LPP SA

WSE:LPP

Earnings Call Transcript 2019-Q1

[Przemyslaw Lutkiewicz, executive]

Good afternoon, ladies and gentlemen. Welcome. Welcome to the conference dedicated to LPP results after the first quarter 2019.

The first quarter has already ended. But remember, it is always the first -- the most difficult quarter in our industry because January and February are sales months, and we introduced new collections, Spring collection in March with a full price and margin. The same happened this year, but we are very happy about the sales results, over 15% growth of sales year-on-year with the whole capital group. And LFLs grew quite fine by 11% -- over 11%. And also, e-commerce grew, and the sale here grew almost by 50%.

Now let's take a look at the map. A new country was added to the group of countries we operate in, Bosnia and Herzegovina. The first stores have been opened. This is our 24th market. And additionally, there is an @ sign on the map in Croatia because this is where we opened the first online store.

And once again, a map with the number of stores. Well, we have 4 stores less, as you can see. It is always connected with the fact that after a good fourth quarter, happens the first quarter with January, February with the optimization closure of less-performing stores and so on. And this is what happened in 2019. And the biggest growth was recorded in Sinsay brand.

And let's move on to LFLs. Quite a nice growth on the graph on the left by nearly 11%. Well, and the whole growth is in green. That means that LFLs are positive all along. And it's very happy -- we're very happy that all our brands had positive LFLs during the first quarter. The best performance was in Eastern Europe, Russia, Ukraine, but Romania is performing quite well as well. And here, you can see online sales, e-commerce. This is nearly 50% growth during the first quarter. And in total, this is 10.5% of the growth, total sale of the company.

And now by brands, growth by brands. On the left, you can see all our brands and their growth of sales. The biggest growth was in Sinsay because, well, we added the biggest number of floor space. But let's take a look at House, plus 20%, whereas the floor space was growing the slowest out of all of our brands.

And now sales by regions. Let's please take a look at the factor that all the regions are positive, growth were recorded. And in Poland, the growth is plus 6%. However, the regions with new stores are growing the fastest, so EU, Russia, Ukraine and Kazakhstan, Eastern countries.

And total sales. On the left on the graph, you can see that every quarter recorded double-digit growth. 15% is a very good result during the first -- of the first quarter. On the right, you can see retail sales per square meter, so revenues per square meters because we are opening bigger and bigger stores in order to present the whole collection in order to offer the best, the most modern stores with new technologies. Then the revenues per square meter is dropping slightly, which you can see in the upper part of the table. But there is one exception, CIS, that was a growth of sales revenues per square meter by 10%.

Now let's move on to gross profit margin which was quite low at 43% for the first quarter, which was caused by 2 elements. After a less-performing December, we had quite a lot of commodities, quite a lot of products that had to be sell off and which was done. We don't really have any more products. And then mid-February, we had new products sent to the stores.

And it was -- let's take a look at the U.S. versus Polish zloty exchange rate. Well, this differs from the previous year. Last year, it was PLN 3.4. And this year, it was PLN 3.8. That affected our margin very much.

And how about the operating costs? On the left, you can see the graph presenting the stores per -- on stores per square meter. Rental costs are just the same as last year, PLN 90 per meter. However, the HR personnel cost and the other costs have dropped.

What do we do to actually decrease the HR costs? Well, a lot of factors are included here. So we opened bigger stores with bigger floor space. And another element is the fact that we are much better with managing the timetables and the work of our personnel. And we also outsource those things that shouldn't be done by our personnel, so for instance, unpacking, cleaning and so on.

And -- but there was a third factor that happened this year. As you can know -- as you know, we are implementing electronic label technology here because this is not a fabric label. This is a rotating plastic clip. As you could actually see before, antitheft clip. And in this case, this clip is a little bit smaller, and the construction is a little bit different, so antitheft but also a technology including today -- well, before, those clips were put by our personnel in the store. Now actually, the clothes are sent from the factory with the clips inside, so there is less work for our personnel in the stores.

And the remaining costs, so services, amortization, fabrics, they are also lower year-on-year. So therefore, the SG&A cost per square meter dropped a little bit.

And on the left, you can see the total costs that dropped slightly year-on-year. This is the cost covering the stores but also e-commerce with logistics and the head office cost. Because the margins are slightly lower year-on-year, then we are trying to manage our costs better. We cut the costs that we find unnecessary right now, unnecessary. Therefore, the cost per square meter is lower.

And now, let's move on to financial results. But this quarter, this task is more difficult because we have additional column. Starting in 2019 January, we also include the IFRS, so rent per amortization and interests. So we have a dual situation.

On the left, you can see the results after the first quarter 2018; in the middle, the newest, the latest results of the 1Q '19 according to IFRS 16; and we added a third column in order to compare results. So the first -- the last column actually is showing you the situation in 1Q '19 without IFRS 16. We have growth in sales and the drop by nearly 2 percentage point on margin.

And now financial costs. The cost is growing by 7%. So the operational loss in both cases is lower than last year. This year, this is PLN 100 million of loss. And year ago, it was PLN 117 million loss. And financial activity, operation and cost of interest and net loss is PLN 115 million. And this is also EBITDA margin or value because this IFRS 16 impacted the most. And this year, it was -- last year, it was negative. And this year, it is PLN 130 million, very positive. And the growth of EBITDA is most visible in the standard IFRS 16. So we changed the cost of store rental into amortization, the right to use the store. And the second part are the interests. And the impact on EBITDA is quite huge because the amortization is quite big. And we also have the impact on the net profit. And additionally, in -- we have FX differences on our leasing obligations. But this month, the FX differences were positive. But taking into account just depreciation and interests, well, the impact would be bigger than just rentals for the same period.

And now let's move on to trade liabilities. Let's start with inventory. On the left, you can see the column that shows you the value of inventories, PLN 1.370 billion. This is one of the lowest columns on this graph, but it's important to calculate inventory per square meter. And this is quite a lower level of inventory per square meter, 1,000 -- over 1,200. So that means that we are quite successful in selling our Winter collection. And we are much, much better in managing new inventories, new collections and rotation thereof. So on the one hand, we have rotation of the inventories, but on the other hand, we are working on extending the period of payments.

You can see on the right, so we are so much better in managing working capital. And quite some time ago, we were saying that we want to just balance those 2 values but -- we succeeded last year, but we can still work on that. Trade receivables, as you can see here, can be higher. Trade receivables can be higher than our trade liabilities inventory.

We want to improve those parameters. We would like to actually extend the trade liabilities terms and actually decrease the inventory. And we view the fact of that the cash conversion cycle was 27 days last year, and now it's 0. And we hope to move on to negative cycle so that we could -- we'll be able to finance -- fund our inventories.

Now let's move on to net cash. On the left, you can see that net cash was PLN 600 million. This cash will be used in the future, yes, to be invested. On the right, you can see CapEx PLN 192 million. And the biggest part of it was invested in refurbishing and opening new stores. And the smaller part, the gray part, is the infrastructure, so construction and construction of logistical centers.

Now summarizing, recapitulating the whole quarter. We are very happy about LFLs, double-digit sales, good approval of our collections, sell-off and so on. At the same time, the e-commerce growing. We control our costs. We shortened the cash cycle. And we have so much better working capital. We work on it, and we have cash to develop safely.

And now a couple of words about the most important issues last quarter. So House has been performing so well since the past year. We have opened a new store in Bosnia, Herzegovina. In Croatia, we opened e-store. And then we signed a contract for a new logistical center in Slovakia. House brand is following the latest trends, and the prints are quite fashionable. So this is the fourth quarter in order where -- consecutive quarter where LFLs in House brand were positive. So 4 quarters in a row, LFLs were positive. So that means that this brand is getting a momentum and is developing so much better.

And other countries, Bosnia and Herzegovina, in March, we opened 3 stores, Cropp, House and Mohito. And in April, we added Reserved and Sinsay store. Therefore, in Banja Luka, right now, in Bosnia, Herzegovina, we have all our brand stores. This is our 24th market. And you can see here on the map that we also opened e-store in Croatia.

So in order to support our expansion abroad, we need to invest in new logistical centers. And this slide presents you our logistical base, this is the green color and our plans in white. So in Poland, we have centers in Pruszcz Gdanski; in Stryków together with Arvato, this is for e-commerce; and Gdansk fulfillment center for Cropp and House brands. This is Poland. Outside of Poland, we have one Moscow logistical center for traditional stores and another one for e-commerce. This is also rented.

What are our plans? We -- next year, we will start constructing Brzesc Kujawski center. And at the same time, we plan to rent stores in Romania, in Slovakia. In Romania, we will open the logistical center, commerce center in autumn this year. And in Slovakia, we will open the new center in the -- during the first quarter 2020.

And now a couple of words about our plans for 2019. Let's start with the traditional stores. During the past -- during the last conference, I was talking about 11% growth. Now we are accelerating. This will be 12% this year of growth of floor space. In Poland, this will be a slight growth, double digit. So mostly, the growth will happen in the EU countries plus CIS countries east of Poland.

Now growth by brands. As before, Sinsay is growing the highest, the fastest. But as far as last year, the growth was the fastest in Reserved. This year, we've decided to focus on the youngest brands for the young people.

So half of our plans have been actually done because we've opened stores in Bosnia and Herzegovina. In autumn, we will open new stores in Finland. PLN 680 million will be spent on stores of our CapEx. In total, the whole CapEx will be PLN 870 million.

Now what was the dynamic growth in online sales? As you can see that during the previous years, we were able to actually double our e-commerce. And this year, we have an ambition plan to actually exceed PLN 1 billion of sales in e-commerce. So this will be nearly 40% growth year-on-year.

How do we want to achieve that? We will be developing the markets that we operate on. So Czech Republic, Romania and Central Europe is growing quite dynamically. We've started e-commerce in Russia. Well, it's performing quite well, but we would like to add new markets to guarantee further growth. And this year, during the second half of the year, we plan to open a pan-European store covering the whole European countries and online store in Ukraine.

And there were questions asked or concerns whether the strategy is too costly. Maybe we will have to spend too much money on marketing and advertisement. So we are not planning to spend money on advertisement in other countries. Of course, we want to spend some money on marketing to be noticed, but we are not planning en masse campaigns. So we would like to start operating on those markets, check which are performing well, which are developing, where we've got customers who want to buy our products. And then we will select the best markets in order to support, in order to gain the momentum to develop those markets because we -- this year, we've started to focus more on the profitability of the business.

So far, we were focusing on increasing the sales, adding new markets. We wanted to focus on mass and scale because only after having mass and scales, then you can start thinking about managing logistical costs.

So the most important, it is to deliver the parcels to the final recipient, especially if the parcel has to cross several countries. Therefore, our idea to take those countries that perform so well in terms of sales, where we operate on a huge scale, to open small warehouses that will support our e-commerce for the final customer and will help us to decrease the final cost. So the profitability of our e-commerce is the main task we focus on. And then development comes -- follows that.

So e-commerce, that is a quite nicely growing part of our business. But we need to remember that this is only around 10%. So 90% of our revenues are generated by traditional stores.

So what we are saying? We are saying that we need to combine both channels, traditional stores and e-commerce, in order to face the challenges of the future. So we build bigger stores with different economy, with better spread of costs, where we can show the full collection, the whole collection. But at the same time, we feel the stores with technology, RFID for instance, that is the basis for the company to develop. So we can deliver better commodities, inventories and to deliver products from store to the customer. We may actually bring virtual mirrors telling the clients what else to buy. We get better information what is happening in the stores, what is the rotation, what is rotating around the store. That helps us to better manage the inventories, the commodities. So this technology is -- helps us to focus better on our omnichannel.

Now a handful of information about our stores because we now have some surplus in CapEx. Between 2009, 2010, we had external crisis, quite serious. But starting as of 2011, 2012, 2013, we've been accelerating. We've been opening new stores. We've been signing contracts for 7, 8, 9, 10 years. And now, this is the time when the contracts are terminating. And we take a good look at those contracts and we wonder whether we want to sign new contracts, renew the contracts or maybe negotiate new conditions. So we talk to the shopping centers, asking them for bigger space, floor space. So before, we've been actually opening new stores. And right now, we are renewing the contracts in the stores, so we have the surplus, CapEx surplus plus our investment in the head office and so on. So the coming 3 years will be quite important and quite intensive in terms of our CapEx.

Now let's take a look at the investment this year. 135,000 square meters of new net floor space, but we will close down 172 stores and 50,000 square meters of floor space. So the growth here will not be big because this will be just 12%, but this will be a huge work inside. We will close down 772 stores and open 183 stores. So our CapEx will be spent on opening new trading floor space and refurbishment of the old stores and opening of the new stores.

Now what are our plans for 2019? What is our outlook? Let me be more precise because, last time, I wasn't as precise as possible. We are talking about the year that starts on -- in January 2019 and ends in January 2012. So this will be 12-month trading year. This is exceptionary situation. So this year, we plan 2-digit growth of sales. This will be connected with the fact that the floor space is growing. We hope LFL grows and other dynamic growth of our profit.

Well, the previous guidance was showing our margin between 54%, 55% for 12-month period. We are now decreasing it to the 53%, 54%, but we are talking about 13-month year, a year where we've got 2 Januaries, and we know that this margin in January is always a little bit smaller because of the sell-off period. So we are moving to a slow -- a slightly lower level, but it's only because of 2 Januaries during the trading year. So the margin has been a little bit smaller after the first quarter. So that means that we will focus on better management of the cost in order to have a very positive final result. And at the same time, we will be managing our working capital better in order to generate more cash in order to have money for further safe development.

And that's all from me. So thank you so much, ladies and gentlemen, for your attention. And now, let's move on to Q&A session. I can't believe that there are no questions.

Because we have an online broadcasting, my colleague will actually come over to you with a microphone.

[Unknown Analyst]

I have this question concerning e-commerce. You've mentioned that the sales will -- may be partially completed by delivering parcels from the stores to the customers nearby. I understand that right now, this process is not happening.

[Unknown Executive]

Yes, it is not happening. We have RFID technology, full technology. Why? Because we can't be mistaken. Because if the customer orders a product, and we want to send it from the closest store, for instance, in Warsaw, we need to be sure that the product that you order must -- is actually in the store. It can't happen that you, for instance, order trousers and a t-shirt, and then it turns out that the t-shirt has been sold. So we need to know that for sure, and this is what is offered by this technology, RFID technology. So that means that the personnel in the store knows that the product is there, they pack it and then send the parcel to you. So we need the technology to know everything about every single piece of -- we have in our stores.

[Marek Piechocki, executive]

Please go on. I encourage you to ask questions. It seems that there are no other questions. Let's take a moment more. Yes, okay. Since there are no questions, thank you so much for participating in this conference. Thank you so much for joining us today in this room, and thank you, our online viewers. Thanks so much, and see you next time.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]