LPP SA

WSE:LPP

Earnings Call Analysis

Company Aiming for PLN 20 Billion Revenue

Company's Black Week sales saw double-digit increases with a higher gross margin, benefiting from both offline and online channels, leading to a strong Q3. A new Moihito app launched aims to boost brand loyalty and reduce marketing costs. A logistics center in Romania is operational, providing efficient supply chain support for Southern Europe. Q3 online sales were flat, contributing to overall flat revenue year-over-year. Q4's focus is on profitability, with a guidance for an EBIT margin around 13% and a pledge to maintain a disciplined cost structure. To enhance competitiveness, the company plans to open new stores, particularly for the Sinsay brand, and implement strategies like a purchasing office in Istanbul for better quality collections. The long-term growth target is 15% per annum, with an immediate aim to reach at least PLN 20 billion in revenue next year, a gross margin of 52%-53%, and keeping the cost-to-sales rate below 40%.

Momentum in Omnichannel and Regional Growth

The company has experienced a triumphant Black Week, boasting double-digit revenue growth across both online and offline channels, with a toast to a higher gross margin. Offline sales soared by 37%, with online trailing at a 16% increase. The company's mobile applications, especially the newly launched Mohito app, have become critical in cultivating customer loyalty and reducing marketing costs, demonstrating the company's strategic shift towards omnichannel retailing.

Logistics Expansion and Market Penetration

Strategically, the company laid a new cornerstone by constructing a logistics center in Romania, poised to serve over 450 stores across Southern Europe—marking a confident step towards infrastructure enhancement. Concurrently, the company's footprint in London expanded with three new Reserved stores, signaling an adaptive response to shifting shopping trends. The company shows no signs of retreat, actively tackling the Greek market with the opening of three Sinsay stores and modifying store size strategies to amplify their presence in Central Europe.

Financial Fortitude Amidst Market Challenges

The third quarter, while mirroring previous year's revenue, fell short of expectations due to a warmer season affecting autumn collection sales. Despite this, the company rebounded in subsequent months, with Sinsay outshining other brands. A commendable gross margin resilience was noted at over 55%. This coupled with strict cost control and reduced expenditure resulted in a substantial net profit. The company bolstered its inventory management, improving turnover while maintaining operational efficiency. Furthermore, by keeping a tight rein on marketing and cutting performance costs, the company has achieved significant savings and looks forward to sustaining its cost-discipline strategy.

Focused Investment and Projected Growth

Looking ahead, the company plans for aggressive outlet expansion, particularly within the Reserved and Sinsay brands. The aim to open approximately 1,000 Sinsay stores in the next three years reflects a strategic emphasis on this highly-potential brand. Technology adoption and further use of RFID tags across brands to streamline operations and improve margins denote an innovative edge. With an eye on sustaining high growth, management anticipates revenue to possibly surpass PLN 17 billion and has set a robust target for next year’s gross profit margin to reach between 52% and 53%. Capital expenditure remains cautious but focused, amounting to PLN 1.1 billion, primarily directed towards store development.

Scaling New Heights in Design and Purchasing

The company has ramped up its design and purchasing operations, establishing a presence in Barcelona and Istanbul. Barcelona will serve as a design hub for the Reserved brand, with a focus on rapidly launching collections tailored to Western European tastes. The Istanbul office will further enhance quality and timeliness for the Reserved women’s collection. These strategic moves illustrate the company’s ambition to refine its product offerings and meet the expectations of a diverse and international customer base.

Cautious Optimism for 2024

As the company casts its eyes toward 2024, it does so with a blend of hope and pragmatism. While acknowledging the slew of challenges that range from economic uncertainties to heightened competition, the company leans into the winds of change with a suite of strategies to navigate these turbulent times. With a firm belief in its growth trajectory, underpinned by robust financial health and a progressive expansion plan, the company remains cautiously optimistic about the future, bolstered by the evolving retail landscape.

Earnings Call Transcript 2024-Q3

[Magdalena Kopaczewska, executive]

Hello, Magdalena Kopaczewska, Investor Relations; Przemyslaw Lutkiewicz, Deputy Chairman of the Management Board. Welcome to our Results Conference for Q3, during which we will tell you what has happened ever since we met during our last meeting. We'll talk about our financial results for the third quarter. And we'll also tell you about our plans -- short-term plans for the future. Towards the end, we will traditionally invite you to ask your questions.And we shall start with Black Friday. Black Friday, that is the period of promotions and an increase in sales that lasted ever since Thursday preceding Black Friday until Monday, so the so-called Black Week. We are very happy about this year's results of Black Week. And that is because we've noted double-digit increases in revenues in both channels and omnichannel comparing our results to the previous year, the same period. What we are most happy about is higher gross margin on sales within this period. In division and the channels, you can see that the shopping trends were higher in offline, they have noted growth by 37%, whilst online an increase by 16%.In terms of the Internet, one should mention that what becomes rather more popular is shopping via our application. That is why even before Black Week at the beginning of November, we launched an application for our Mohito brand. And this is yet another brand that is accompanied with an application following Reserved and Sinsay applications that make it possible for us to build consumer loyalty to our brands. At the same time, they make it possible to lower the marketing costs, the so-called performance marketing costs online. And therefore, they become a great tool that gives us knowledge about the customers and their behaviors and their usual choices. They're also very beneficial for our customers as the applications make it possible to have access to the full history of shopping online or offline. They also make it possible to carry out quick returns without receipt. And also, they make it possible to get access to information about a given brand. Mohito app is available in Poland only, but we also are planning rollout in Czech and Romania.Now Deputy Chairman will take over to tell you about other events in our company. I'll be back with you for Q&A.

[Przemyslaw Lutkiewicz, executive]

Another important event we need to mention, this is the construction of our logistic network. We also announced it that we are going to open the logistics center for stationary stores in Romania. It has already happened. We started the construction in January this year. At the end of the year, right now, we are starting with the production works in the logistics center. This is close to the capital of the country in Bucharest. This is a leased center. We do not invest in CapEx. We just leased the situation, and we employ within logistics, Romania, the employees for our own jobs. This logistics center have shops across the entire Southern Europe, Slovenia, Bulgaria but also Hungary, Croatia, Serbia and Greece. So 450 stores today, this is how many we have in this region. But of course, this region is something that we keep on developing. So with time, there will be more stores to come.Another important event is opening 3 stores of Reserved in London. Now we have 4 in London altogether, 2 at the main shopping street, High Street, that is Oxford Street, one that we opened in 2017. And nearby, there is another one. But also, we have 2 new stores in shopping centers. You're asking us how the sales go over there, quite well, but we can see this difference in the shopping malls, the results are better than those noted in Oxford Street. So that shows the trending -- the changing shopping trends in Western Europe. These 3 new stores that we opened are much more preferable in terms of the conditions that we have there in terms of the rental burden and so on. So we certainly hope that the return on investment is to be observed within the 3 years to come.Greece is another market that we have started conquering. We've opened it towards the end of the previous financial year. Now we have 3 Sinsay stores in the Greece market. That's a market that sells really well, both online, where we had launched our main store in that country beforehand as well as all the stores, offline stores, they also sell really well. I need to mention that it is owing to the Greek market that it has turned out that we need to be more flexible about approaching our new Sinsay stores. So far, we intended to open those between 900 and 1,200 square meters in terms of floor space. It turns out that there are not many locations of this kind in Greece. So in order to enter this market, we need to reduce our expectations in terms of the size of the stores. So adjusting to the market conditions being more flexible, we are now ready to open Sinsay stores of 500, 600 square meters. That also makes it possible for us to increase our developmental potential across the entire Central Europe region. That is why we also increased the guidance of new launches of stores for next year. I'm going to tell you more about that as we go today. So our goal for next year in Greece is to open over 20 new Sinsay stores.So altogether now, we have over 2,200 stores in our network. The table on the left-hand side shows you that we added almost 370 stores over the year, out of which, 101 in Poland and 268 abroad. Poland still remains the core market for us, generating around 45% of total sales. We have almost 1,100 stores in Poland, but the development for the years to come is something that we envisage to happen more intensely beyond Poland. So Romania, Bulgaria, Greece, Serbia, Croatia or Italy would be those markets that we would like to keep developing within at the fastest pace.And now moving on to the financial results, starting, of course, in our revenue sales. We can see that over those 9 months, it is offline stores that's better than online ones. In online, we had a few percentage drops in sales. In offline, we had increase of 12%. Also, the floor space grew by 24% year-on-year. So we are present at the 39 markets now and the gross revenues of the group within 3 quarters increased by 7%.The Q3 sales were below our expectations. It was identical to the results noted last in both distribution channels, offline and online. So similar digit in terms of the revenues results. The warm end of the summer shifted -- extended on to September, many competitive companies also complained about that already there were autumn collections in the shopping centers, the traffic was low because people still benefited from the warm season and they did not purchase autumn collections yet. That changed only starting in October when colder days came and then the sales started to grow. But the weak September resulted in the revenue being flat year-over-year.When you look at the table down there, on the right-hand side, you can see that the best dynamics in terms of growth of revenues was that by Sinsay that exceeded the area of PLN 2 [ billion ] in 1 quarter, that is our biggest branch contributing the most to our sales. Reserved, Cropp, House and Mohito, those 4 brands had drops of sales year-over-year. And I guess that the bigger ones were in e-commerce online.So looking now ahead, it is in October that we could see the sales rebounding, good ones in November, continuation of good trends in December. So I believe that Q4 is going to be much better in terms of sales dynamics year-over-year.Now looking at online sales, again, it was flat year-on-year. You can see at the graph that in the domestic market, we've had increases in sales, but minor drops abroad. But basically speaking, very similar comparable results, about PLN 1 billion in the online channel. As Magda has mentioned, applications are growing, of more important in those markets that had welcomed applications as the first ones, [ 50% ] of online sales go through the applications. That is why the applications are so important for us to develop across all the brands.We can also see that [ right ] the newest application. Well, a week ago, we had Mohito launch, a month ago it was a [ silent go ], a week ago this more broadly advertised one, but we have many users now generating 25% of all the online sales in Poland. So you can see that the applications are really important. Now taking a general look, about 1/4 of the sales of the group is generated by online sales.The share of foreign sales and revenues, again, we see that it is beyond Poland that our stores' revenues grow fastest. You can see that the floor space has increased by 24% out of which 15% of growth is that in Poland. There is still space for Sinsay in retail parks in smaller towns, but abroad. Well, this is where the [ country ] has mentioned before, is where we are going to grow over 1 million square meters floor space. That is a growth by 30% year-over-year. And the country saw it grow fastest and where we can saturate the market with our stores faster. Of course, the biggest countries in the regions, Romania, Serbia, Bulgaria, Hungary, these are the markets that we are focusing on now. Of course, Italy and Greece are new kids on the block as well.Now let's move on to profit margin. On the right-hand side, the chart shows you [indiscernible] balancing of margin over 55%. We have mentioned for some time now that the second half of the year is going to be stronger in terms of profit margins because the previous quarters, 4 quarters, was selling excessive collections that we had resulting from the outbreak of war in Ukraine, and that is where the big inventories, the excessive inventories had to be sold. We had to use a variety of promotion activities that lowered our margin. Now we have completed the sale of those collections. Now we have new collections that are delivered just in time, that are sold at lower prices in terms of dollars, they're also bought at the foreign exchange rate of American dollar year-over-year. So we can see that zloty lot is growing stronger, that is beneficial for us. As important, also the freight costs have dropped, so transporting of commodities from Asia to Poland, and you can see that, right?There are fewer and fewer promotions, and that is something that makes it possible for us to sell at regular prices. The third quarter that started in August, so August, September, October, that's introducing collections at regular prices. So we try to reduce the amount of promotions. Still in 2021, as the graph shows, the situation was that Q4 noted higher profit margin than the third one. I wanted to tell you that if you are to forecast our results for coming quarters, please do not be misled by the historic pattern. In 2021, the situation was unusual. The demand was so high after the preceding COVID closure that customers bought goods at first prices. We even had shortages of goods. So today, the market situation is quite different. Q4, including February, this is how we end our financial year, is going to offer promotions and lowering of prices. So certainly, the profit margin on Q4 will be lower than what you can see in the record Q3.At the bottom, you can also see the level of inventories. These are those dark blue bars. It's similar for the last 4 quarters, over PLN 3 billion in inventories. What's important is also this additional index, that is the calculation of inventories per square meter. The level of inventory is stable, but we are increasing the floor space in square meters. That is why this index inventory per square meter is over PLN 1,600. And I think we are at this level that is normal to us. We would like to stick to this level of PLN 1,600 or PLN 1,700 per square meter looking ahead at the quarters to come.Of course, today, it's somewhat easy to manage it all because, again, when we look back when we had too much of stocks, we had too many products, so we had to bring it here owing to the turbulences elsewhere. Today, we can say that we are proceeding the way we should. So it's just in time, we are importing in time and introducing it to stores in time, no turbulences across markets, including transportation services.What's important is also that we've improved the rotation of our goods. So it's 148 days. Previously, a year ago, it was 167 days. So again, this is one of the main indexes here in terms of the turnover. It could be improved to 148 days. It's still quite a lot. We would like to have the turnover closer to 130 days.Then the costs. From Q4 last year, we have looked at our costs very closely. The discipline was visible in any component of our campaign in stores and the headquarters in logistics. In our e-commerce activity, everywhere, we try to cut costs, and you can see that, at the top, when you can see cost of our own stores, PLN 171 per meter. That's the level that we've kept for some 3, 4 quarters, so that's stable. That's a 13% drop of the cost per square meter year-over-year. At the bottom, you can see total cost of those of stores plus logistics: e-commerce, headquarters, again, per square meter, PLN 287. That's the lowest readout in the period analyzed. Again, a drop by 27% year-over-year. And this discipline -- cost discipline is kept owing to which we can generate very good profit.Looking now at stores again, year-over-year, we can see drops in all the categories: rental costs, the new Sinsay stores have lower average rental cost and all the other stores in the network, particularly those by Reserved or Mohito. The cost of staff, again, are lower year-over-year. The remaining costs such as energy or materials that we use to prepare stores for launch, they are lower as well. But when you look at the last bars, the last quarters, they are similar. So we are sticking to the same low level of costs across the entire group.But in terms of the total cost, you can see the savings that we've made that is those performance marketing that have been cut year-over-year. The same goes for logistics, but also the costs in practically any department, any area of our company's activities are lower year-over-year. Now the index that we've been watching carefully, so cost per sales, that's 37%. A year ago, that was 41%. So again, we say that we would like, on a long-term basis, for this index to be lower than 40%. Now of course, we have reached even a better result.I now move on to profit and loss account. The sales for quarter PLN 4.3 billion. So it's rather flat, no changes, but we have more increase in the gross margin of 55%. That's [Technical Difficulty] operating cost PLN 12 million, minus financial cost interest but also exchange rates and taxes, the net profit, PLN 574 million. So this is a good net profit, 45%. This profit margin makes our profitability much, much higher, 18% better in quarter 3.And year-over-year, over PLN 12 billion in sales here, 7% year-over-year, but the costs are lower by 6%. [Technical Difficulty] operating profit by PLN 1.6 billion and profitability, 13%. And net profit over PLN [indiscernible] million and PLN 1.127 billion. So this year, we focused on improving profitability of our business, and this was done.One more information about the working capital. If you remember that our goal as for the working capital was to make it lower, so to cover our inventories. This is happening in this period as well. Inventories are much higher, and we have the negative working capital. So the turnover of inventories is much faster than the settlement as for the receivables. Our cash flow over PLN 1 [ billion ] from operating cash flow. This is already the third quarter when we generate PLN 1 billion additional operating capital.And then level of debt. We do not have any debt. Looking at this, we have the slide, we have this net debt, but this is with IFRS assumptions, so the rentals plus the cash that we have in the financial market. So the net cash, that would be around PLN 300 million. So there is no debt as for the company. So we are on a safe side. Therefore, we can invest our own resources. These investments are just new stores. On this lower diagram, you can see over PLN 300 million investments. The majority of these went to stores. Now we completed also the cycle of investments in our logistics centers. So we don't have more of these investments apart from stores, so investments like in the IT systems, additional software, for example. I believe that next year, [Technical Difficulty] of our CapEx, I will go into that in a moment, will be directed to the development of our stores.So summing up, the net 9 months of this year, we are very happy about the results. We have the 7% increase for 3 quarters. We can see that offline is developing much, much faster than online. We maintain our cost-saving policy. Operating margins, we thought [Technical Difficulty], it's 13%. So this goal has been achieved. We have very good operating cash flow, PLN 3 billion. As for the operating cash flows, this is very good. So there is a safe debt level.Now the plans for the future. We have a good outlook for the fourth quarter. This is the middle of this quarter, so good months, November and half of December. Last year, December was not so great. We can see for this time, a double-digit increase in online sales. We can see double digits in offline sales, both distribution channels sell very well. Of course, the weather was a factor here, weather is helping us. When it's more cold, clients buy winter clothes more willingly. On Black Friday, that was during the Black Week, that was really good result. Year-over-year, we had double digits. And our target is to maintain the cost discipline. We also have the Christmas, new Christmas collections, bought at more favorable rates. So it should be much, much better year-over-year. And our target is to increase EBIT and improve our profitability.Our Christmas and Carnival collections, these are mainly new accessories, Christmas accessories in Sinsay and Reserved, but also other brands, they also have some surprises for our customers. We also have additional elements in our collections in terms of clothing, party and Christmas. From Reserved, this is the classic tailoring with bold cuts dedicated to Western markets because we can see the potential over there as for these more bold collections.So for this year, our target was to improve the profitability. We thought offline is going to grow much, much better than online. We wanted PLN 18 billion as for the group revenues. The third quarter was not so great in terms of sales. So we can see that we might not reach this goal, but we should exceed PLN 17 billion significantly. So we still have this goal in mind that gross profit should be 51%, 52%. As for the savings, PLN 1.2 billion. That was done in the first 6 months. We can see it's much more than we planned. So this is very positive. And EBIT margin, we planned it over 10%. Now we can see it's around 13%. So we would like to maintain this goal till the end of the year. CapEx, it's still maintained as we planned at PLN 1.1 billion, more of these for our stores. We want to maintain this conservative policy, so very conservative structure for the capital, lower level of [ debt ] and normalization of the working capital.Some information about our plans for the next quarters. We want to strengthen the Reserved brand, opening stores in Milan and in London and our stores in Berlin show that Western European clients expect better quality, more classic and more bold collections. To make it happen, to have these collections and provide them for the Western European countries, we focused on the design office in Barcelona that was launched in Sinsay. So it's going to be taken over by the Reserved brand. We won't have, over there, only the designers, but also a group of people who are purchasers.So the Spanish market, especially Barcelona, are very interesting. We have a lot of offices -- design offices over there and sales offices established by the producers, by factories from Europe and from Asia. And for us, they offer ready-made solutions and designs that can be purchased and launched very quickly. So one of the elements of our strategy for strengthening the Reserved brand is the design and purchasing office in Barcelona to launch the collections very, very fast on the Western market.Another important element is the purchasing office in Istanbul. We've been purchasing a lot of collection in Istanbul, 30% of Reserved women's collection come from Turkey. So we would like to have much better qualities and in terms of time also offer for the clients. That's why the purchasing office in Istanbul.Sinsay and the dynamic development, we can see the potential of growth for the next 3 to 5 years. That's why we believe that the strategy for Sinsay development comprise of 3 elements: opening new stores, apps and support for online stores, but also maintaining attractive prices. So we can see significant potential when we decrease our expectations. As for the size of Sinsay stores, up to 600 square [ meters ], we observed much, much better potential. So we would like to open 300 stores every year for the next 3 years. So we say about 1,000 -- around 1,000 stores in 3 years. We are going to develop them in smaller towns in retail parks. We know that the rental terms are more favorable than renting floor space in big shopping centers. That's why the cost for Sinsay is going to be much lower, attractive prices, so big volumes contracting ahead in terms of our collection, looking for alternative plans or other markets and online activity, value for money.And this is one of our features, e-commerce offer. This is -- we are going to focus on these apps on other markets. We also introduced the loyalty program we want to develop for the future. This is dedicated only for Sinsay brand. And you also know that in e-commerce or online stores, the assortment is much, much broader than in offline. That's why we encourage our customers to buy online. So this is the strategy for Sinsay brand. We want to double the number of stores within the next 3 years.The costs are also an important element to have them on a lower level. As for the cost control and managing the costs, we need algorithms. What we were saying, RFID technology, so this electronic tag in our 4 brands: Reserved, Cropp, House and Mohito, it's there, but we wanted to develop this technology and expand it in our stores. In Sinsay, we have other projects related to different packaging or streamlining in packaging. As for shipping goods to stores, we want to save with large volumes so that the logistics is more efficient and cost effective. We streamlined these logistics between plants and logistics center, but we want to -- need another element. So the delivery from logistics centers to the stores to have it at more effective level and cost managing. So various algorithms or historic patterns, we've been analyzing. They are going to help us with improving our margins and have more streamlined discounts later on.As for the medium term, we would like to grow about 15%. As for Sinsay brand, next year, our goal is 20%. So we want this growth from this year to maintain for the next year. We will have 2 million square meters of floor space at the end of '23-'24. For the next year -- for the next 2 years, '25 and '26, we would like to have the increase of 15% year-over-year.This year, our motto was to improve the profitability of business. This was done. For the future, we focus on the increased growth in revenues. We can't forget lower -- about the lower cost, but we want this growth in revenue to be much, much higher in both distribution channels. Of course, we are going to open new stores, increase our floor space, but like-for-likes is also an element here, we plan for the next year. We plan double-digit growth in sales online. So we believe that the group revenue will reach at least PLN 20 billion next year. Gross margin should be much better year-over-year. We would like to have guidance for 52%, 53% as for gross profit margin and maintaining the cost effectiveness, we calculated with cost to sales rate, we would like to keep it below 40%. We speed up with increasing the floor space from 15% to 20%. So we needed to increase CapEx for next year PLN 1.3 billion, PLN 1.2 billion investments for new stores. And we would like to also maintain a safe debt level, so significant financial security.Looking at our cash flow for the next year and financial forecast, we won't need additional resources from bonds. We talked about it last year. But for now, we keep it on the side, as for the bonds. And we would like next year to buy out the bonds that we issued in 2019. So no corporate bonds rollover plans for now.Of course, we had numerous challenges, but also a number of opportunities that offer themselves, the change of government in Poland and what we've heard over the last days. So even a greater level of social transfers announced in the future, so increases of [ salaries ] for teachers and across the whole budgetary spheres and social programs, including 800+. It means that in Poland, the consumption demand should increase. We should be among the beneficiaries of the situation.But that's not only about Poland. Of course, we are very happy about that, and we certainly hope that it will increase our sales. But looking at the new markets, we are also very hopeful about new stores in the markets mentioned, also increasing the dynamics of sales online. That is what should contribute to greater revenues. We will keep on developing applications, and we hope zloty be strong against other currencies. We will keep on increasing the efficiency of our business and increasing our profit.We also see the risks. As usual, they are related to uncertainty in the economy, the inflation pressure, the increase in minimum wage across many markets means an increase of costs for us. So that is something that we will have to face somehow cost-wise. And increase in competition is something that we see in the value for money. We are not only talking about offline stores, but also online new competitors keep emerging. These are usually Chinese entities. And the biggest risk now that the entire world is facing and all the businesses are facing across all the industries is, of course, geopolitical instability and the ever new emerging black swans.But generally speaking, ladies and gentlemen, we are optimistic about the coming year. And the very last slide, just informing you about a few changes. We would like to notify you about -- remind you really about one of the Board members, Jacek Kujawa decided to leave the company. Mr. Mikolaj Wezdecki was appointed to take his capacity. He's responsible for IT and e-commerce now. There was changes in the Supervisory Board recently. Now we have 2 women: Jagoda Piechocka, who is the daughter of Mr. Marek Piechocki, the Founder of the company; and Alicja Milinska, who for many years has been the Chief Accountant in the company. So we got 2 ladies in our 5-member Supervisory Board.In terms of shareholders, you remember that we had 2 main founders and their foundation is the biggest shareholders in our company. So the Semper Simul Foundation that is related to the Piechocki family and also the Sky Foundation, that is the one related to Mr. Lubianiec family. Mr. Lubianiec's Foundation has reduced its share in the structure of LPP, below 5% at the AGM. So they will be the only big shareholder about which we will keep informing, it is going to be Semper Simul Foundation belonging to the Piechocki family.That's all for me. Thank you very much for your attention. Let me just repeat that we are happy about the 3 quarters. We are optimistic about the coming year and further growth opportunities for our company. It appears that the sentiment is slightly to improve. The demand is likely to grow. So for the time being, we are very optimistic about 2024.And now I would like to ask you for your questions and we'll eagerly take all of them.

[Magdalena Kopaczewska, executive]

Let us start the first question. Looking at the 2024 guidance relating the profitability, we can get the impression that you are expecting quite an erosion of profitability compared to the second quarter -- second half of 2023. The profitability of EBIT in the second half can reach 15%, 15.5%. And the next guidance envisages EBIT profitability across the entire year at the level of minimum 12% or 13%. The bigger challenge is to improve the gross margin or lack of big expansion of SG&A in 2024?

[Przemyslaw Lutkiewicz, executive]

Right. Guidance for 2024, now that we haven't closed 2024, we want to be very careful about our guidance for next year. But with time, as we see good financial results matching our expectations or even exceeding them, which we very much wish for, then certainly, we will be adjusting our guidance. The 13% for the time being of profitability at the level of EBIT, and this is something we would like to stick to this year. But we will see how January goes, that is always related to sales and introduce a certain uncertainty. So let's leave this security margin concerning our guidance for the coming year. We will see the first quarter and what it brings. We would love to increase it upwards. We wouldn't like to do it downwards. So we are conservative with our plans for the coming year.

[Magdalena Kopaczewska, executive]

Another question. Would it be possible to order goods from a few brands: Reserved, Mohito -- for example, Reserved, Mohito and buying them in one basket and getting them in one parcel?

[Przemyslaw Lutkiewicz, executive]

Yes. So there is this concept that very often we are asked about like having 4 brands in our portfolio, wouldn't we be ready to create a single marketplace, a place where you can buy all the brands to get them in a single parcel, right, using a single click button. No, for the time being, there are no plans like that. Each of the brands is going to work independently. That's our strategy as of today. So it will not be possible to buy everything in one basket. We stick to the division. That's our strategy, both offline and online. Many players that, again, have a few brands in their portfolio, behave similarly, and we would like to stick to this market trend as well. We wouldn't like to get into multi-platform but rather rely on branding strategy.

[Magdalena Kopaczewska, executive]

What's the level of Sinsay profitability? What does it look like in terms of the division into brands?

[Przemyslaw Lutkiewicz, executive]

Oh, a very detailed question. Let me address it step by step. The EBIT margin that you asked about for Sinsay is very closely comparable to other brands. There are 2, 3 points of difference depending on the period, so not much. The offline channel is, of course, much more profitable than online one. Here in online, we are talking about the fact that the difference is of 3 to 4 percentage points beneficial for offline stores. So generally, at the level of business, Sinsay, without fully loaded costs from back office, but only at the level of costs. And so pure e-commerce business is somewhat less profitable, but the incremental growth, on the other hand, is higher; meaning the growth of business on Sinsay part means that the total margin of the group is not diluted because we've got the economies of scale here. And it matters that new stores and new clients in e-commerce are more profitable than the average in the entire group. So generally speaking, Sinsay contributes positively to the entire profitability of our business.

[Magdalena Kopaczewska, executive]

The question about commercial Sundays. So how would you compare the sales in the weeks, including those Sundays, where you can't purchase compared to other weeks?

[Przemyslaw Lutkiewicz, executive]

We enjoy high levels of sales in those Sundays, particularly the last one was record breaking one. Clearly, there is demand for Sundays to be open for commerce. The previous ones were not as good as in the past because previously, Saturday used to be the best day and then Friday or Sunday. So Sunday ranked rather high in terms of sales level. After the ban was introduced and only some Sundays were available, then we had sales at the level of, say, Tuesday, Wednesday, so the average day of the working week. But we can still see that these are good levels of sales. So the last Sunday was really super, but I think that's exceptional because it's December. But still, the Sundays that are commercial are profitable for us. So it makes sense to open stores to run our activity. That's definitely positive for us.

[Magdalena Kopaczewska, executive]

Lower cost of sourcing, are they likely to reduce the first prices in Sinsay next year? Does the company believe that competitors may take a similar decision whose prices dictate the lowest levels for the entire market?

[Przemyslaw Lutkiewicz, executive]

Looking at the policy of Sinsay in terms of pricing, you might remember that at the beginning of the year, we believed we could increase price levels, but then it turned out that the customers did not accept it. So in half 2, we had to return to lower prices. We can see that owing to that, the sales are growing dynamically in the second half of the year. And the Sinsay brand is performing really well. That's a signal for us that Sinsay has to stick to low prices, looking at the competitors, it has to match its prices against the backdrop of the other companies in the value-for-money segment. That's a priority for us. On the other hand, we have managed to negotiate lower prices of purchasing in the factories. Is it possible to keep on reducing these prices? I don't think so. I think that the levels are satisfying now. If we manage to stick to them, that's already good. So we are very happy about the prices and the price margins.

[Magdalena Kopaczewska, executive]

Can there be significant write-offs in Q4?

[Przemyslaw Lutkiewicz, executive]

No, I don't think so. As of today, we cannot see this risk.

[Magdalena Kopaczewska, executive]

Q4, are you observing the higher dynamics of increased online or offline? Are the dynamics in offline higher than 20%?

[Przemyslaw Lutkiewicz, executive]

That's interesting because the dynamics are comparable, ranging between 15% and 20-some-percent in both the distribution channels depending on the day. I'd say that, yes, we are expecting those double-digit increases in Q4 in online. But I believe somewhat faster growth in offline, like-for-like in Sinsay that we see over last weeks, double-digit, and they really make the offline activity to display this trend. Probably offline will keep on performing better than online.

[Magdalena Kopaczewska, executive]

Can you explain exactly what LPP means by a double-digit growth and several percent growth? How would you differentiate that?

[Przemyslaw Lutkiewicz, executive]

The double-digit growth means 20%-plus and several percent is between 10% and 20%.

[Magdalena Kopaczewska, executive]

Another question concerns Spain. Will you also open stores in Spain?

[Przemyslaw Lutkiewicz, executive]

We are not planning to do that as for now.

[Magdalena Kopaczewska, executive]

Opening [ Shein ] center, time-to-market, is it something that is noticeable in the market and has it increased confidence in the online channel for Sinsay?

[Przemyslaw Lutkiewicz, executive]

We can see the [ Shein ] activity, we've been observing it for some time now. For over a year, we have seen that this brand is performing well and is quite a serious competitor that has to be taken into account and value for money online segment. Now opening their magazine, their warehouse, will change anything. Well, even their entry itself without the last step was considerable. So I don't expect any major change to happen after the first shock. The [ Shein ] customers have gotten used to the brand. Will the faster deliveries change anything? I don't think that they will contribute much to changing of the situation.

[Magdalena Kopaczewska, executive]

There are differences in preferences of customers across different markets. Will the product offer differ in Western countries compared to the remaining market?

[Przemyslaw Lutkiewicz, executive]

The product offer differs even across different stores in a single location. So our algorithms adjust the assortment collection to the demand of the customers we can see is purchasing at a given location. So we build on historic patterns of the shopping habits. So we differentiate between particular stores across different cities, but also across different countries. We can see that London stores or a store in Munich or Milan have somewhat different customers, bolder fashion. They are more demanding. They are ready to pay more. But also they purchase those more costly collections. So certainly, we will keep on differentiating, but we've been doing that for some time now. And that's related to our recent activities connected with opening a design office in Barcelona, one in Istanbul and also inspiring our designers and purchasers and them working in the fashion capital such as Soho or New York.

[Magdalena Kopaczewska, executive]

Next question. To what conclusions do you get when thinking about next year's dividend [ this year ]?

[Przemyslaw Lutkiewicz, executive]

Well, we've already announced last year, our dividend policy. We would like to pay between 50% and 70% of profit of the group as a dividend. Last period, that was 70% of the profit. So we will follow the pattern also next, so around 70%.

[Magdalena Kopaczewska, executive]

Another question concerning, again, Reserved and Sinsay. Looking at the A/W collection, we can see that Reserved has moved some of the upwards, making space for Sinsay in terms of the range of percentage points. Is that right? The price difference between Reserved and Zara is something that is evolving or is it stable?

[Przemyslaw Lutkiewicz, executive]

Yes, we are trying to keep the price range between Reserved and Sinsay -- well, we're trying to preserve this difference. We want the price point difference to be visible. Of course, Reserved as the more fashion brand is going to be the one that will be more expensive than Sinsay. So yes, we are purposely differentiating it. And we would like to stick to this differentiation that Reserved should be perceived as more -- or the prices in Reserved should be lower than in Zara, again we try to have our attitude constant. That works if the clients, consumers can see that this is good because that's what we wanted them to do.

[Magdalena Kopaczewska, executive]

How do you assess the conditions in terms of dollar foreign exchange, the cost of freight, the cost of work?

[Przemyslaw Lutkiewicz, executive]

Well, actually, starting from the second half, we have noticed that the collections that we've introduced are bought at a lower foreign exchange rate of dollar. Freight for half a year now has been at a similarly low level, even prior COVID level. And the purchases of collections for autumn this year were done at lower unit prices expressed in dollar. And here, it appears that -- right, so at the beginning of this year, it was easier to negotiate lower purchase prices with factories because we can see that many western companies actually withheld their purchases or they reduced their orders. Today, we can see that it is somewhat different already. So the demand and supply have been balanced. So the factories are not that eager to offer further discounts. I think that sticking to the levels that we have negotiated is going to be favorable. Anyhow, that means that the margin you could see rebounding in Q3 will be preserved. So if the situation is stable as it is in terms of dollar prices of purchasing and right price, freight prices that I can say are record low, then we, as a company, will be satisfied absolutely.

[Magdalena Kopaczewska, executive]

And a question about the differences in profitability online when Poland is compared to abroad. Further expansion online should be really supportive for profitability?

[Przemyslaw Lutkiewicz, executive]

Well, you are referring here probably to transportation costs, I mean, the shipping of parcels. Of course, the further we transfer something, we ship something abroad or apparel in e-commerce, the more expensive it is. But these differences are not that significant. I'd say that comparing Poland and abroad, these differences are perhaps 1, 2 percentage points in terms of profitability. So here, what is more important for our e-commerce profitability is performance marketing-related costs than the costs for logistics. The more we sell abroad, the greater volumes we have abroad, the lower the cost per unit. So of course, there are differences, but there are -- it's more expensive abroad when compared to Poland, but that does not impact the profitability of our e-commerce business, that's not more than 2 percentage points.

[Magdalena Kopaczewska, executive]

Thank you very much. That was the last question today. We would like to thank you for all the questions. Since this is our last meeting this year, we would like to thank you very much for all the meetings we've had over the year. We would like to wish you a merry and a healthy Christmas. May you have a good new year, may it be peaceful, but also interesting. Thank you very much. All the best for Christmas and see you.[Statements in English on this transcript were spoken by an interpreter present on the live call.]