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Edited Transcript of AMAR3.SA earnings conference call or presentation 8-Nov-19 6:00pm GMT

Q3 2019 Marisa Lojas SA Earnings Call

Sao Paulo Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Marisa Lojas SA earnings conference call or presentation Friday, November 8, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adalberto Pereira Dos Santos

Marisa Lojas S.A. - CFO, VP of Finance, Administration & IR and Member of Board of Executive Officers

* Marcelo Ribeiro Pimentel

Marisa Lojas S.A. - CEO & COO

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Conference Call Participants

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* Felipe Cassimiro de Freitas

HSBC, Research Division - Analyst of LatAm Retail

* Richard M. Cathcart

Banco Bradesco BBI S.A., Research Division - LatAm Retailers Senior Analyst

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Presentation

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Operator [1]

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Good afternoon, thank you for standing by. Welcome to the conference call of Marisa to announce the results of the third quarter of 2019. This conference call being recorded and will be available at Marisa's Investor Relations website. (Operator Instructions)

Before continuing, we would like to clarify that statements made during this conference call relative to Marisa's business prospects, operational and financial projections and goals are beliefs and assumptions of the company's management and are based on information currently available. Forward-looking statements are not guarantee of performance. They involve risks, uncertainties and assumptions because they [relate to future] events and therefore, depend on circumstances that may or may not occur.

Investors should understand that general economic conditions, industry conditions and other operational factors may affect the future performance of Marisa and may lead to results that will be materially different from those expressed in such forward-looking statements.

Now we would like to turn the conference over to Mr. Adalberto Pereira Dos Santos, Investor Relations Officer and Vice President of Finance and Administration.

Good afternoon, Mr. Pereira Dos Santos, you may start.

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Adalberto Pereira Dos Santos, Marisa Lojas S.A. - CFO, VP of Finance, Administration & IR and Member of Board of Executive Officers [2]

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Good afternoon to everyone. Welcome to the conference call of Marisa Lojas S.A. We have here Marcelo Pimentel; Marco Muraro, our Commercial VP; and Alberto Kohn, Operations VP. And we will be talking about the company's numbers for the third quarter of 2019.

As you could see in our press release, the overall results is still a little bit [work], considering our aspirations. But when we look in detail, they confirm once again how [right] in our strategy and in the -- for the recovery of our numbers. So overall, the numbers that we will be showing to you in a minute when we [exclude the -- choose] nonrecurring events, especially tax recovery, our top line is once again positive for the third quarter in a row. Gross margin because of our commercial strategy, it's still very much pressured, but less and less so. Our G&A is quite efficient as we have said for a few quarters, and we also have quite resilient results in our financial services.

And in summary, all [pillars] are absolutely in line with everything that has been designed by management for the operation in a very consistent manner.

Now going to our presentation. On Slide #2, you can see the net revenue on the top chart, with 1.9%. On the chart at the bottom, you can see our same-store sales of 5.6%. We haven't had such a positive sequence in 4 years almost, and this is especially relevant. This has been driven by a higher flow in our stores. We see more and more flow and less in this pricing strategy. So this combines the marketing and commercial strategy. The conversion has also increased something that we saw in recent months. E-commerce, once again, has provided a very significant contribution of 62.5% in the period. So we can see an acceleration in the recovery of sales, not just in our stores, but also in e-commerce. And as I said, e-commerce in the last month of 3Q September had a growth in excess of 100%.

Now on Slide #3, you can see our gross margin and -- gross profit rather than margin. So you see quite -- 42.7% in our margin with a gradual recovery that I had mentioned before, driven especially, and I think this is very important, by greater uncertainties of our collections. So higher margins drive the company's gross profit that has recorded a growth reaching BRL 235.1 million in a period. So once again, SG&A ex IFRS 16 will increase 1.4%, and we closed 3 units in a period. If we exclude the nonrecurring events in 3Q '19, the number for SG&A would have been negative.

Now moving to Slide #5, you can see adjusted EBITDA and margins, still negative with a gain with BRL 13.2 million year-on-year, once again, in [essence of our -- such as] the same-store sales and the positive evolution of SG&A.

On Slide #6, you can see the contribution margin in our financial services, so [a low] share of Marisa's Cards and the contribution of our co-branded card with Itau. And here, you can see our private label has a higher share of our cards in recent months. Also, exceptional expenses in collection because of the outsourcing of some customer service, something very specific, a one-off effect in more -- recently both in private label and loans. We -- there have been events that will drive positively the following periods.

Now on Slide #7, once again, financial services EBITDA. So we cannot fail to mention the positive impact of co-branded of 9.6% year-on-year and the lower results from private labels and personal loans, and costs and expenses increased 3.5% year-on-year.

On Slide #8, you can see the evolution of our private label. So on the chart, you can see a drop of 9.7% loss -- from 9.7% to 7.3% in terms of losses on the portfolio. And then you can see EFFICC in the chart below. So here, we have the percentage of losses on the portfolio. This does not mean deterioration, but rather a change in our profile. Recently, we kept our portfolio [and declared] our own credit card and [now being] processed by partner banks. And after January, everything that is under the securities will be traded or managed by our own. Now we consider them as a loss and it used to be 180 days, now we have 360 days. And so this is just a management issue without any more significant impact on our numbers.

On Slide #9, you can see the evolution of our personal loan portfolio with a growth of 6.6% of loss under portfolio to 8.4%, which is related to the change. And then this is accounted as net losses, as collection expenses. And the portfolio is quite healthy, both in terms of losses on the portfolio on the chart at the top. And EFFICC is also at a quite reasonable level.

Now on Slide #10, you can see the consolidated results of the company, financial and retail. So there is a gradual recovery of retail operations, which is small but significant. So it went from minus 2.4, just with a gradual recovery of our retail operation, once again, and the adjusted EBITDA consolidated numbers with a growth of BRL 9.1 million.

Now on Slide 11, consolidated results first 9 months on a recurring basis, our retail EBITDA presented a recovery of BRL 57.7 million, with BRL 89.9 million. The costs are under control. The expenses are under control. And so we had a change of 5.6% in sales and in margin, in EBITDA and multiply it by 4, with a quite positive leverage of the company, and this is what we expect, and we hope to see it more frequently in the future.

On Slide #12, you can see the evolution of our consolidated net result's also negative, but with a net income that increased by BRL 42.5 million, reflecting productivity gains and efficiency of the retail operation. So it's very important. We have a recovery in fiscal terms and also of the retail operation. And this number is -- although negative, but it indicates a significant trend. When we see year-to-date numbers, the recovery is even more significant. We had BRL 261 million negative, and now we are only BRL 132 million negative, thereby showing a recovery of our operations, especially in terms of top line.

Now on Slide 14, cash flow. You can see operational -- the generation of operating cash, impacted by the greater yield of working capital derived from higher sales in a period. We also have a one-off event, which was more advanced in inventory levels for the Black Friday.

And these were my remarks, and we are now available to answer any questions you may have. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Rich from Banco Bradesco.

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Richard M. Cathcart, Banco Bradesco BBI S.A., Research Division - LatAm Retailers Senior Analyst [2]

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My question is about same-store sales in Q3. How much of same-store sales was driven by flow because I know this is one of your focuses? And secondly, could you give us some color on how same-store sales is doing in October?

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Adalberto Pereira Dos Santos, Marisa Lojas S.A. - CFO, VP of Finance, Administration & IR and Member of Board of Executive Officers [3]

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Thank you, Richard, for your questions. As part of our strategy as we have been saying during the whole year, so we invested in margins to bring flow and lead people to experiment or to try. In the third quarter, we can see that purchases comes from higher flow and also items per ticket, not just -- not only do we have more customers coming to our stores, but they're also buying more once they come to our stores. And this has confirmed the strategy that set -- we set ourselves to do earlier this year.

You also asked a question about October, and I could say that we had -- that we are very confident that Q4 is -- will consolidate the strategy in which the growth in sales takes place with a much smaller need of using our margin for that. So now we are experiencing much healthier sales in the last quarter.

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Marcelo Ribeiro Pimentel, Marisa Lojas S.A. - CEO & COO [4]

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And if you -- if I may, something slightly different. E-commerce has been performing very well, both in this quarter and in previous quarter, and Adalberto mentioned that in September.

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Richard M. Cathcart, Banco Bradesco BBI S.A., Research Division - LatAm Retailers Senior Analyst [5]

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Could you tell us more about the profitability of this channel? Is it different from the average and also on EBITDA as there is so much growth? Maybe you -- we -- you were starting to see some leverage on this channel?

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Adalberto Pereira Dos Santos, Marisa Lojas S.A. - CFO, VP of Finance, Administration & IR and Member of Board of Executive Officers [6]

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Yes. And the growth margin for the channel distribution margin is much better. And when we see the shape, especially with the modeling, we have the full quarter, I believe, and part of our access comes from the new model click and pick up. And so this is the result of the [omni] project for our 115 stores. So this provides very good margins for us. This is not only health, e-commerce, but it's also providing new flows to our stores. And about 30% of all our customers that are buying according to the click-and-pick-up model, they are customers with new -- are new to Marisa. And the main advantage is the, what we call, repurchase. So we are working at close -- levels that are very close to 20% in the model or in the modality click and pick up.

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Operator [7]

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Now our next question from Felipe Cassimiro from HSBC. (Operator Instructions) Our next question comes from Felipe from HSBC.

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Felipe Cassimiro de Freitas, HSBC, Research Division - Analyst of LatAm Retail [8]

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Can you hear me now?

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Adalberto Pereira Dos Santos, Marisa Lojas S.A. - CFO, VP of Finance, Administration & IR and Member of Board of Executive Officers [9]

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Yes, we can hear you.

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Felipe Cassimiro de Freitas, HSBC, Research Division - Analyst of LatAm Retail [10]

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I would like you to tell me a bit more about the acceleration in e-commerce. What [are the factors attributed] to the growth? I was speaking of the click and collect. And the second question is about the pilot project of store, street stores. There were 10 stores that must go with a different dynamic. So I would like to know, to hear more about this project, the speed of sales and what you expect in terms of rollout of this new initiative.

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Adalberto Pereira Dos Santos, Marisa Lojas S.A. - CFO, VP of Finance, Administration & IR and Member of Board of Executive Officers [11]

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Good afternoon, Felipe. First, talking about e-commerce, I don't know how much you've heard, but certainly, the expansion of our click and collect strategy has evolved greatly. It's also worth mentioning that in the last quarter, we started our first operation of marketplace in MercadoLibre. We started with 100 items. We already have 1,000 SKUs. And as to click and collect reinforcing the numbers today, more than 30% of all e-commerce sales is done in the modality, click and collect. And our plan is the past in the second quarter with 10 stores, with 115 stores, so we have -- we are seeing very good compliance also in our store or street stores. So in Rio de Janeiro, in Minas Gerais, we are selling in the digital channel, but also bringing flow into our stores complementing sales, where we are already very close to 20%. So certainly, the omnichannel is -- starts to have a significant share for the development of e-commerce.

Now talking about our street stores. So we are monitoring very closely this project, and we share with you our numbers. This started with 10 stores. And then there was a pilot for 30 stores. And then right now, what we were able to see was a growth in sales compared to the growth in cards, in the share of the cards and profitability of these stores. So bearing that in mind, we decided to expand this project, not -- no longer is a project, but as a rollout. And our intention is to end in the fourth quarter with 93 stores and to finish the rollout in the first half of 2020.

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Operator [12]

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(Operator Instructions) We have another question from Felipe from HSBC.

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Felipe Cassimiro de Freitas, HSBC, Research Division - Analyst of LatAm Retail [13]

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I would like to take the opportunity to ask about gross margin. Pimentel said that you're now going through a new phase with less investment in pricing with better margins. So from now on, what should we expect for the gross margin? A gradual recovery in Q4? Can you already recover the gross margin to close the year with not such a big drop?

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Adalberto Pereira Dos Santos, Marisa Lojas S.A. - CFO, VP of Finance, Administration & IR and Member of Board of Executive Officers [14]

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Felipe, I think that what we've been experiencing is that we are living in full the strategy that we've set for ourselves earlier this year. So we announced this to the market, we communicated it to the market, and we were hoping to recover our gross margin in the second half of the year and to continue to increase our sales. So we took the first step in the third quarter. And now our expectation and something that we have already been seeing in October and November, it's the confirmation that women that came and bought with us in the first half of the year. And they experimented the new proposal, trend more quality and affordable prices, and now they're coming back in the second half of the year, much more confident in what Marisa is doing for them. So our expectation for the last quarter of the year is an advance both in sales and in gross margin. Our expectations, however -- and we are very respectful, and we know that this is important for our customers, so any improvement will be gradual. And we want to make sure that every quarter we may report better and better numbers.

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Operator [15]

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(Operator Instructions) We now close our questions-and-answers session. So I would like to give the floor back to Mr. Pimentel for his closing remarks. Please, Mr. Pimentel.

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Marcelo Ribeiro Pimentel, Marisa Lojas S.A. - CEO & COO [16]

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I would like to thank everyone for your participation in our conference call. And we enforce our focus on our strategy over more fashion, more trends, more quality in our projects at very good value for your money. And we want to close the year with the recovery in sales and margins for our shareholders.

So I would like to close by inviting you all to come to our stores in the last quarter of the year and to try our new collection. Have a good afternoon.

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Operator [17]

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The conference call of Marisa has now ended. We thank you all for your participation, and have a good day. Thank you very much.

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