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Edited Transcript of LLIS3.SA earnings conference call or presentation 15-Aug-19 2:30pm GMT

Q2 2019 Restoque Comercio e Confeccoes de Roupas SA Earnings Call

Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Restoque Comercio e Confeccoes de Roupas SA earnings conference call or presentation Thursday, August 15, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Livinston Martins Bauermeister

Restoque Comércio e Confecções de Roupas S.A. - CEO and Member of Board of Executive Officers

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Conference Call Participants

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* Marco Calvi

Itaú Corretora de Valores S.A., Research Division - Research Analyst

* Olivia B. Petronilho

JP Morgan Chase & Co, Research Division - Analyst

* Ruben Couto

Santander Investment Securities Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to Restoque's 2Q '19 Earnings Results Conference Call. Today, with us we have Mr. Livinston Bauermeister, CEO; and Mr. Rafael de Camargo, Investor Relations Officer. Today's live web and earnings release may be accessed through Restoque's website at www.restoque.com.br. And we should like to inform that this event is recorded. (Operator Instructions) There will be a simultaneous webcast that may be accessed through the company's website.

Before proceeding, we would like to mention that forward-looking statements are based on beliefs and assumptions of Restoque's management and on information currently available to the company. They involve risks and uncertainties because they relate to future events, and therefore, depend on circumstances that may or may not occur. Investors should understand that conditions related to the macroeconomic scenario, industry and others could also cause results to differ materially from those expressed in the statements.

Now I'll turn the conference over to Mr. Livinston Bauermeister. Mr. Bauermeister, you may begin your conference.

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Livinston Martins Bauermeister, Restoque Comércio e Confecções de Roupas S.A. - CEO and Member of Board of Executive Officers [2]

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Good morning. Most welcome to the earnings call of our second Q 2019. During the second Q, we continued our strategy to lay the foundation of our sustainable and long-term growth. This growth is based on strong technology upgrades, unification of our online and offline through the omnichannel, growth in our online sales, multi-brand sales growth and full sales growth in the retail channel. But this movement also impacts negatively our revenue in the short term, as you have seen in the first Q 2019.

On the second quarter, we had a decrease of BRL 180 million in sales mainly due to our strategies. First, to deliberately decrease our sales to third party online channels amounting to BRL 62.5 million; and second, the decrease in sales due to reduction in promotional sales in our own stores and accounting BRL 56.2 million. Our expectation throughout this year is to compensate and offset this difference with the sales growth in our online channel, omnichannel, and also integrating physical and online sales stores.

It's important to mention that online sales grew 17.7% in the quarter, reaching over 31.7% positive in May and June, with omnichannel representing 34.8% and 65.1% of the sales in these months. Now this July, when all brands kept full omnichannel operations throughout the months, the growth of the online channel reached 130.2%.

Our expectations were also to offset throughout 2019 the decrease in our re-marked sales in retail and also wholesale. Sales in multibrand offline customers reached growth of 19.4% in the second Q, with a greater engagement and trust of the multibrand customers of our brick-and-mortar stores.

And when we disclosed the first Q sales, we decided to concentrate all online sales in our owned omnichannel. And aiming to favor our channels with greater margin, we decided to decrease in the second Q '19 the sales volumes of repriced sales -- in resales. You have been following this movement with us for several quarters.

Despite the sales volumes in Le Lis Blanc was slower than in the second Q 2018, both sales improved significantly in the use of items through these sales. Dudalina kept a 39% volume of items lower, decreasing the assortment and preserving the volume of bestseller piece items, which will not be on sale. This also was relevant in Le Lis Blanc because they have 36% less items in -- on sales with better use of their items. This you can check in our website.

We're also very successful in the second Q 2019 to implement the operation of omnichannel, enabling the integration of all of our stores and improving the e-commerce channel and sales in other stores, increasing the possibility of conversion of e-commerce sales and brick-and-mortars, enabling also a better use of our stock.

The percentage of our online sales over the total grew from 2.2% in April to 5.8% in June, reaching 7.9% in July. We also mentioned that the conversion of our online sales, considering January and July of last year, was 0.11% and went to 0.41% this year of '19. This shows a great potential of maturing.

We went on evolving in development the technology and the simplification of our system and the support for sales. Our proprietary technology, LiveRetail, of real-time sales has been fundamental to maintain the efficiency of our retail channels. The results -- targets in -- of the company are also followed through a proprietary app called Live Goal. This includes the unfolding of the company's targets, enabling all to have a quick analysis of all of our departments, projects, collaborators in an individual fashion.

Now going to our results in the second Q '19. Total sales reached BRL 333 million with a drop of -- due to the -- mentioned before. The same stores dropped 15.8% (sic) [15.2%], the reduction of 8.7% (sic) [11.7%] in sales per square meter.

Our gross margins reached 62% in the quarter, impacted by the sale of manufactured items in the first quarter of '19 since the production of our set plants was reduced due to the conclusion of the plant integration of sewing and cutting.

Due to the drop in productivity, the unit cost of items produced between January and April was 75%, and the recovery of productions as of April, the problem was solved. However, the sales of these items during the second Q '19 impacted the profitability of the quarter. We want to mention that despite these factors already mentioned, gross margin in the first Q -- first semester was 65.6% as compared to the first in '19 -- '18 -- in 2018.

We also maintained our discipline -- there is no sound.

(technical difficulty)

We apologize for the problem.

Going on, therefore -- I was saying our expenses were -- we maintained our discipline, dropping in 2019 with the reduction in year-to-date of 5.4% compared to last year. It's important to mention that the direct comparison of expenses was impacted by the directing of 16.6% -- BRL 16.6 million in expenses reclassified as leasing.

Second, BRL 18.9 million for social security taxes, which were reclassified from deduction of expenses as payroll; three, BRL 5 million in credit card rates that had been reclassified due to the operation -- as operational expenses, which we mentioned in last quarter.

Despite the accounting factors, these are duly explained and very well explained in our release.

And in other revenues, we had a credit of BRL 117.1 million due to the exclusion of expenses of PIS and COFINS, which were res judicata -- actions duly recovered in 2018 to -- 2011 to 2019. These operating factors are also very well explained in our material.

Concluding the factors that I mentioned, we obtained BRL 139.6 million as accounting EBITDA, and we also posted profits of BRL 41.2 million in the quarter.

And then we want to leave the message with you that we will be focused throughout the year with recovering our sustainable growth, as you have been following in the last quarters. And this recovery of growth is based in our strong technological upgrades and with our omnichannel that is now fully implemented; also in growth in our online sales through our own channels; and also the growth in full prices in the retail channel; and also in wholesale for multibrand stores.

I thank you all for being with us. And now we open for Q&A. Thank you so much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Mr. Marco Calvi from Itaú BBA has a question.

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Marco Calvi, Itaú Corretora de Valores S.A., Research Division - Research Analyst [2]

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Please, could you delve a bit more the main challenges you're facing in this huge transaction -- transition from going through, and to the omnichannel platform, unifying your channels, and by doing that, having a higher participation of online channel in your sales. Considering all that, could you please explain and share with us the main challenges that you're facing throughout this process?

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Livinston Martins Bauermeister, Restoque Comércio e Confecções de Roupas S.A. - CEO and Member of Board of Executive Officers [3]

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Well, good morning, Marco. Thank you for your question. This is our main project to date, the unification of all of our channels among other initiatives and the challenges, other natural challenges of implementation of a new project involving all the company, all the stores, all the channels, and also the collaborators as well.

I think that we have been following in a very successful fashion in this implementation. This is not a simple project. It involves everyone. But results are already popping up and showing that we are following a very consistent path in our change of strategy.

As you see -- can see, our online channel is performing month-after-month, month-by-month in a much better way, representing a very relevant presence of 2/3 of sales and making stocks available to our clients, with all of the company's stock at the disposal of a click of the sales person.

So this we explained for everyone. And it shows that the path ahead of us has very positive points. And the issue of technology always has challenges along the way, but we are following up very well the implementation of this project and the results are good.

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Operator [4]

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Olivia Petronilho from JPMorgan has a question.

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Olivia B. Petronilho, JP Morgan Chase & Co, Research Division - Analyst [5]

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I would like to focus in sales of stores and see the performances in the quarter. And how much you believe that the results come from the implementation of omnichannel and the lower discount items in your stores? And how much do you see that this is the reason for positive results -- positive revenues?

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Livinston Martins Bauermeister, Restoque Comércio e Confecções de Roupas S.A. - CEO and Member of Board of Executive Officers [6]

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Good morning, Olivia. Thank you for the question. It is very pertinent, I might say. And obviously, this is one of our main focus, revenue. We already imagine that the first Q would show these impacts. And in the second Q, we already made use of the nonrecurring extraordinary credit event in order to place in a more effective way our strategy of not selling online to third-party online clients and concentrating sales in our own channel with a better control and better adjustment with our retail network. In the first Q, we were able to make this turn in our strategy, and obviously, we had impacts in sales. And in the short-term, this impact was expected: You set aside the third-party online channels and you gear to your own sales, and you give up promotional sales in order not to have them conflict our own retail sales. And in the second Q '19, we already hope -- second semester of the year, we expect to equalize with the positive impact. Even if you consider the setting aside of revenue from third party channels and lower discount sales, we expect to have positive results, better than in 2018, for the second semester.

The first semester was catered to implementation along the strategy. And in our projections for the second semester, we expect sales, even excluding these effects, to be positive.

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Operator [7]

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Mr. Ruben Couto from Santander has a question.

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Ruben Couto, Santander Investment Securities Inc., Research Division - Research Analyst [8]

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Part of this last question also answers me, but could you share your expectation for the second semester? And the reasons for the performance on the second semester being slightly different -- expecting to be different. But perhaps, you will expect to have a change only in the first semester next year. What do you expect?

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Livinston Martins Bauermeister, Restoque Comércio e Confecções de Roupas S.A. - CEO and Member of Board of Executive Officers [9]

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Good morning, Ruben. Thank you for participating and your questions. Well, the wholesale channel, it's one where we try to split the online sales to clients -- online clients to have wholesale sales for them. And in our brick-and-mortar, we've made a point of making this segmentation because we set aside selling wholesale online to privilege our core channel. And we are reinforcing our efforts to our multibrand traditional brick-and-mortar clients. They give us the popularity and the -- going throughout Brazil.

So despite several clients of the brick-and-mortar stores, they have already taken up 20% of sales with 19.4%. This is a result of our strategy. Obviously, we will go on with the segmentation because we set aside online sales, wholesale sales and geared to brick-and-mortars throughout the first semester, and we hope to have it along the second semester. But this increase in sales to the brick-and-mortars offsets the loss in sales to wholesale online clients. So our expectation for the rest of the year is that this loss will be offset.

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Ruben Couto, Santander Investment Securities Inc., Research Division - Research Analyst [10]

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Well, I understood very clear. Another question. In your gross margin, we see that there was a flat performance here. But this repositioning controls will define the brand to sell more promo sales. And the level here that you show is the one that you will pursue? Or there is a possibility of increasing and improving positioning of the other brand?

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Livinston Martins Bauermeister, Restoque Comércio e Confecções de Roupas S.A. - CEO and Member of Board of Executive Officers [11]

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Well, thank you for the question. The impact at first was a margin loss, but the expectation we have is to recover the margin throughout the year. And with higher sales online, we will have a higher gross margin. We had a participation of 7.9% in the end of -- at the end of July, so we see higher participation. And of course, this will obviously contribute to our gross margin.

Another initiative of positioning is the effect you have been following since the end of year 2017 and throughout 2018, reinforced now this year, of increasing margins. Unfortunately, in the second Q, we had the ad hoc issue of unification of cutting and sewing plants, the cost went up over 65% between January and February. And this impacted [EBITDA] margin in January.

But our expectations are that this margin not only will be recovered but will reach higher levels than we have historically. Since the online channel tends to have a higher participation in our retail main channel, we'll have less discount sales, promo sales. And in the average long-term you are, however, correct in your estimates.

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Operator [12]

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(Operator Instructions) Now we would like to give the floor to Mr. Livinston for his final considerations. Please, Mr. Bauermeister, you have the floor.

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Livinston Martins Bauermeister, Restoque Comércio e Confecções de Roupas S.A. - CEO and Member of Board of Executive Officers [13]

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I would like to thank you all for participating in this call. We want to reinforce that we are at your service for any questions. Our IR department also is at your service, and we are at your full disposition anytime you want. Thank you very much.

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Operator [14]

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Thank you. The Restoque Second Q '19 Earnings Results Conference Call is concluded. Thank you very much. You may disconnect your lines.

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