didn't increase markdown compared to last year, while UPIM that was approaching the second half with a higher level of stock has entered in a bit higher markdown mood, which as expected, generated more traffic and more sales.

On Piombo, today, Piombo represents something more than 15% of the penetration in men and women. I don't think we will increase this amount and the square meter dedicated to Piombo because we don't want it to hyper-characterize the company as a more fashion one, even if I need to point out that the Piombo style is an endless style. So Piombo is not something that you wear and then day after, you stop wearing. So the risk of obsolescence, as you said, is not that high compared to other fashion brand, which are highly risky in term of obsolescence. Basically, Piombo is another green.

In term of impact of Piombo anyway, there will be some novelty next year because we are introducing Piombo also in the kids. So in order to satisfy the desire, the preferences of customers which are a bit more -- I'm not saying fashion-conscious, but I say demanding in term of quality, we will introduce also Piombo kids. That will start from spring. I don't think that in the beginning, the presence will amount to something close to 15%. Maybe in the first year, we will have a 3%, 4%, 5% of kids represented by Piombo.

[Operator]

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

[Federico Belluati, analyst]

I'm just asking how the Stefanel channel going, if you are satisfied with it? And what are your expectation for this year and for the coming months?

[Stefano Beraldo, executive]

I'm really sorry about the quality of your microphone is different from the others. So...

[Federico Belluati, analyst]

Oh, sorry. Sorry about it. Do you hear better now?

[Stefano Beraldo, executive]

No. No.

[Federico Belluati, analyst]

Do year me better now?

[Stefano Beraldo, executive]

Right now.

[Federico Belluati, analyst]

Can you hear me?

[Operator]

We cannot hear you now.

[Federico Belluati, analyst]

What about Stefanel? Can you hear me better now?

[Stefano Beraldo, executive]

A little bit.

[Operator]

Mr. Belluati's line dropped.

[Stefano Beraldo, executive]

No. Maybe there -- the only word I understood was Stefanel. So I hope that Mr. Belluati is still with us. On Stefanel, we are really in a start-up situation. We are happy with the response from the customer that we are receiving. We are opening some new franchisee store in Italy, and we are opening in some other country. But we are still prudent because what I want to do now before pushing the accelerator of opening. And in principle, we might open plenty of franchising store because the demand for Stefanel is pretty high in the market also out of Italy.

We want to be sure that we have a great collection. So the impression is that we have still to work. We have good signals, but also some adjustment to be made in the collection. I hope that also with the improvement in the organization, with the team which is now more focused on the evolution, the planning of the Stefanel collection, we can have a great spring/summer. This is really something we are waiting in order to start pushing the accelerator and opening more and more stores.

Very well, Stefanel, in the e-commerce. This means that the higher price and the reputation of the brand is still attractive. And because the number of store is much smaller compared to OVS, we are noticing that the penetration of Stefanel e-commerce in the total sales of Stefanel is much higher compared to OVS.

[Federico Belluati, analyst]

Okay. Sorry about the technical issues.

[Stefano Beraldo, executive]

Now I hear you. So I think that -- unless you have further question from...

[Federico Belluati, analyst]

No. That's fine.

[Stefano Beraldo, executive]

Okay. So thank you for attending this call and -- no, please go ahead.

[Operator]

Excuse me, we still have 2 questions.

[Stefano Beraldo, executive]

Okay. Sorry.

[Operator]

So the next question is from Luca Orsini with One Investments.

[Luca Orsini, analyst]

Can you hear us?

[Stefano Beraldo, executive]

I know that you met Masimo in London, I know.

[Luca Orsini, analyst]

Yes. I know. We talked about you. Such a nice guy. I just had 3 questions. The first one is on Coin. Just if you can tell us if something is going to happen and how do you think you can finance that. The second question is on the SKU, are you happy on where you are on SKU? Or there is still some optimization work to be done, either increasing them or -- decreasing them or increasing them, which I don't believe?

And then the first thing is on the -- if you have a comment on the average ticket where it has moved significantly. And the last thing is, are you carry on with your buyback? And what is your plan? And what you're going to cancel stock?

[Stefano Beraldo, executive]

Okay. On Coin, the answer will be very, very fast. We have no news on Coin. And so we have also no -- I would say no comment on the way we are going to finance in case we should have used. But one thing is clear, we will not penalize our balance sheet with consolidating Coin in any case.

So in one way or the other, we go ahead or we don't, we wouldn't go with an acquisition for [ 100% ]. So in any case, the balance sheet, the net financial position of OVS will not be impacted by Coin. After 15 years of high leverage, I don't want to have -- in this moment in the market with rising cost of money, I don't want to have a bigger burden of debt on our shoulder.

In term of SKU, no. Maybe I can say that we are starting to move our first steps in the outwear, sport leisure wear. So there will be some inclusion in a segment of a product like tennis, like Nordic walking, like biking, which is more related to urban mobility than really to sport in term of performance. So there will be something new there. Obviously, with the new SKUs.

Average ticket is increasing from -- Francesco gave me some number because I didn't have this number. So thank you, Francesco. In '19, average ticket was EUR 26; in '21, was EUR 32; in '22, is EUR 33. And the last question was about...

[Luca Orsini, analyst]

The buyback.

[Stefano Beraldo, executive]

The buyback is going to continue but not at the same pace than before. We gave to our broker instruction to be less bullish even because in this moment, we are in a moment where with the exclusion of yesterday, the share price is basically well oriented. And the nature of the buyback was also to act in a way to balance excess of volatility. But we are happy with what we did, and we are ready to do more in case it will be necessary.

[Luca Orsini, analyst]

Okay. And will you cancel the shares?

[Stefano Beraldo, executive]

We are not talking about it now.

[Operator]

The next question is from Francesco Brilli with Intermonte.

[Francesco Brilli, analyst]

The question I had was almost already answered. That was on Coin and just wanted to say that if they are -- which are the main focus area that you are assessing and you are focusing your due diligence one. You already answered, I think.

[Stefano Beraldo, executive]

We are focused on generating liquidity. Okay. So thank you to all of you and Merry Christmas, given the timing of this call. Bye-bye.

[Operator]

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