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Edited Transcript of LIVEPOLC-1.MX earnings conference call or presentation 24-Jul-19 2:00pm GMT

Q2 2019 El Puerto de Liverpool SAB de CV Earnings Call

México, D.F. Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of El Puerto de Liverpool SAB de CV earnings conference call or presentation Wednesday, July 24, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jose Antonio Diego

El Puerto de Liverpool, S.A.B. de C.V. - IR Officer

* Laurence Pepping

El Puerto de Liverpool, S.A.B. de C.V. - General Manager of Suburbia & Digital Strategy

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Conference Call Participants

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* Antonio Hernández Vélez Leija

Barclays Bank PLC, Research Division - Research Analyst

* Julie Chariell

Bloomberg Intelligence - Senior Analyst

* Luis Rodrigo Willard Alonso

GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst

* Miguel Felipe Ulloa Suárez

BBVA Corporate and Investment Bank, Research Division - Team Leader & Chief Analyst

* Nicole Zaragoza;GBM

* Robert Erick Ford Aguilar

BofA Merrill Lynch, Research Division - MD in Equity Research

* Rodrigo Echagaray

Scotiabank Global Banking and Markets, Research Division - Analyst

* Thiago A. Bortoluci

Goldman Sachs Group Inc., Research Division - Research Analyst

* Ulises Argote Bolio

JP Morgan Chase & Co, Research Division - Analyst

* Valentín III Mendoza Balderas

Casa de Bolsa Banorte Ixe, S.A. de C.V., Research Division - Research Analyst

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Presentation

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Operator [1]

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Welcome to El Puerto de Liverpool's conference call. With us are Mr. Jose Antonio Diego, Treasury and IR Directory; Mr. Laurence Pepping, Suburbia General Manager and Digital Strategy; and Mr. Enrique Grinan, Investor Relations Officer. Our speakers will present the results for the second quarter 2019. At the end of the presentation, we will have a Q&A session.

As a reminder, all forward-looking statements on this call are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions discussed today. This may be due to a variety of factors including the risks outlined in El Puerto de Liverpool's most recent annual report.

At this time, I will now turn the conference over to Mr. Jose Antonio Diego. Please go ahead.

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Jose Antonio Diego, El Puerto de Liverpool, S.A.B. de C.V. - IR Officer [2]

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Good morning to all, and welcome to Liverpool's Q2 2019 Conference Call. As usual, we will go through a quick recap of our key achievements and financial results during the second quarter of 2019 and then we will open the floor for Q&A.

As we mentioned last quarter, we are now reporting our financial results under IFRS 16. Our 2019 financial results discussed with this call are expressed on an apples-to-apples basis versus 2018 to make things easier. Thus, 2019 figures are without IFRS 16. At the end of our remarks, we will take you through the effects of these new reporting standard in our 2019 financial statements.

First of all, we would like to talk about the consumer environment in general. We continue to see relatively good figures for most of the indicators associated with the health of the consumer. Inflation for the past 12 months is at 3.95%, and although we have seen some volatility around the peso price, it is similar to last year's. In general terms, contractual salaries have increased 6.1% in the semester and remittances has continued to grow at 6.5% in peso terms.

As a result of the aforementioned, the consumer confidence index remains on the high side. Total retail sales grew 8.7% during the quarter and 8.1% during the year. Liverpool Q2 same-store sales were up 7.1% prior for the first semester of the year they did sold by 6.1%. Average ticket went up by 5.1% while traffic contributed with 1 additional point. Our perspective same-store sales for ANTAD Department Stores during the second quarter is increased 6.9% and for the apparel and shoe categories, they did sold by 4.8%.

During the second quarter, we have some calendar effects, such as a late Easter, changes in our promotionals, especially Mother's and Father's Day sales, and additional Sunday during the Hot Sale promotion back in May and last year's soccer World Cup in the comparison base.

We reduced the number of weekend days on which we hosted our special sales because of the transformation of Fábricas de Francia. The net effect was 6 days of sales compared to 8 last year.

Due to retail gross margin was 31.9% or 40 basis points below last year and 31.1% or 80 basis points below last year on a cumulative basis. It is relevant to mention that a significant chunk of these reductions are coming out of the mix of sales while white goods and computing was the 2 biggest categories growing in the quarter, sports and baby clothing and apparel went down significantly, sports essentially because of the effect of the World Cup last year.

Joining us today, we have Mr. Laurence Pepping, Suburbia General Manager and Digital Strategy who is going to discuss Suburbia and Omnichannel results. Laurence, please go ahead.

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Laurence Pepping, El Puerto de Liverpool, S.A.B. de C.V. - General Manager of Suburbia & Digital Strategy [3]

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Thank you, Jose Antonio, and good morning to everyone. Regarding Liverpool's Omnichannel strategy, Internet reported strong sales growth of 30.2% during the first 6 months of the year. More importantly, digital sales, which include Internet and the extended catalog, now accounts for a total of 8.3% of company sales. Omnichannel customers, those that shop through digital channels and the physical stores, grew 13% versus the previous quarter and now account for 10% of our total customer base. This is particularly relevant as these customers are more loyal and shop more frequently, accounting for about 25% of total Liverpool sales.

Liverpool Pocket, our most relevant mobile channel, grew by 104%. Downloads increased by 67% versus last year.

During the quarter, we continued to support recent payments option improvements, specifically customers campaign cash in over 8,000 convenient in pharmacy stores nationwide. Cash payments increased by 104% in the quarter, albeit from a small base last year.

In addition, we continued to enhance our market base offering that now accounts for 5% of our total assortment. This extended assortment is offered to our customers in store as sales associates are enabled with handheld devices. Initial customer response is positive as 10% of marketplace sales are done in store, 45% of marketplace orders are collected in store and 98% of returns are also done in store.

In terms of logistics, during the quarter, we redefined, standardized and simplified our logistics processes. Such improvements allowed us to fulfill 50% more orders from the quarter, while reducing lead times by 14%.

Fulfillment costs were also reduced through real-time inventory management and utilization of our nationwide store network. Specifically, we were able to assign 85% of all orders to stores closer to our customers location for faster and lower cost fulfillment.

Now moving on to Suburbia. Same-store sales for Suburbia grew in the quarter 5%, coming out of a high double-digit comparison base last year. For the first half of the year, same-store sales grew 2.5%, while total sales grew by 8.3%.

We are pleased with progress in several strategic fronts. In terms of geographic expansion, we opened one new store, converted 5 stores from the Fábricas de Francia format and closed 2 nonprofitable stores. Thus, we have reached a total of 137 stores by the end of the quarter.

We expect to continue rapid expansion to end the year with a total of 160 stores. To note for the 8 Fábricas de Francia stores that have already been converted, initial results are positive. We are seeing higher gross margin, lower SG&A and higher overall profitability. We expect to convert an additional 6 stores during the following quarter.

Regarding Suburbia credit card launched 1 year ago, we have achieved total base over 460,000 cardholders and credit portfolio of MXN 800 million. The Suburbia credit card accounted for 15.7% of sales during the quarter and 21% if we include Liverpool's credit cards.

And finally, after our 7,6 weeks project and possibly our most significant achievement for the quarter and having 120 participants and an investment of over MXN 400 million, last July 2, we implemented SAP S/4HANA. This was a retail solution for Suburbia and is SAP's world's biggest upgrade. A new version of retail, logistics, promotions, income control applications with more than 5,000 business processes were implemented without any meaningful impact to our customers. This wraps up Suburbia's in technology platform transformation. To note, Suburbia is now using the moving average cost method by which moving item information is available, such as profitability for SKUs or real-time floor level availability and pricing.

Now Jose Antonio, back to you.

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Jose Antonio Diego, El Puerto de Liverpool, S.A.B. de C.V. - IR Officer [4]

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Thank you, Laurence. Now moving onto other business highlights. Credit card income rose by 19.9% in Q2 and by 20.9% in the first half of the year. The credit card portfolio did sold by 6.9% year-on-year as we continue to record NPLs under control.

Risk management in origination and collections have resulted in a 5.6% over 90 days NPLs by the end of the quarter compared to 5.7% last year. That is 10 basis point improvement. It is also worth noting that the Liverpool cards continue to gain market share as a mean of payment. Now 46.2% of sales are done through our credit cards. That is an increase of 50 bps throughout the year.

Revenues from our shopping centers decreased 4.6% during the quarter and increased 0.3% in the year. It is important to note that in Q2 2018, we recognized MXN 141 million as business interruption claims paid related to our Galerías Coapa mall. Excluding such effect, revenues was kept grown by 12.9% during Q2 and 9.2% during the semester. Occupancy levels remained sound at around 95%. Total consolidated revenues increased by 9.3% during Q2 and 9% on a cumulative basis. Consolidated gross margin was flat vis-à-vis Q2 2018 and 20 bps lower on the semester due to the above-mentioned reduction in our retail gross margin, which was partially offset by a better mix of credit and real estate.

Operating expenses excluding depreciation increased by 10.8% during the quarter and 9.3% during the year. The most relevant factors increasing SG&A are new provisions for bad credits, the increase in minimum wages and its implication on other salary ranges, higher electricity rates, new store openings and higher IT expenses. Q2 EBITDA margin was 14.6%. That is a reduction of 30 bps versus last year, while for the first part of the year, it was also a reduction of 30 bps for a margin of 13.7%. It is also important to mention that without the effect of the business interruption claims that we have in 2018, EBITDA margin would have been flat in the quarter -- I mean, in the first 3 months of the year, sorry.

Net profit increased 14.6% during Q2 and 11.6% on the first semester, reflecting the above-mentioned operating performance and lower net interest expense. Our CapEx during the period was MXN 3.9 billion. That's an increase of 12% compared to last year. A total of 23 Fábricas de Francia stores have already been successfully transformed into Liverpool stores. Such stores are recording sales growth at around 20%, and we expect to finish such conversion during Q3 2019.

We closed the quarter with cash on hand of MXN 10.9 billion. Our net debt-to-EBITDA by the end of the quarter was MXN 17.4 billion, that is 0.84x last 12 months EBITDA. Importantly, we do not have any debt maturities in 2019.

The next one is in May 2020 when MXN 3 billion comes in. All of our debt in peso denominated and at fixed rates.

Last May 24, we paid the first part of the dividend approved during our Annual Shareholders Meeting. That was for an amount of MXN 886 million, and the second part is due next October.

Finally, regarding the effects of IFRS in our financial statements. During Q2, our net profit is reduced in MXN 70 million or 2.2%. For the first half of the year, such impact accounts for MXN 146 million or 3.5% of net profit. For the effects on our balance sheet, we posted a leasing liability of MXN 11.4 billion, and on the asset side, we carry usage right for MXN 11.3 billion.

Thank you very much for your attention. And now we are going to move on to the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Mr. Antonio Hernández from Barclays.

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Antonio Hernández Vélez Leija, Barclays Bank PLC, Research Division - Research Analyst [2]

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Could you please provide a traffic and ticket breakdown for your same-store sales at both Liverpool and Suburbia format?

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Jose Antonio Diego, El Puerto de Liverpool, S.A.B. de C.V. - IR Officer [3]

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Thank you, Antonio. Well, for Liverpool, as we mentioned, pretty much out of the 7.1 growth that we've had during the semester, just about 5.1 was related to average ticket while 1% was related to prices. Now for Suburbia, at this point of time, we are not providing such information. We trust that, eventually, throughout the year, we should be able to do so, maybe by 3Q, we can have that number available.

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Operator [4]

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Our next question is from Mr. Robert Ford from Bank of America.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division - MD in Equity Research [5]

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As indicated in the press release you made quite a bit of disclosure with respect to e-commerce and in there, there is a line that says, I think, 5% de la oferta comercial, right, is now marketplace and I was wondering if I understood that correctly? It sounds like it's 5% of your catalog now apparently is now coming from the marketplace. And I just want to make sure that, that's what you mean and not revenue? And then you talked a little bit about how you expect that marketplace to evolve in terms of its importance and consumer service levels.

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Laurence Pepping, El Puerto de Liverpool, S.A.B. de C.V. - General Manager of Suburbia & Digital Strategy [6]

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Robert, thank you for your questions, this is Laurence. Yes. Your interpretation is correct. 5% of the total catalog assortment is now coming through external vendors that make up the marketplace. This, of course, is changing rapidly, and we expect to have a more meaningful offer over the next few months. Now we are being so much cautious because we would like to have our offerings be curated by our merchandisers, such that the offer is the best possible offer that we can make to our customers. So for the time being I don't think it will be the best majority of the catalog, but over time, we'll be making some adjustments.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division - MD in Equity Research [7]

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And Laurence, are you using data from zero search results on the site to onboard balance by your merchandisers and buyers? And is that the real bottleneck? Or is it also difficult to just onboard and make sure that they can comply with the service levels and the value propositions you want to provide to your clients?

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Laurence Pepping, El Puerto de Liverpool, S.A.B. de C.V. - General Manager of Suburbia & Digital Strategy [8]

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We are looking at the information from searches that have bake-in results and that is feeding our merchants plans to secure broader assortment. But your answer will be right. We have to be very cautious to bring in the right partners that can provide the right service levels.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division - MD in Equity Research [9]

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And how do you see the scaling over time?

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Laurence Pepping, El Puerto de Liverpool, S.A.B. de C.V. - General Manager of Suburbia & Digital Strategy [10]

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I think it's too soon to say, but our team is very energized and optimistic, and they are reporting exponential growth, whatever that means, but I think you will be seeing significant growth in the catalog over the next 12 months.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division - MD in Equity Research [11]

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Okay. Great. And then one last question, if I may, and that is on e-commerce. I assume that's primarily the line from affiliates, right. There was a huge increase in the second quarter despite what I would have expect would be a very challenging environment in several of the Central American marketplaces. Could you expand as to why there is a that big increase in e-commerce from affiliates and if it's recurring in nature?

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Jose Antonio Diego, El Puerto de Liverpool, S.A.B. de C.V. - IR Officer [12]

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Bob, this is Jose Antonio. Yes, the increase was actually in general was the result of our tax provisions being long in many countries. In Central America, we pay a minimum amount of tax because of the composition of taxes in those places. So pretty much the provision was longer than the tax that we have to pay. We haven't really seen a recovery so far in many of those countries. So pretty much it's a tax effect. We will always see that recurring.

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Operator [13]

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Our next question is from Mr. Ulises Argote from JPMorgan.

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Ulises Argote Bolio, JP Morgan Chase & Co, Research Division - Analyst [14]

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Some questions here from our side related to NPLs. The first one, we saw a strong promotional season, strong Hot Sale campaign, et cetera, during the second quarter. Can you comment on the use of credit around the promotional seasons and any color that you can provide on NPL formation for July? And here; the second one is just a quick follow-up on this -- to get some color on the increase on provisions, right. You mentioned there in the release that a big portion of it around 80% is related to Suburbia credit, but just to understand here, can you provide color on how the NPLs are looking for the Suburbia credit cards and are you using any kind of different provision in metrics?

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Jose Antonio Diego, El Puerto de Liverpool, S.A.B. de C.V. - IR Officer [15]

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Ulises, thank you. Well, in your terms as we mentioned in the call, we have seen a good performance of the market share of our cards, we are doing just about 46.2% of Liverpool sales with Liverpool cards. And with Suburbia, we are doing 15.7% solely with suburbia, including Liverpool's 21%. So those numbers are definitely, I would say that are significant highlight of the quarter being incremental. Now in general terms, we believe that NPLs should continue to be on the level that we are intending to keep them by year-end which is essentially the same as last year's. So we gained actually 10 basis points during the quarter. It's also worth noting that we have a challenging second half of the year in front of our sales. As you might recall, last year essentially we started to see a recovery in NPLs by the second half of the year. So eventually, we do have a difficult comparison based ahead of ourselves. And regarding Suburbia, at this point of time we are not breaking down the NPL. What we can tell you that it's below our expectations. So at this point of time, we don’t really have any concerns. As we have mentioned, we are reserving, and as we also mentioned in our press release, a significant portion of the new reserves are due to Suburbia's credit loan book and that's pretty much the explanation of our new product being launched, is only 1-year-old. But we can tell you that at this point of time it's below the range that we were supposed to have.

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Ulises Argote Bolio, JP Morgan Chase & Co, Research Division - Analyst [16]

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Got it. And then just there -- like the provision in metrics, are they the same as you use for the Liverpool portfolio or is there any specific differences between them that make you provision further?

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Jose Antonio Diego, El Puerto de Liverpool, S.A.B. de C.V. - IR Officer [17]

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No, the provision is exactly the same. What changes significantly is the origination and collection process. They have a different analysis risk models. It's not necessarily the same as Liverpool's being a very different products, but the way that we provisioned is exactly the same as Liverpool's.

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Operator [18]

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Our next question is from Mr. Rodrigo Echagaray from Scotiabank.

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Rodrigo Echagaray, Scotiabank Global Banking and Markets, Research Division - Analyst [19]

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Just a quick update on the Arco Norte project. I mean, it seems like a lot of the shipping is being done either through Click & Collect and/or through the store. How will the Arco's Norte -- what kind of role will this project have given these trends on the delivery?

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Jose Antonio Diego, El Puerto de Liverpool, S.A.B. de C.V. - IR Officer [20]

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Rodrigo, thank you for your question. Well, first of all, I would like to say that during the quarter we actually started building formally of the projects and it is due eventually by 2Q 2021. Now the first leg of Arco Norte DC is going to be essentially related to big-ticket items. So we are going to essentially expand the one that we currently have and we are going to move the current facility into this new one. So as you mentioned, we are doing a lot of the fulfillment directly from our stores, just about 85% of the stores are fulfilling the orders -- I mean, 85% of the orders having fulfilled from stores. And eventually, the capacity that we are going to gain is essentially on warehousing and eventually on this preliminary merchandise into lockout on regional basis. Now that's just the first leg. The second leg is still not that clear at this point of time.

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Rodrigo Echagaray, Scotiabank Global Banking and Markets, Research Division - Analyst [21]

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Great. And then a follow-up on the sale trends. Any update on post-quarter sales trends? Have you guys witnessed any weakness? Or do you continue to see a fairly healthy consumer?

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Jose Antonio Diego, El Puerto de Liverpool, S.A.B. de C.V. - IR Officer [22]

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I think that is a little early to tell. In general terms, I think that we are really focused into inventory management and taking good care of lockdowns and also to take good care of SG&A. And eventually, sales are pretty much in the same track that we have been seeing so far. But we are really keeping our eyes open at any possible changes in the metrics of consumers and how they are performing.

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Rodrigo Echagaray, Scotiabank Global Banking and Markets, Research Division - Analyst [23]

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And, I guess, that's obviously in the context of group of some reported negative same-store sales for the quarter. So any thoughts on where you guys are seeing the biggest market share gains, whether from regional perspective, format perfective or categories, any thoughts on that?

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Jose Antonio Diego, El Puerto de Liverpool, S.A.B. de C.V. - IR Officer [24]

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Well, in general terms, the category winners throughout the quarter, as I mentioned earlier in the call, pretty much are related to the white goods and computers, and that sell a lot related to the Francia el Ventas Nocturna that we hosted for Mother's and Father's Day during the quarter and also the Hot Sale. So those 2 categories are definitely growing ahead of ANTAD. And as a whole, as we mentioned earlier, we are growing slightly ahead of ANTAD. So in general terms, the categories that also are growing a little ahead in our sales our men's wear. So we are keeping attention in the ones that we are not doing that good such as sporting goods and baby apparel and clothing. But asides to that, I can tell you that pretty much we are outgrowing ANTAD slightly so it's difficult to tell who we are taking market share away from.

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Operator [25]

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Our next question is from Ms. Nicole Zaragoza from GBM.

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Nicole Zaragoza;GBM, [26]

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I have 2 questions regarding Omnichannel strategies. I was wondering if you could give us a little more color in what -- in which has been the main driver of online sales, whether if it's increased payment options such as cash payments as you mentioned or if it's the lower delivery time and where should your strategy should be focused? The second question is how Suburbia's online platform performing year-to-date? If I'm not mistaken, last earnings call you mentioned Suburbia's online strategy wasn't performing as you expected.

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Jose Antonio Diego, El Puerto de Liverpool, S.A.B. de C.V. - IR Officer [27]

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Thank you, Nicole. Regarding your first question regarding what is driving sales -- digital sales? I would say there are 2 key drivers and the first one has to do with people adopting Liverpool Pocket. This consumer application has been improved dramatically over the past few years and it makes it very easy for people to find what they're looking for and quickly checkout. So the adoption of this app in the cell phones, I think, is clearly driving the growth. Secondly, through CRM, we are embarking significant activities to convert people from single-channel purchases, mainly from physical stores to become Omnichannel customers. And as I mentioned earlier, just for the quarter we saw a 13% increase in Omnichannel customers and these are customers that because they adopt the digital channels are more loyal and shop more frequently. Having said that, I would also add that the growth in cash payment is not contributing significantly for the quarter, although we expect that to continue to grow and become stronger growth engine over the next few months. Now regarding Suburbia, as you may know we launched the suburbia.com website last October 2, and we've seen a lot of traffic, we're seeing over million customers visit the website and it is quickly becoming one key driver for store traffic. Sales on the other hand are still very small relative to Liverpool. And I think that's normally if we look at the Liverpool trend over the past 6 months, Dotcom sales were the smallest store sales for the chain. The same is happening with Suburbia. Today, the digital store ranks are the smallest store in the chain. But we're seeing that change quickly. So I think it's too soon to say. As we extend the catalog, add more payment options, I think we'll be able to see growth comparable to what we've been able to deliver on liverpool.com.

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Operator [28]

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Our next question is from Mr. Luis Willard from GBM.

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Luis Rodrigo Willard Alonso, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [29]

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Just wanted to discuss a little bit Laurence about the synergies and the Suburbia format that you have seen so far and how do you see those synergies in terms of commercial offering and the credit, of course, that we have seen growing. How far are you from where you want to be in this format specifically in Suburbia?

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Laurence Pepping, El Puerto de Liverpool, S.A.B. de C.V. - General Manager of Suburbia & Digital Strategy [30]

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Luis, thank you for your question. I'm very pleased with the synergies that we've been able to tap with the Liverpool group. Let me give you just a few examples. First of all, technology. Suburbia had a legacy of systems across the enterprise that really worked just very basic functions and those would now allow us to expand rapidly and control hundreds of stores that we aim to open over the next few years. The implementation of SAP was done mostly through the expertise at Liverpool. With dedicated teams that Liverpool provided us, we were able to implement this in a little over 70 weeks, which I understand is an all-time record for SAP worldwide. Another example is, of course, e-commerce. Suburbia has always wanted to have an e-commerce platform and they were unable to launch it. And in just a few months, through the technical expertise and the assets that Liverpool has, we were able to launch last October the website. And we continuously leverage the CRM capabilities as well as all of the new product launches that Liverpool will be planning to do over the next few months. Another example is geographic expansion. This is an area where Liverpool has broad expertise and really all of the work is done by the Liverpool team. They are able to scout nationwide for facilities, negotiate terms, construct the new sites and deliver the stores ready to open to the Suburbia team. And this allowing us to open up over 30 stores this year alone, something that the company had never ever been able to do. One last meaningful example is how we're expanding from being mostly an apparel store to being truly a department store, adding new categories. We have been able to tap into the Liverpool merchandising team for hardline, electronics, kitchen appliances, big-ticket items, and we're starting to build our own merchandising team. And we're already seeing some impact in terms of sales. The highest sales categories have to do today with hardline put for Suburbia for the quarter. So those are just 4 examples how we're leveraging the Liverpool acquisition.

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Luis Rodrigo Willard Alonso, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [31]

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Okay. So at this point, just say that you're testing, incorporating new lines in Suburbia? Or are you -- have you decided to make it a full department store?

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Laurence Pepping, El Puerto de Liverpool, S.A.B. de C.V. - General Manager of Suburbia & Digital Strategy [32]

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Great question. We have decided to become a full department store, and the transformation of Fábricas de Francia to Suburbia has forced us to rapidly build up the merchandising team. We didn't really have a merchandising team for electronics, kitchen appliances, hardlines in general. And today, we have a fully dedicated team that's learning from the Liverpool team and leveraging negotiation with our vendors. Some of the stores, the larger stores we have been able to include a relatively acceptable assortment, televisions, microwave ovens, computers, just general merchandise in general and they're doing particularly well, of course, because we're leveraging our credit programs. These are just a few stores that probably maybe 50 stores that have an acceptable range of assortment for general merchandise. We're also including the general merchandise assortment in the web page, and we're seeing that take off nicely. As you know, e-commerce, at least for Liverpool over the past 6 years, was initially concentrated in general merchandise, appliances, electronics, computers, cell phones. So adding that to our catalog, I think will boost sales of e-commerce over the next month.

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Operator [33]

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Our next question is from Ms. Julie Chariell from Bloomberg Intelligence.

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Julie Chariell, Bloomberg Intelligence - Senior Analyst [34]

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I'm wondering about plans for special sales events in the third quarter. Now you had a few events in the second quarter that seemed to help same-store sales a bit in sus Ventas Nocturna since Hot Sale in May. Can you talk about what events are being planned in the third quarter? And then related to that, a bit of the gross margin pressure, I imagine came from this increased promotional activity, so what's the outlook on gross margin is? Where we expect them to stay sort of where they are with a higher promotional activity, maybe a little less inflation and is there a mix component so what's happening with gross margin?

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Jose Antonio Diego, El Puerto de Liverpool, S.A.B. de C.V. - IR Officer [35]

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Thank you, Julie. Well, generally speaking, the calendar for promotions during 3Q pretty much look the same as last year's. Right now, as we speak, we are in the summer sale and eventually the comparison basis a little bit more similar to 2018. So we don’t really have any much as regarding the Ventas Nocturna. So it should be a little bit more transparent in 4Q. Now in terms of what do we see gross margin evolving, as I mentioned before we are trying to be very, very selective of promotions. We don’t really are introducing new one. And generally speaking, we are trying to be as disciplined as we can in inventory management. Also right now that we have the new version of SAP in Suburbia as Laurence was mentioning, we definitely are going to have a little bit more tracking information for Suburbia's inventory and that is also going to help in profitability of gross margin in Suburbia. So going forward, we should have pretty much between quarters, as you know 4Q is definitely our most relevant one. So the goal is to get to the same point of 2018. So eventually, we are going to get there.

We have also had a number of effects regarding mix. In general terms, as I was mentioning before, this particular 2Q white goods and computers were the 2 categories that grew the most. And as you know, margins on such categories are not necessarily the best ones. And in general terms, as we move forward in the year, we are definitely going to continue to have such effects. But I think that the comparison basis a little bit more similar in general. So the contribution of credits and real estate eventually are going to have tougher comps in the second half of the year. So eventually, the overall gross margin should remain in the flattish to 10 bps minus/plus area.

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Operator [36]

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(Operator Instructions) Our next question is from Mr. Thiago Bortoluci from Goldman Sachs.

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Thiago A. Bortoluci, Goldman Sachs Group Inc., Research Division - Research Analyst [37]

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Actually I have 2 follow-ups. One, you mentioned the outlook for same-store sales growth and gross margins. I would just like to explore a little bit more on the outlook for SG&A. Would you think it is possible to keep flattish year-on-year going forward in the context of our investments in e-commerce and the conversion business, one? And two, you mentioned during the call, I just want to make sure about the right number that the Fábricas de Francia as a new converted stores are experiencing 20% sales growth, is this right? And two, what is incremental investment and CapEx that is required by the conversion plan going forward?

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Jose Antonio Diego, El Puerto de Liverpool, S.A.B. de C.V. - IR Officer [38]

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Thank you very much. Well, first of all, in terms of the Fábricas de Francia conversion program, firstly we do not need any additional reserves given that we already provided those back in 2018. So we don't really expect any significant hits or any hit whatsoever on a SG&A coming from that particular front. Now on the other hand, yes, you heard correctly, just about 20% is the number that we have seen so far in the stores convert from Fábricas into Liverpool. That's the performance that we are getting. And in general terms, we are going to keep you updated on such information. Now also it is worth noting that as Laurence was mentioning the Suburbia stores that are coming from Fábricas de Francia stores are also gaining some profitability given that they have a slimmer SG&A portion of the business rather to Liverpool's. So eventually, that is also going to be helpful. Now regarding SG&A and how it is going to behave in the rest of the year, well, certainly, it's one of our key initiatives to have a strict control over SG&A. The growth that we have seen so far is within range, it's actually below our target. And generally speaking, I would say that we still have a tough comp in second half of the year, particularly from credits on which we started to build reserve a little bit more aggressively. So eventually, we hope to keep SG&A under control, but the comp is a challenging one coming second half of the year. So essentially, as we mentioned, some of the new store openings and higher IT expenses tend to increase by the end of the year since most of our stores are back-loaded. Both eventually, since we have already provisioned all of the expenses related to the conversion of Fábricas de Francia, that shouldn't be a big issue.

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Operator [39]

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Our next question is from Mr. Miguel Ulloa from BBVA.

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Miguel Felipe Ulloa Suárez, BBVA Corporate and Investment Bank, Research Division - Team Leader & Chief Analyst [40]

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Just a quick follow-up regarding Suburbia. With the decisions made recently, could you help us quantify the aspect of impact in margins in the business in the short- and medium-term?

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Jose Antonio Diego, El Puerto de Liverpool, S.A.B. de C.V. - IR Officer [41]

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Miguel, let me see if I got your question correctly. You're asking about the commercial margin for Suburbia for the quarter?

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Miguel Felipe Ulloa Suárez, BBVA Corporate and Investment Bank, Research Division - Team Leader & Chief Analyst [42]

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No, for the medium-term with the decisions to turn it more in department stores with the savings and synergies you are finding with all the conversion what kind of projects should we expect in the medium-term?

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Jose Antonio Diego, El Puerto de Liverpool, S.A.B. de C.V. - IR Officer [43]

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Well, we have launched a very detailed program to improve margins over the next 2 years for softlines that is where our focus is. And just to give you one example. Last month, we had the merchants placed the purchase order for imports for spring/summer of next year, and we took a conscious decision to reduce the days of strategic vendors from 31 to 20. By doing so, we're concentrating our buys with less merchants, gaining more scale and negotiating better costs to bring better value to our customers and widening the profit margin. This is a very conscious effort that we have already done for all of our imports and we began doing this same effort for our local vendors. This is not a quick win. We see this as a strengthening of strategic partners, and we do intend to deliver better profit margins in softlines over the next 2 years.

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Operator [44]

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Our next question is from Mr. Valentín Mendoza from Banorte.

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Valentín III Mendoza Balderas, Casa de Bolsa Banorte Ixe, S.A. de C.V., Research Division - Research Analyst [45]

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Just have a couple of them. The first one has to do with the decline that you reported on your GLA for your shopping centers on a quarterly basis. I just wanted to know the reason on that. And the second one is if you could share with us a little bit of your stats on this over performance you are seeing on the Liverpool that just converted from Fábricas de Francia a 20% growth you mentioned in sales growth. I was wondering if you could give us a sense, is it has to do with the traffic increase or with the ticket?

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Jose Antonio Diego, El Puerto de Liverpool, S.A.B. de C.V. - IR Officer [46]

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Thank you for your questions Valentín. Well, first of all, in terms of GLA, we did an adjustment related to how we were actually accounting for those shopping centers. So in the days of previous years, we actually had the consideration of all of the GLA as ours. So that's something that we needed to clarify because it wasn't right and the ones that you're seeing right now essentially is our proportion of GLA on those shopping centers on which we do not have a majority stake. So pretty much that's the explanation of the number changing.

Now in regards of Fábricas de Francia.

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Laurence Pepping, El Puerto de Liverpool, S.A.B. de C.V. - General Manager of Suburbia & Digital Strategy [47]

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Yes. Let me try to respond to that question from Valentín. The increase in sales that we're seeing from the conversion essentially reflects the change in banner from Fábricas de Francia to Liverpool. The merchandising, the pricing is essentially the same. The employee, the salespeople are the same salespeople. All we really did was changed the banner, and this really reflects the strength of the Liverpool brand relative to the Fábricas de Francia brand. This is something that we expected. We have done a number of conversions in the past and in every single conversion, we had seen an increase in sales just from the change in banner.

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Valentín III Mendoza Balderas, Casa de Bolsa Banorte Ixe, S.A. de C.V., Research Division - Research Analyst [48]

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My question has to do more with the, let's say, the breakdown between traffic or is it ticket. What is the thing that main driver behind this increase? I understand that it has to do with the strong brand that Liverpool implies.

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Jose Antonio Diego, El Puerto de Liverpool, S.A.B. de C.V. - IR Officer [49]

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Yes. It's mostly attributable to more traffic. The Liverpool brand is more attractive, more appealing. We spent significantly more in advertising and building the brand in Liverpool and Fábricas and that drives traffic flow. So we are seeing an increase in traffic from same stores.

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Operator [50]

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That was the last question. I will now hand over to Mr. Jose Antonio Diego for final comments.

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Jose Antonio Diego, El Puerto de Liverpool, S.A.B. de C.V. - IR Officer [51]

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Well, thank you very much for joining us today and see you next quarter. Thank you. Have a great day.

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Operator [52]

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(Operator Instructions) This conference is over. Thank you.