Brunello Cucinelli S.p.A. (BC) Earnings Call Transcript & Summary

Good evening, and welcome to the conference call on the Q9 2023 results of Brunello Cucinelli, the CEO, Mr. Stefanelli, CEO; the CFO, Moreno Ciarapica, co-CFO Senior and Investor Relations and Corporate Planning Director. Mr. Arnaboldi, will be taking the floor. [Operator Instructions] And now, I would like to hand you over to Luca Lisandroni. Please go ahead, sir.

Good evening. Thank you very much. Thank you for attending our conference call. I'm here with Riccardo and we'll be taking the floor today during this conference call to comment on the results for the first 9 months of '23. As you might know, Brunello together with Carolina and Alessio is traveling in the States, so he won't be here tonight. However, we are a good company because we are here with Dario, our CFO, Moreno and Pietro. And we would like you to think of us as if we were accompanied by all the people who have contributed to the incredible results that we are going to comment on in a minute. So we are very young, energetic, cohesive enthusiastic group of people open to the world and to change. So tonight, we'll try and be exhaustive and as brief as clear as possible to allow those of you who are planning to attend Ferragamo's conference call. And we would like to thank Marco Gobbetti and his team for their support. Our call will be subdivided into 2 parts. The first part that will be devoted mainly to the results. So besides analyzing the first 9 months results, we'll be providing our outlook for the full year. And then we'll be providing you with the guideline for 2024 as well. And today, our guideline is -- I think it's fair to say that it's very robust. And then we will be also illustrating our project for '25. We have a fairly good visibility on 2025 after completion of the 11th 5-year plan. And then the second part of the conference call will be devoted to a more qualitative analysis, and we'll be commenting with you the main trends that have emerged on the various geographies. We would like this call to be entitled "the call of the market" or even better "the call from the market" because idea is that of providing an in-depth and dynamic analysis on the results -- of the results achieved. And I'd like to move on to the results. So revenues amounted to EUR 818 million, up 27.5% at current exchange rate, which is amounted to 28.8% at constant changes compared with the same period of '22. All the geographies have performed very well in a very balanced way, the Americas, up 21%, Europe, up 18%, Italy 20%, Asia 50%. So I'm rounding up on the figure. As the -- as for the distribution channel, they are also well balanced with substantial growth of retail, up 35%, wholesale up 17%. The very good results of the first 9 months of the year -- of the year and the attention to the exclusivity of our garments make us think of substantial growth of revenues for '23 between 20% and 22% compared with the previous estimate of 19%. And Brunello has commented as follows. In the first 9 months of this particularly good year, we have achieved significant growth in sales and image, given the high-quality of sales, we expect a nice healthy profit as a result. We see there is a robust demand for high-quality handcrafted garments that epitomize an idea of quiet and precious luxury that reflects our personality. Based on the above, we have chosen to raise or to review upward the year-end sales growth estimate from 19% to 20%, 22%. Given the excellent sellout rate of the fall/winter 2023 season and the exceptional order intake for the spring/summer '24 one, we are very confident in our balanced growth project for 2024, which we have estimated at around 10%. And in these days of distressing news, I call upon the world's great man, the temporary guidance of creation with all my soul and with all my mind so that they may be enlightened and shed light themselves on the darkness of war and find the path of peace for so many suffering human beings. And we know that today, we are asking you a major effort to leave aside for a moment the stronger emotions that we have all been feeling over these days to focus on our economic and financial results. These results are really excellent and they have been driven by the soundness of a trend that emerged in the first month of the year and has continued in July, August and September. These results are extremely satisfactory for us, and they enable us to combine the exclusive positioning of our brand and the relationships at a very strong -- sound relationship with our customers. In the first 9 months of this year, we have witnessed 2 main trends emerging. First, the wide spreading of this new concept of luxury, namely quiet and precious luxury. And then the search for uniqueness that has been witnessed in all geographies. As for Q3, as you might have seen, Q3 in absolute terms is very similar to the 2 previous quarters. And percentage-wise, it features a growth of 21%. Considering the contribution of the various geographies, well, the picture that was described in June has remained unchanged. The Americas account for 35% of our sales; Europe 38%; Asia 27%. And this mix is very similar to what we will be seeing at the end of the year. As for the geographic mix, we expect that by the end of the year, Asia will grow in terms of contribution by a couple of percentage points, moving along the direction that we have anticipated. Moving from geographies to channels. The wholesale channel completed the Q3 in incredible way, with an incredible result and grew by 20%, thanks to very timely deliveries and the order intake for the new season. As you know, as for the Fall/Winter season, orders intake take place in Q1 and shipment takes place in Q3 normally. As for the retail channel, retail ended the Q3, growing 22%, much higher growth rate than we expected, considering the growth rate that was reported in 2022 that was already very good. Please remember that the timing for shipping is generally Q1 and Q3 for the wholesale channel, and that's why wholesale accounts for a larger share of contribution to sales in Q1 and Q3, whereas Q2 and Q4 are mainly driven by the retail channel. This is why our current channel mix is accounted for by retail 62% and wholesale 38%, we can expect that by the end of the year, the retail channel will account for a larger share roughly 2 percentage points more. At the same time, however, we would like to remind you that the retail sales is accounted for by the concessions in multi-brand stores that account for 10% of the total. So if we consider our sales broken down by single brand and the multi-brand stores, the break down by channels would be even more balanced. '23 will be remembered as an incredible year for our retail channel for our retail business. However, we are extremely satisfied also with the performance of the wholesale channel. The wholesale channel has seen the advent of new multi-brand players, both physical and digital. I'm thinking, for instance, what we managed to achieve with the Lane Crawford in China, or Mytheresa digital player. They have laid the foundation for a stronger and even greater growth going forward. At the time, where we are witnessing a changing taste, we believe that being present in multi-brand stores has been of paramount importance because we have been able to make our brand visible to customers who have not paid so much attention so far to our brand. And so the number of customers has increased -- increased substantially in this year. But let's now look at the next quarter, Q4. We have discussed at length about the guideline provided. And in preparing the estimates for Q4, we have considered the number of factors that will affect the results of Q4. Well, first of all, we have been able to retain our positive performance. And every quarter, we have exceeded the expectations that we had at the beginning of the quarter. And of course, we are particularly satisfied with these results. And then the winter season started off very, very well in terms of sales at the store. This means that our customers, at the end, customers appreciate what has already been appreciated very much by our buyers and by a wholesale channel. And then the seasonal nature of our business, consider the average price of the Fall/Winter season collection that is generally higher than the Spring/Summer collections because of overcoats, heavy jackets or knitwear. Q4, as a consequence is the quarter that reported the highest sales in the year. But at the same time, we considered that the Q4 in 2022, was a very strong quarter where both the wholesale and retail channels have performed very well. In those days, if you remember, the markets were euphoric after the concerns brought about the pandemic. In our retail network, we see number of customers who have already purchased the fall/winter season at the beginning of the season. And of course, at the same time, if we have to consider the tensions in the Middle East. We are not so much concerned about the impact that such tensions can have on the Middle East area, rather because of the violence that involves innocent people, something that we wouldn't like to see. As a whole, we -- and on the ground that I've just illustrated, we expect a very sound Q4. We expect EUR 3 million worth of sales. That would be the record sales ever experienced by our company. And this is definitely a target that we couldn't even think of a few years ago. This is why we have reviewed our estimate for full year '23. So by the end of '23, we expect our sales to increase -- our revenues, sorry, to increase between 20% and 22%, which percentage-wise and in absolute term, this would mean EUR 1.1 billion in terms of revenues achieved by the end of the year. This translates into 2 main targets achieved. So first of all, we will be exceeding the EUR 1 billion milestone, and it would mean doubling our revenues compared to 2020. So this year, the sales trend has led us to review upward our estimates. And this additional performance has been generated with a network of stores and wholesale clients that has remained unchanged. And especially, these results have been achieved with the very same strategy and the very same initiatives that we had planned at the beginning of the year. So we've been really surprised by this, the way that our collections have been, let's say, received and welcomed by the market. This applies to our brand, but also to many other luxury brands. Today, we hear about the slowing down of the market. But if you look at the absolute figures of our sales, of our store traffic or the acquisition of the customers. Well, we've got the impression that we're still witnessing a very sound and strong demand. And thinking of the past, thinking of October, November last year, and you know that October, November is the time when we draft the budget for the following year. I remember last year, speaking with the colleagues of other brands, and everyone would have been very happy to report a double-digit growth rate. And I believe that most of the healthy brands that are on the market and will report a much higher results in terms of revenues than the one expected and hoped for October last year. And I would like to refer to the other KPIs. Again, revenues are expected to grow between 20%, 22%. EBIT is expected to grow by 16%, in line with the margins reported in the first 6 months of this year, growing versus the 14.6% reported in 2022. And then net income between 10%, 11%, which is very, very, very good. And then as for stock, we expect 25%. CapEx amounted to 8%, investment on advertising and events, 6%, 7%. The net debt remaining unchanged, and we expect to pay out dividends amounted to 50% of our profit. So this is, I believe, the ideal situation for our company. The company is reporting very high and quick growth of revenues without diluting the perception of exclusivity that accompanies our brand quite diverse. We do believe that revenue growth has been accompanied by a further strengthening of an idea that we cherish, namely an exclusive brand with an accent on the ready-to-wear and a distinctive taste. So our company has a sound P&L, balanced margins and a very sound balance sheet that despite the substantial investments made over the past years, and consider the investments that we have planned will remain sound. Currently, the company has 2,500 employees that account for the most valuable asset of the company and also the basis to plan the future growth. And after the 2024 look -- let's have a look at 2024. For 2024, we expect revenues to increase by 10% with good balance between the price mix and the volume increase.

So may I interrupt you here, Luca, there's a balancing effect between volumes and price mix is something which we think will happen with very well-balanced pricing. So we'll keep our pricing strategy, which is 100 in Europe, 121 in the U.S., 128 in Asia. Sorry for interrupting.

So of course, I would say that in 2024, we do expect that both sales channels would increase their sales. For the wholesale channel, we already have very relevant information. A great part of our revenues is represented by the good orders we have already collected for the sales campaign of Spring/Summer '24, which is going to be the revenues of the first quarter of '24. As to the retail channel, we still trust, we'll see a further improvement of comparable sales, both for the menswear and womenswear, based on comps that are going to be pretty relevant from the beginning of the year. We can actually confirm that the opening of new stores, the plan of new openings for 2024 is already consolidated. We are going to open 3 main stores, 2 in the first part of year, Miami Design District and a lovely store at the Macau Four Seasons. Whereas in the second half, towards the end of the year, we are scheduled to open one store in Toronto at the Yorkdale Mall, which is one of the most important malls, not just in Canada but in North America as a whole. So you know well that over the last few years, a very important role was not just opening new stores, but also extended existing ones. So extensions of existing stores allow us to improve our presence in the cities where we do operate already, so we can capitalize on locally established presence without exaggerating in expanding the network of our stores. Amongst the most important extensions for next year, there is 2 that are particularly charming. At the end of the first quarter next year, we expect to extend the store in Venice, whereas towards the end of the year, we are going to extend our store in Vienna. Those new openings and extensions, together with the CapEx we invest in technology, and the industrial part of our operations make us think that next year, CapEx is likely to be, again, nearly 8% of the turnover. As far as communication is concerned, we believe that the investment we did last year or whether this year, which is 6% to 7% of revenues will allow us to be discovered gradually by customers, but at the same time, to make sure that everybody who will show their interest towards us will receive a full representation of our taste and the following presentation of our brand and product. On the other side, we want to continue along the store animation program, which was very rich and busy and very important throughout the year. As to 2025, as we see it today, we expect it to be very similar to 2024, and we expect the revenues to grow by 10% as well with the same kind of investment strategy. Compared to what we already told you recently, we can tell you that the new element is that today and for some months already, we have achieved very good visibility on all actions we expect to perform in 2024. So we are in the best possible conditions to start building our performance in 2025. Thanks to this, we already started scouting for the 2, 3 new stores. We are scheduling to open in 2025, and so we already have very interesting and very important options there. So Rick, correct me if I'm wrong, but in industrial terms, the estimate of future needs on the segment-by-segment category-by-category basis has already been updated, and we are very confident we are all set to go. And most importantly, we'll understand what the main event will be in the first part of 2025.

Very good. Thank you, Luca. Let me give you a couple of quick comments on production. As we anticipated in our last conference call, we have gathered our small artisan companies in Solomeo in mid-September as we usually do. And this is really important for us, not just to share results, but also to share the expectations for the next few years. All SMEs we work with sees this opportunity to go back home with a good understanding of their future, which is also based on -- which is also the basis in which they make decisions in their investment, their future is on training their people. When we meet our SMEs, we also work about the blue-collar and factory workers, which is something that, as you know, has been very important for us for quite some time now. It's a direct content. There's no platform to go between -- it's typical of the Italian culture and this allows us to experience products first hand day in, day out. Then Solomeo, we believe that the project for the new factory, which is continuing and the investments we've made in all the land surround in our industrial facilities, we guarantee the company and Solomeo to keep growing for the next 100 years, which is what we like to think of. So you all know that as a family, we're very strictly connected to the concept of long-lasting things, long-lasting products and investments. And also, we believe that the combination between Solomeo and the factory is the best prerequisite for us to think in secular terms. Looking out of Solomeo, in mid-November, we will actually open the first part of the new Penne facility, where we'll start manufacturing the first product anytime soon. And we're really eager to see and to start using this facility because as we imagine, the location is really rich in artisan and know-how and skill sets. So you may remember, we first discussed this in April, but we get access to manual skills and artisan skills there that are quite aware and [ scarce ] and lead us to think that we can expect a great growth there. .

Thank you, Rick. Now let's close this part on numbers. As usual, we wanted to be totally open with you and let you know about our expectations. And I think we should look at markets now. So if you agree, I'll start with the America. There is 2 data that are important for us. America accounted for nearly 30% of the total growth of revenues of the company in the first 9 months of 2023. From a different angle in the first 9 months of 29 -- well, compared to the first 9 months of 2019, the American market grew by 91%. Both things make us believe that America is a very important domestic market for us, a very relevant and important one. But it hasn't really become the typical mature market for us. If we look in particular at 2023, we see that some very clear things happened in America. The first, a very clear event is that the demand for luxury has become much more widespread in different locations. So demand has kept very strong in large cities like New York City, Los Angeles, Chicago and Miami, has grown enormously in all main resorts like Aspen, the Hampton's and Palm Beach. But the real surprise for us was actually the performance in, let's say, second tier cities such as [indiscernible] Texas, Minneapolis, Nashville. So all cities where we do have operations through specialty stores and department stores. Another very relevant issue we have observed in America is that ready-to-wear is becoming more and more important. And there is a kind of rebalancing of traffic within department stores between the ready-to-wear and accessories categories. And this is a trend which is very strong, very visible in America, and I think it's pretty much visible everywhere, which is people attach more and more importance to understanding and acknowledging the value of exclusivity and brand position in an artisan quality of products. So we keep investing in America, we're very convinced about this market. We invest in our own stores and in multi-brand stores. We believe that multi-brand partners are fundamental for us to help bring the same brand image to all end customers. At the beginning, we said Brunello is traveling in U.S., let me give you some information about that trip because I think it's really telling and predictive about our strategy on the American continent. To the night, starting from the East Coast, we celebrated 25 years of fantastic mutually satisfactory partnership with Saks. For that celebration, we completely took over the 6 store windows on Fifth Avenue. And the layout and the setup of the windows was really -- especially was the Solomeo expressed a kind of dream train that started from the windows and went into the stores with stops and stations in the individual outputs on different floors of the department store. One of which was dedicated to the exclusive launch up until the end of the year in the North American market of our fragrances. The event was completed with the lovely dinner at the upper floor restaurant where Brunello and his family had an opportunity to personally thank the many people who by simply coming there, expressed their estimate and their appreciation of the brand. Now the group has traveled to the West Coast, where in the iconic location of Chateau Marmont in L.A., Brunello is going to receive the many Californian trends of the brand. In a private event where a very heterogeneous group of guests was invited, including artists, actors, physicians, great entrepreneurs. At the moment, which is going to be a very friendly gathering of people. And we had an opportunity to gather all of the beautiful people who, over time, have been kind of a reference point in that beautiful part of America. The last day of the trip will be dedicated to the product completely and to the last chapter of the celebration for the very important Neiman Marcus Awards, which Brunello received earlier this year. So you see, there's pretty much everything in the trip. There's a lot of careful image. A lot of unrelenting attention to the visual merchandising, the product as a key core, an important issue for us that the need and desire to gather all categories under the same umbrella. We love to listen to people, look for the their feedback. There's a lot of glamor, but also gratitude and personal relationships. And we believe all those elements together were fundamental in driving us in America through a very successful journey. Europe now. While Europe is still the dream destination of luxury clients globally. Even today, European cities still hold all the most important stores, the actual flagship stores, they have a lot of luxury brand, so much so that they become actually travel destinations in individual cities. Think of Paris, for instance. If you really think about it, today, Paris has 2 open-air luxury salons, one in Avenue in Montaigne, the other in [indiscernible]. You may remember that up until a few years ago, [indiscernible] was a luxury destination that just in the top part of the street, whereas the whole street, which is really long has now become a luxury retail street. And the Champs-Elysees are also joining in as a further luxury destination in Paris. So using Paris and as an example to show that the importance of luxury in European cities and global cities are increasing enormously over the last years. On the other hand, take London. Now despite Brexit, despite the cancellation of tax-free release, London is still having very interesting turnover, both in monobrand stores in the wonderful department store at the city, both, and it keeps investing in its own development quite a lot. So I'm thinking of Sloane Street, for instance, which may certainly become much more charming and interesting than it is today. One final example for Europe is the Cote d'Azur, the French Riviera. We had a very, very positive season there. The French Riviera was very successful, thanks to our presence through a flagship store in Monte Carlo, a new lovely store in front of the [indiscernible] in Cannes and a small but resort-oriented store in Saint-Tropez. And we believe that the French Riviera gave huge contribution to our revenues in the first 9 months, but also gave a great contribution to strengthening our image as a lifestyle brand. Italy. Italy is experiencing a record year through both sales channels. And this is mainly due to the unique multi-centered nature of luxury markets in Italy itself. So there's not a single great capital, but there are many cities like Milan, Rome, Venice, Florence, that are extremely important for luxury retail, there are resort locations and prevention cities as well. And there again, the retail was very likely and very brisk and interesting. So altogether in Europe, we did experience a lovely summer. And we're really confident we'll experience winter which is going to be just as lovely and interesting. And also, we are confident to say that also thanks to the really domestic nature of our operations here. And then Asia. Asia contributed 40% of the overall growth in the first 9 months. Two areas in particular were most important, China and the Middle East. But we also had excellent performance in Japan and Korea. I just came back 3 weeks ago from Asia. And I have to say that I saw for myself, I felt and I realized the great potential of this project, which they call the Greater Bay area. So first of all, I saw an infrastructure, which is complete by now. I drove around from Hong Kong, Macau, Shenzhen. And then in a very short train trip, I reached Guangzhou. And in each of those 4 cities, along the perimeter, I found luxury retail, which is absolutely exciting. And the level of investment made there is absolutely remarkable. Now this area by size and by concentration of wealth is deemed to become one of the most important luxury areas globally. It is called hyper connector. It is called a hyper connected, connecting finance, technology, fashion, art and entertainment. Hong Kong. Hong Kong is in great health, and we are actually far above the performance of 2019. And in particular, Hong Kong is back to welcoming a great number of tourists coming from Mainland China at the Mid-Autumn Festival a few weeks ago. Something that really struck me as I came back from my trip to China is the intention of many landlords from Hong Kong and from Mainland China to try and reproduce in these destinations to some of the atmosphere of outdoor luxury retail. So in Hong Kong, Shanghai and Shenzhen. I noticed there is a lot of desire to go beyond the typical design of the indoor malls, which is typically in China, they would like to integrate some outdoor open-air locations to increase the space for creativity of individual brands and to offer shopping experience to end customers, which is going to be really reaching content and fully immersive. And then in general, city by city in China, I noticed that luxury retail is becoming more and more elevated, which is speaking well for the future. And I would say they are increasing in each individual city where we have operations. Thanks to serving more and more clients. So on one side, we have new clients walking into our stores for the first time. But on the other side, I'd like to remember that our established clients have a loyalty level, which is just as high as the Western benchmark. I conclude about China to inform you that we are waiting for the next award that will be given to Brunello next December. And this will -- this award will be, again awarded in a country that we believe is extremely -- has an extremely high potential where our brand is still very young namely China. As for the Middle East and Dubai, they're still attracting tourists coming from all over the world. And there, we expect incredible times characterized by growing expenditure devoted to garments by the local customers. And thanks to this, we have been able to extend our local customer basis. And we have seen a high contribution of the Middle East to our revenues. And thanks to the recent openings in the area and the great job done in this area recently, we have been able to see growing the contribution of this geography and we rely on this going forward as well. And concluding about the digital channel. So the physical channel has accounted for the live share in 2023. However, direct sales through the digital channel are growing as well. But what is growing even more is the number of visits of our website. And something that is very, very interesting, in my opinion, is that the number of interactions of the native digital customers with that stuff is increasing substantially, which means that the digital customers are looking for a piece of advice and a human interaction. As you know, as you might know, ever since we started our boutique online, we've always aimed at having high-quality website, a very effective and efficient website, but above all, we wanted to endow a tool that is, I mean, personal with the human touch. I would like to conclude by thanking all our coworkers, our employees, the journalists, the analysts and investors for accompanying us along this path. So thank you very much. And now we are open for questions.

This is the Chorus call operator. We can start the Q&A session. [Operator Instructions] First question by Andrea Randone at Intermonte.

Good evening to you all. You already commented extensively on the results. So my question will focus on 3 points that I would like you to comment on -- you mentioned Hong Kong and China and you mentioned the Golden Week in China. Can you report on the Golden Week in a few words. And then Italy, you said it's a strong market. You said that there are many cities where luxury is actually present. Can you please comment on the retail, wholesale channels in Italy in particular. And then the third question refers to the comments made by some observers about high interest rates. Then some of your wholesale customers, the department stores or other wholesale customers are asking for extending the payment terms have you experience any of this kind? Anything of this kind.

Well, starting from your last question, well, honestly, no. No one has asked for different payment terms and conditions. Our receivables are extremely sound and healthy, I would say. So we do not expect any issue in this regard. As for Italy, I can confirm that the performance of both the wholesale and the retail channels has been very strong. As for the retail channel, the Spring/Summer season has been incredibly good. We have achieved a very high sales rate. And the beginning of the Fall/Winter season shows similarly good performance. As for the wholesale channel, well, our network is now well consolidated. We have a large number of stores also in the second layer towns. And as I already pointed out, our revenues are mainly accounted for by these second layer cities. As for China, we believe that we have already achieved a very good results there, and we'll be expecting even better results for next year. China is still focusing on luxury retail and investing on it. We see an incredible number of new projects of luxury malls that we are currently analyzing carefully, paying the utmost attention to our distribution in China. As you know, our network in China is still limited in terms of number of notes, and we would like to retain the exclusivity of our brand in China as we have already had in other geographies as well.