LPP SA

WSE:LPP

Earnings Call Transcript 2019-Q4

[Przemyslaw Lutkiewicz, executive]

Welcome to the fourth quarter of 2019 results, and I'd like to start with a bit of information. This is an additional conference. It's as you know, full results covering the fourth quarter of 2019 and the whole 2019, the 13 months longer year will be discussed in the end of April. But before that conference, we might in the end of November and discussed the past 3 quarters. And we believe that a long break between those 2 conferences would be just too long. That's why we decided to meet with you in order to show you the fourth quarter according to the calendar.

And for the past 20 years, yes, our company has been presenting results according to the calendar months, but this year, we will be changing the whole system. We will add one more month but we just wanted you to close down your 12-month model, 2019 models and start 2020 models, peacefully and easily. But I need to remind you that our audit will cover 13 months of 2019 and January 2020.

At the same time, we would like to show you preliminary results of the longer quarter covering October to January, end of January 2020 but that will happen later on. Let's start with our presentation.

What happened in 2019 in the fourth quarter? Well, it was a very interesting, very challenging year, but a very good year for us. We've developed our company.

We introduced our stores in new markets, and we had nearly 1,800 stores operating in 25 countries, and the floor space grew by 14% and LFL were higher by almost 4% year-on-year. This is the part of our traditional business, stationary business, but we also have e-commerce.

We had over 50% growth sales, e-commerce in the past year, and we cover 30 countries with our e-commerce. And if we combine off-line and online business, we reached PLN 9 billion worth of sales, and that means 13% of growth of group revenues.

Now let's take a look at the map. And the green part are the countries with our traditional stores and online stores. And the grey color means just the traditional off-line stores and the blue countries are the e-commerce countries.

So in total, 39 countries are covered by our stores. So nearly the whole Europe has been covered by LPP.

In October, we've opened a new store in Helsinki, Finland, 5 stores.

Each brand opened its own store. This is yet another market in Europe, and the first one that is generating profits since the very beginning. So this is a huge advantage, a huge benefit for us that after December, well, Finland is generating profits.

So this is a good message. On the table, you can see that we've opened 20 new stores during the past years, but crop hit brands, while these are the brands where we optimize our stores, so small drops. And since is actually doing very, very well, plus 50 stores last year, not just in Poland but in South -- in Central and Eastern Europe.

At the bottom, you can see outlet stores, 20 stores led less. What is happening right now? Well, we've been using those stores to sell off the previous collections.

But because our management inventory and collection management is so much better? Well, the multi brand outlets are not really that important for us anymore because we don't really have that much inventory to sell-off. And we will leave a few outlets in Russia, Ukraine and in Poland in the end, this is the plan. But the fact that we are doing so well in managing our inventories, our collections, well, this is translated into those outlets that are not that important anymore. LFLs, we have growth here by 4%. And as you can see, we had growth in recent quarters. And well, we continued this trend.

Out of 5 brands, 4 brands had growth of LFLs during the fourth quarter. And geographically, the biggest growth were recorded on those markets what the investment is the highest Russia, Ukraine. And German market is actually performing quite well. And LFSs are quite good. So the business is operating -- is doing better.

And then online sales, on the right side. And I need to remind you that our goal was to actually go above PLN 1 billion of sales, and this goal has been [Audio Gap] sales of the group growth by brands, and all brands had growth, recorded growth, bigger or smaller, but growth.

And the last brand that was problematic a little bit was the Mohito brand. But right now, you can see that the floor a grew by 4%, and the sales by 8%.

So you can see that this brand is performing so much better, and we believe that this will be continued throughout 2020.

We also can see 68% growth in Sensata -- and in sns, and you can see that very well on the graph. This is our second best brand following the Reserved.

And now sales by revenue, so Poland, 5% growth, and the biggest growth is outside of Poland.

So EU, except Poland, CIS, 26% growth. And we also have a very fast growth of floor space here. And Poland is just 22.5% of growth.

So we have a very saturated market. And well, the growth is happening mostly outside of Poland and the total sales by quarters.

As you can see that we had 15% growth in the first quarter, 8% in the second one.

And then the third and the fourth, again, around 15% growth. This is due -- mostly due to positive LFLs and growth of floor space and online sales.

So that is performing very well. In the table, you can see revenues per square meter and the retail sales, well, be can a small fall, but that does not apply to CIS countries.

And this is -- this is where the growth is happening, but we have some falls, but that's because we have bigger stores, bigger and bigger or stores. So the stores are bigger, but actually, they are performing better.

But if we add online and off line sales, and then we divided by the square meters, well, this is where we have growth.

And the margin seasonality, always the second and the fourth quarter are positive. That happened in the second quarter.

Well, the growth was a little bit smaller than last year, but that was actually connected with the exchange rate of U.S. dollar, we were buying our collections.

And we also have since a performing the way it performs and the costs. We are starting with our -- the cost of our own stores per square meters, and they are below [ PLN 200 ] in the fourth quarter and all elements, starting with the green rent and HR, gray and the rest, the remaining costs yellow are lower year-on-year.

So they are dropping by 4% year. When we actually add all the costs then we will have 240 -- PLN 294 per meter.

So this means that we have all costs under control. It's just PLN 2 higher than last year.

And income growth, the growth of revenues, 15%, costs, 15% growth.

Margin is lower by 1 percentage point, but operating profit is over 12% or almost PLN 495,000. And again, also, net profit is 20% year-on-year, sales growing 13%, revenues are growing

13%. Well, the costs are growing by 10% only. The operating profit is 16.3% and [ PLN 905 million ]. And because of the FX well, the profit is just minimally lower year-on-year.

Last year, it was PLN 505 million. And now this is PLN 495 million. And inventories well, they are growing nominally, nearly PLN 2.2 billion, but when we actually check the green line here per square meter, well, this is similar throughout the past 3 past quarters.

So this is PLN 1,776. Why did it speed up because while we bought new inventories for the new collection. Therefore, the acceleration in bringing the products from the suppliers, but we are also developing Sinsay brand, so more inventories and also e commerce development, they need inventories. They need products, they developed very fast. And when we actually divide all inventories per square meters.

And there are no actually physical meters in e-commerce. This is where are growing the inventories.

But as I've said, we are closing down the outlets and the way we sell of our collections and our close result in a situation that we have less and less inventories, old inventories.

And all inventories are actually sold normally and also working capital on the right, as you can see, higher inventories.

Well, that doesn't affect us because they are covered by the growing liabilities and receivables. And the cash cycle is really short.

Well, we have cash. We have net cash over PLN 700 million of cash in the end of the year.

So we are able to safe company who we have net cash, and we can develop safely and to fund future investments, logistical investments.

Last quarter, we spent PLN 200 million on different investments in stores, but also infrastructure. A year ago, it was PLN 300 million. So we are developing, we need more cash now.

Recapping the whole 2019, well, the revenues are growing, and the revenues are generated also broader. And faster developing channel is the e-commerce. The -- we are controlling the costs, and we don't have debt.

And we have cash net, so we are a safe company. And now a little bit about and the financial results of the longer quarter and covering October to January, growth. And we have growth and let compare apples with apples.

So on the left, we are showing you the fourth quarter 2018 plus January and again, the same in the middle, the middle role.

And so the growth of revenues are growing by 14%, gross profit on sales by 13%, and the gross profit margin was comparable. And the profit is over PLN 410 million.

And 13-month year, these are preliminary results because we are still working on that. Let's see the preliminary results.

The revenues grew by 13%. Costs are growing by 11% and the the profit is -- EBIT is growing by 16%. So this is a very positive, very good year for our company.

So record-setting profits and record-setting trade, and we are ready for the next year 2020.

And now the outlook. Well, we are stand by what we've said during the past year, so growth of floor pad by 16%. If we analyze the brands, those brands that perform very well in traditional stores, so crop, Sinsay and House. Well, they will be developed dynamically and Reserved and Mohito, those brands performed very well in e-commerce. We will focus on that we will move more to e-commerce. We will be observing our customers, how -- what is their response in our stores? Poland is growing by 4% by regions. But of course, European Union was performing very well.

And CIS countries, over 30% growth for last year. We will have new country, North Macedonia, and this will be [ a 26 ] market for our traditional stores.

And over PLN 1 billion will be spent on Capex, PLN 760 million Capex. But we will be actually opening rescind logistical center and PLN 200 million will be spent on that.

And well, the omnichannel. We don't believe in just e-commerce, and we believe that the traditional stores will also be operating very well. And we believe in the strategy where we combine all e-commerce and off-line stores in order to make it easier for our customers. That's why we need RFID technology.

So in excellent information about our commodities, but also combining all information about our commodities into 1 warehouse from the off-line warehouses and our traditional stores.

At this point of time, we have still separate warehouses. But with this technology, we will be able to combine those 2 type of warehouses into 1 huge warehouse in order to serve the customers better, in order to improve the management, the rotation of our inventories, and then in the end, decrease the level of inventories.

So new technologies, modern technologies and omnichannel, but also our contact with the customer, we would like to identify our customers with the help of the number of the bank card even if they use several different debit cards or credit cards, we will be able to identify our customers.

And further development of our logistics in all -- in order to improve our distribution channels, but also decreased the cost of distribution of the cost commodity reaching the customer. And as you know, that the cost of deliveries are the biggest cost in e-commerce.

And new centers, the ones that we opened in Romania and the one that will be opened in Slovakia this year, but we were actually able to decrease the cost of deliveries in order to improve the profitability.

Well, we will have the traditional stores, off-line stores functioning operating in the future.

We don't know how many of them will be the traditional stores, but we are sure that they will be operating. And the last slide, what are the chances that according to us?

Well, strong and positive growth in LFL. So with the help of positive of good collections that performed well with a good start.

RFID, a new implementation. We implemented it in Reserved. But this year, we will be focusing on Mohito and then other brands.

And then, again, also a strong focus on the logistics and distribution.

So we want to maintain the growth of revenues of the sales, though, throughout the year and then to perform well with regard to EBIT.

And that's all from me. I'd like to thank you so much for your attention.

Well, this presentation was really shorter because those matters such as the most important events will be discussed in April.

But I believe that the update covering the past 12 months will help you to understand what is happening in the company will help you to close down the financial models that worked for so long. So thank you again for your attention, and now let's start Q&A session.

[Unknown Analyst]

[indiscernible]

[Operator]

Unfortunately, I cannot hear the question. In the context of the spring collection, let me recapitulate the question for the translation purpose. So the question was, what was the situation in China? And how the China situation and the virus can affect us? What is the risk?

[Przemyslaw Lutkiewicz, executive]

Well, we don't see too many risks today, but those that can appear in a moment, the delays in deliveries of collections. As you know, before the Chinese New Year, many companies and their production, they pack the commodities and then ship it to Europe, for instance.

And this is what was happening. We have -- this is happening. 60% of our spring collection is in our warehouses, another 30% is being shipped and around 10%, well, this is -- there is -- this is where the risk is.

It is a very small risk, but I am worried about what will happen after the new year, Chinese New Year. And what will happen with the traveling around China, whether our employees will be able to go back to the factories and start working again. We are waiting for the information until February 10, the ban on traveling around China is in force, we don't know what will happen.

We have Plan B. Our plan B is to talk to our other suppliers in Bangladesh and Turkey. We know that they've got capacities. So we are starting to talk to them, whether they are able to take over the production, should the situation in China be continued. And then we know that this is possible of course, another element when it comes at the risk, whether we will be able to deliver the fabrics because, well, in addition to the sowing, China also supplies us with fabrics, but we are actually monitoring the situation.

We are monitoring the decisions that are being taken right now.

Right now, we don't see a much possibility for a risk, but if should the situation change, we will move with our production to manufacturing process to other countries.

[Unknown Analyst]

I have 2 questions. The first one relates to the revenues per square meters. And since the past 3 quarters, that was deteriorating, how much do you believe this is due to the maturity of the stores? Or maybe the expansion was too fast and now geography? The second question, looking at the structure that you have CIS performs very well, but Poland is actually performing much, much worse. And let's start with Sinsay.

[Marek Piechocki, executive]

Yes, that's true. Revenues per square meter in sense is dropping a little bit. But when we actually look at the history, the stores had [ 350 ] -- [ 400 square ] meters. And now our stores are over 1,000 meters big, and so twice as much, and they include also homeware, also children clothes and so on, and they perform very well.

Those stores are operating [Audio Gap] Our clients like to spend money there. And as compared to that, Polish market is not performing that well. So I'm very happy that we sell more outside of Poland, abroad because the Polish market, I don't know what are the reasons, but one of the reasons is probably the ban on sale, on trading on Sundays, is one of the reasons, but for some reason, Polish customers don't really want to spend the money even if they have the money.

And our customers say that they like to buy things online because now because of the ban on trading on Sundays, well, there are too many people in the shopping centers on Friday evening and in Saturdays.

But actually, the growth were 20%, 30%. And now this is 30%, definitely, the growth of e-commerce so this is actually accelerating.

There was another question. There is no question. Okay. Okay. Ladies and gentlemen, yes, there is one question, online question.

What is the reason for the growth of e-commerce? And how long does it to take? What is the time before the design to production? Well, why we have online growth? Because we've opened stores in new markets.

I'm not talking about Western Europe markets because they are actually having their momentum, they are actually starting to operate well. But last year, we've opened a store in Ukraine and it performs very well and 70% growth in e-commerce in Russia. So the Russian market is performing very well. And we have dynamic growth in Germany, we've -- why the growth? Well, it turns out that it's not so easy. It's not just copy and paste with online market. You can't really translate things from one to another country.

So first of all, we need to translate everything and actually adjust to the payments that are popular locally, depending on the country, something is actually popular, and we need to monitor that.

And each country can have their own favorite solution, and we need to actually adjust to it. But once we've learned about our customers in a given country, well, this is when and the e-commerce speeds up, starts to speed up.

So Ukraine, Russia and Germany, those markets are really performing very well, over 70% growth. But in other countries, we also have really good growth. And and the second question, how long does it take from design to production in the shortest cycle? If we need to do something very fast because it becomes fashionable very fast, it takes 1.5 to 2 months.

So from starting production net to delivery, 6, 7 months, we -- this is what we need for children collection -- collections and the mail collections. But the shortest one is 1.5 months, 2 months.

And the third question, since a brand, how many stores are in new format and bigger format? How do they perform as compared to the traditional format? Are you be -- going to expand the format?

So since a brand is being changed by us, the stores are bigger, and we have more to offer. Because in 2013, when we were starting the Sinsay brand, we wanted to sell collections for young girls.

But now we've expanded so we needed bigger stores. And often, those new stores are over 1,000 square meters, but they are also opened in smaller streets, in smaller towns on the streets or in shopping malls. And those that you can see in really nice shopping malls, they are there. They are performing fine, but they are smaller, but they are doing so much better in smaller towns.

And we also focus on Russia, for instance. So wherever they perform well, we try to be there. Is it a very -- is it the final new collection?

Is it the final approach? Well, we will probably be expanding our collections. Our team is working on it.

And we have a very young and dynamic team, and they are monitoring the situation. We are working on the situation.

Will we add mail collection? Yes, probably, we will add a mail collection. The longer I speak, the longer I answer, the more questions we have.

What are the KPIs in 2020? What is your expectation? So comparing the past month, so cost and growth, how does that work?

Well, these are the questions that I cannot give answer to you.

And that's why I actually haven't provided you with information about the margin because we don't know. We can't do it right now, we will -- we don't know about the USD exchange rate.

We always, as you know, we always fight to have the best possible growth, and we will be fighting to -- we will try our best to have the highest margin possible. What about the cost?

Well, we will try to continue monitoring the cost and controlling the costs in order to keep it at the lowest level.

And as you can see, the cost per meter is dropping, and we will continue that in 2020.

What is the own stores cost? So it's hard to say for me right now. But because the cost is dropping. And because the conditions for us are better and by -- better rental cost should fall down.

And the new question. Are you planning to join the Zalando platform? No, this is not our plan.

We want to, right now, invest in our e-commerce. We want to invest in our own resources, our own platform.

So this is what we are planning to do. So we will continue the classical current model.

And there is no other questions. So thank you so much, ladies and gentlemen, for your attention, and let's see each other in April.

This will be a conference recapitulating the whole 2019. So thank you so much, and see you in April.