El Puerto de Liverpool, S.A.B. de C.V. (LIVEPOLC1) Earnings Call Transcript & Summary

Welcome to El Puerto Liverpool's conference call. With us are Mr. Enrique Güijosa, CFO of El Puerto Liverpool; Mr. Antonino Guichard, Digital Director; Mr. José Antonio Diego, Treasury, and IR Director; and Mr. Enrique Grinan, Investor Relations Officer. Our speakers will present the results for the second quarter of 2020 and the perspective of Liverpool's actions and digital key role during the COVID-19 pandemic. [Operator Instructions] 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 Liverpool's most recent annual report. At this time, I will now turn the conference over to Mr. Enrique Güijosa. Please go ahead.

Thank you very much. Good morning to everyone, and welcome to Liverpool's Q2 2020 Conference Call. First of all, I sincerely hope that you and everyone in your families are healthy and doing well. I'm going to start with a brief review of the strategies we have taken to protect our liquidity. After that, Antonino Guichard, General Manager for our digital business, will share with you the highlights of what happened during the second quarter in this strategic area. I will then continue with a few additional remarks regarding the overall performance of our business. Needless to say, this was a very tough quarter. Without any doubt, one of the most difficult periods in our very long history doing business in Mexico, as all our revenue streams dried up. To put our financial results in context, it is important to remember that all our stores and shopping centers were closed during most of the second quarter, and we offer to all our cardholders the chance to skip their payments during April and May. Our cash on hand at the end of the quarter was MXN 5.5 billion. While we may not be able to control all the challenges caused by the pandemic and ensuing economic downturn, we are aggressively executing the following strategies to protect our liquidity. Number one, our CapEx budget for 2020 was basically halved to MXN 5.1 billion. We do not have any new store openings planned for Liverpool for this year. As for Suburbia, we'll open only 9 new stores. Construction in Arco Norte continues but at a slower pace. The remodeling expansion of Perisur, Galerías Monterrey, and Galerías Insurgentes also continue as they were already underway when the pandemic started. Number two, we reduced our OpEx to the very minimum. During the pandemic, we laid out a plan to improve our cost structure, which allowed our SG&A expenses during the quarter, excluding depreciation and bad debt provisions, to deliver a 17.3% reduction versus a year ago. It is important to highlight that we can consider our people vital for a continued success. And in that sense, we have made efforts to maintain our total headcount unchanged since the start of the pandemic, except in logistics where we hire more than 500 temporary workers to help us manage the significant increase that we faced in home deliveries. Therefore, these results were not achieved through furloughs or layoffs. Number three, we tightened our new credit origination and proactively approached stockholders that were already late in their payments to offer them tailor-made solutions. Furthermore, we heavily promoted our digital channels to facilitate payments for all our cardholders. Our credit portfolio is MXN 6 billion or 18% below year ago. Number four, we significantly reduced our purchase orders for new merchandise. For prospective receipts in our second quarter, we're down 70% for Liverpool and also for Suburbia. Our inventory at the end of the quarter was only 12.4% above year ago. Number five, our shareholders approved the referral of the dividend payments. Importantly, the decision on the timing and the amount of the dividend payments were delegated to our Board of Directors. Number six, we put our stock repurchase program on hold. And finally, number seven, we secured new short-term bank credit lines for a total of MXN 3.5 billion. During May, we made the MXN 3 billion bullet payment for the LIVEPOL 10 bonds. To strengthen our liquidity, we just filed the paperwork to obtain approval to issue a new 10-year bond in the local market for MXN 3.5 billion in the upcoming weeks. We are planning to go to market as soon as possible. Despite our effort to improve liquidity, our cash burn during the quarter was MXN 8.7 billion, mainly driven by store closings and a significant reduction in trade payables, which were down more than 60% year-on-year, reflecting the above-mentioned reduction in merchandise receipts. I will now pass the mic to Antonino. Please go ahead.

Thank you, Enrique. Hello, everybody, as well. I hope everybody is well. On my part, I'm going to tell you a little bit about how did the digital business behaved during the second quarter. As expected, our e-commerce sales grew exponentially during the last trimester. In our case, our growth was [ specifically ] close to 400% versus last year and over 300% of our plan. The digital sales during this pandemic time conducted more than 80% of the company sales. Regarding our website behavior, our traffic grew more than 130%. I would like to emphasize on Liverpool Pocket, the Liverpool app, which visits grew more than 2.6x. Also, our conversion rate grew more than 50%. Again, there's a special recognition to Pocket's and desktop behavior, which accounted for more than 85% of our sales. We also noticed an important change in customer behavior. The mix -- the sales mix between soft lines and hard lines was 29% and 71%, respectively. In the past, this mix was closer to a 40-60. We also noticed a pick in Liverpool Pocket, not only by being the most important traffic channel, as mentioned before, and with our most loyal customers, but we also had a 3x growth in monthly active users. One of our most important accomplishment during this time was our customer base. We grew our new customers more than 400%. Practically, we are having this -- we had the results of the past 3 years combined in new customers. But I would like to emphasize a little bit that the most important part of these new customers that we had is a 30% of this new base, our new customers, Liverpool is customers that we didn't have. And the other 70% are customers that migrated between off-line and online. Now with this new base, it opens huge opportunities for us. Just to give you an example, now we have a new base where we can offer credit. We have to analyze this base, change the customer behavior, make them download our app so we can have more valuable customers over time and their lifetime value for this, 30%, it's pretty impressive. Also, as a curious fact, our e-commerce sales during the month of May accounted nearly for 86% of what e-commerce sold during 2019. All of the above resulted -- all of the above results combined our 5-year goals into a 3-month period. So what we were expecting to have around 2025 just happened in the last 3 months ago. Since we are expecting a worldwide change in customer behavior, we are expecting in the upcoming future that e-commerce sales will account for 20% of Liverpool. That was our objective in 2025. I would also like to talk a little bit about marketplace. By the end of this trimester, this new business model had already reached their 2020 goals, growing more than 1,000%. Our clear Omnichannel strategy in this business was affected the store closure. Before pandemic times, marketplace sales, 25% of those occurred in the physical stores. So the marketplace shares, our e-commerce sales, dropped from 12% to 6%. Also, we saw a huge opportunity on capitalizing new sellers. Our base grew 3x compared to previous COVID times. Also, it is very important to mention that our net contribution from this model grew by more than 1,500%. Also, talking a little bit about Suburbia, that despite being a new website, suburbia.com.mx, with still some technical issues that we are trying to solve, its sales grew close to 1,000%. Also, I'm very proud to announce to you that during this time, we were also able to do a lot of new releases that we had already in scope. And I'm going to talk a little bit about those releases. One of the most important was what we did in credit -- in our credit business. As Enrique mentioned, we implemented a skip a payment strategy, but we also implemented online as a self-service option for our customers. We also recently launched our eWallet. We launched eWallet on our Pockets for our private credit cards, and it's an important new feature during these times, which allow our customers to pay contactless and cardless in stores. The results of this eWallet without any communication so far, by the end of last month, we already have 3,000 -- 30,000 users connected through this. Also, we redesigned our Pocket, putting it with the highest U.S. standards worldwide focusing on usability and fast performance. We changed the main menu to a lower tab experience, which all of these new fixes were able to increase our conversion rate in Pocket in more than 50%. We migrated all of our systems into a newest infrastructure. This important challenge allow us to have better capacity for this high demand and overall performance. We are now hosted in Monterrey. We used to be in Querétaro, and this doubled our capacity on this high peak demand. We were able also to launch gap.com.mx. One of our new websites added to this portfolio, and now we are running 7 websites operated by Liverpool. We were also available to implement a new agile method within the company in several products. This will allow us to fix our issues faster and having releases every 1 to 2 weeks. The most important features we released were express checkout. We used to have a 3-step checkout. Now focusing on our customers, we have only 1-step checkout helping in a conversion rate. We are constantly making changes into our browse and shop product on our search and recommendation engines in order to satisfy our customer needs and wants. We were also able to do marketplace upgrades, mostly focusing on our sellers and the experience they have within Liverpool. This help us increase our seller base and our service at Liverpool [ once. ] Also, I would like to talk a little bit to you about logistics. During this trimester, our deliveries also increased by more than 400%. And also, it's important to mention that during May and June, our Click & Collect option was closed. So all of our deliveries were home delivery. This growth in full home delivery was not favorable for our logistics operations, putting it on the highest stress. Previous to the pandemic, 80% of our deliveries were done through our own logistics. However, since we were completely overwhelmed by demand, we had to ride on third party logistics. Now our mix is closer to 87% third party; 13%, our own logistics. Despite these efforts, our delivery experience was not the best. Since our logistics and overall country logistics were compromised, we did not reach our on-time delivery goal. Our on-time delivery was 90%, leaving a 10% delay in deliveries, which were not where we want to be. Our KPIs are closer to 95%, 97%. Since we didn't have the best results, the logistics and digital team are completely focusing on having a better customer experience. We are primarily focused on increasing on-time delivery and reducing overall delivery time. One of the first things we were able to do is to increase our home delivery capacity by 7.5x. With our third footprint throughout the country, we were also able to fulfill more than 90% of our orders through stores in the country. We reactivated Click & Collect in most of our stores. This decision help us reduce delivery dates and reduce the overall demand on home delivery. By the end of the trimester, Click & Collect deliveries were close to 25% of our sales. We also implemented our curbside pickup service. This has been very well accepted by our customers since they are now receiving their product without going into the store. Just also as a curious fact and this is the last point I have on a term sheet, is that the demand we experienced in the past trimester was the estimated demand we had for home delivery in the peak season of 2028. I now give the word again back to Enrique.

Thank you, Antonino. Now let's talk briefly about the other highlights for the quarter before moving to Q&A. Same-store sales during the quarter for Liverpool show a contraction of almost 60%. For Suburbia, they were negative 91%. The latter reflects that we still do not have a robust e-comm offering. At apparel in general, and fashion in particular showed weaker sell-through rates. Significant part of Suburbia business comes from the metro area of Mexico City and the state of Mexico, where stores were closed during the full quarter. Retail gross margin of 19.7% was 12.4 percentage points below a year ago. Higher expenses for home deliveries due to the exponential increase of our e-comm business and the fact that Click & Collect was closed for most of the quarter, as Antonino explained. This then explains 1/3 of the gross margin reduction. The other key drivers were increased promotional activity to monetize inventories and also developed merchandise mix shifting to hard lines. NPLs of 3.9% show a substantial reduction when compared with the 5.6% recorded in Q2 2019. Well, this is certainly very misleading and we offer the skip a payment program during April and May. We would be able to assess the health of the credit portfolio starting in September when most of the payments of the cardholders that chose this option come due. We took advantage of IFRS 9 to start preparing for the expected increase in default rates by increasing our reserves in almost MXN 1.2 billion. The [ bad debt ] reserve coverage ratio at the end of this quarter is 14.2%, 380 basis points above December 2019. Finally, a quick update on our store and shopping centers reopenings. As previously announced, we are only progressing will result on the reopening of all our operations to deliver stable and healthy operations for customers, employees, and suppliers. Although we started opening some stores since mid-May, the bulk of the reopenings took place during the second half of June. And in fact, our units in Mexico City and the state of Mexico opened until July 8, which represents a delay of more than a month versus our original expectation. As of today, we have reopened 97 Liverpool stores. They represent 79% of store count and 85% of our sales; 138 Suburbias, which represents 86% of our units and 88% of our sales; 130 boutiques, which are close to 85% of the store count; and finally, 24 or 89% of our shopping centers. We developed a sales base program taking into account best practices from all around the world. As a result, street safety and health protocols were implemented in all our stores and shopping centers. We continue to manage the risk from the pandemic, and we are confident that we have put the right measures in place to protect our people, our customers, and our suppliers. This, of course, is a very fluid situation. We are facing different constraints in terms of capacity and operating hours across all states. In some instances, we have been asked to shut down once again. Prolongación Vasco are the most important space in which we are still waiting for the approval from the state authorities to reopen. For perspective, sales for stores that have been opened during July are around negative 35% below a year ago for both Liverpool and Suburbia, but these trends have been improving week after week. Liverpool has been able to adapt and rise to the challenges we have faced during our 170-plus years of history, and we certainly plan to deliver a stronger future for the company. Stay safe. And we will now move to Q&A.

[Operator Instructions] The first question is from Mr. Andrew Ruben from Morgan Stanley. Our next question comes from Mr. Antonio Hernández from Barclays.

Actually, a couple of questions. First one is, thanks a lot for all the information you provided on sales mix. Now my question is, regarding sales mix now in -- I know, of course, some stores are being reopened and only for a couple of weeks or maybe even less than that. But what are your expectations now with stores reopening in terms of sales mix -- sorry, in these stores? And my second question would be in terms of profitability for online sales. If you could give us more light in terms of -- I know they depend, of course, a lot on the scale of operations. But in the end, you also had to make a lot of investments. So could you share more light on profitability of these online sales?

Yes. Thank you, Antonio. Let me talk about the sales mix first, and then I'll ask Antonino to discuss profitability for the online channel. In terms of our sales mix, yes, as we have been reopening our stores, we're seeing an uptick in the sales of our soft lines. So we are still skewed towards hard lines. But little by little, day by day we're seeing better sales rates by -- for apparel and shows basically and all the -- our soft line merchandise. Specifically in the past 2, 3 days, we have seen very strong figures for the women's section or department in all our stores. So that's good news. And we have basically replaced that we also have, as you know, the clearance sales for all the spring and summer season, which is now being sold at -- with very attractive discounts for our customers. So that's what I can tell you. Again, it's very early. Our expectation is that little by little, we will return to the, let's say, the normal mix. What we are expecting is that probably, our customers are going to be more conscious in terms of buying fashion items. They're probably going to move more towards into the basic apparel or merchandise. And that's something that we're monitoring very closely. And I will turn to Antonino now.

Thank you, Enrique. Antonio, regarding our profitability, we're proud to say that our e-commerce business is profitable. But as mentioned above and due to the increase in-home delivery and on-demand, our expenses grew around 400% as well as our sales. And our profitability on the last Q was 265% above what we had planned and 360% above last year. So still, we're profitable. Yes, of course, we -- the increase in -- mainly in logistics part hit us, but we are still profitable with very impressive numbers.

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

I also hope that you and your families are all well. I have 2, Antonino, specifically about logistics. So I mean, as your CapEx needs are limited for the time being, maybe this year and next year, Arco Norte project will likely be delayed for at least a year. But on the contrary, as you mentioned, you're now managing 95% of deliveries to stores, a figure that has been climbing over the last quarters. But still, you're falling short of the on-time deliveries. I know because this is, as you mentioned, because of a higher demand. But if demand starts to come down to a new normal, what are your plans to improve logistics and specifically, delivery times in order to become more competitive versus other players? And then I have another one, please.

Yes, of course, Luis. Thank you. Well, as you know, well, this demand, as I mentioned, was what will be expected in the future. With Arco Norte probably being delayed, there's a lot of things we can do. This increase in sales and overall the stress we had in the digital business, also put -- and it showed all of our opportunities and the things we need to solve. As I mentioned, we were able during this time to increase 7.5x what we could deliver on a daily basis to our customers. How are we doing this? Well, we are now heavily depending as many of our competitors on the third party logistics. That's something that we're doing every day, and we are negotiating every day. We're also using different types of delivery like Uber or iVoy in Mexico. And with all of these improvements and also a better allocation of our merchandise closer to where the customer is will help us increase our delivery time and obviously increase our delivery promise. So that's where we're mainly focusing on what the opportunities rose and now, well, depending heavily on our third-party partners.

Right. So follow-up on another topic. I mean, after seeing such growth in the e-commerce business, as you mentioned, you acquired a large base of new customers. What in terms -- maybe, I don't know, say, in the next 12 to 18 months, what are your top priorities to ensure recurrence of these new customers?

Yes. Well, our top priorities right now is a little bit with the question before. It's first, and most of all, we need to fix what we found on our logistics part, and we're working heavily on that. Also, there's a lot of issues that also rose with the IT team and demand we had. So we're also focusing on the back end of our systems and how can we pronounce better and have a better website operation. And regarding our new customers, we also had -- we have been investing in the past 3 years a lot in our own customers. We have, I believe, the highest 360 base -- 360 customers knowledge base in Mexico. And what we do with this, we segment all of our customers. And now with hyper-personalization that we are able to do in the upcoming 2 to 3 weeks, we can understand what our customer wants and needs better. We can also know if we failed a customer or not. So there's different strategies regarding looking at our customer and how can we -- if we fail him, how can we get him back on track so he can try us again. And the ones that are already loyal customers, how can we improve their visits to us and how can we increase their frequency. There's a lot of different strategies depending on each customer.

Our next question is from Mr. Andrew Ruben from Morgan Stanley.

I hope everyone is well. I have 2 questions. The first is just on the reopened stores. The color was helpful. You mentioned the minus 35% comps. I'm just curious how that breaks down between physical traffic and then what you've seen for your e-commerce sales in areas where stores reopen. Have they started to decelerate? Or have you been able to sustain the levels? And then second, just if the pandemic has changed how you're thinking at all about your store footprint longer term.

Do you want to take the question on the reopened stores, what has been the impact on the e-comm, Antonino?

Yes, Enrique. Well, since the stores have reopened, of course, the mix between online and off-line has reduced from 80%. Now it's representing around 35% of our sales, the digital business. However, I believe it's too soon right now to see where the mix will stop. Remember that we come from a 10% by the end of 2019. So as mentioned before, we are expecting to have a mix now more around 20% digital sales with all the stores reopened. However, since there's, as Enrique mentioned, not all the stores are open and we don't know if some stores will close in the near future, so this mix is not there yet, but where we're expecting without COVID times to be now around 20% due to customer behavior change.

Thank you, Antonino. Andrew, to answer your second question on the -- what we think of -- are going to be the effects of the pandemic on our strategies for new stores, I think that we have taken now a very thorough look at the profitability for each of our stores, and that was for our Liverpool stores, for Suburbia stores and also for our boutiques in order to make sure that overall the profitability is where it should be; and if not, to take advantage of the current situation to perhaps take some drastic actions. Frankly, in the case of the Liverpool footprint, we don't see any store that it's in jeopardy because of a poor profitability. So we don't have any plans to close the stores. We have -- we believe we have the right footprint. And as we have announced previously, in the case of Liverpool, we have to have -- even before the pandemic, we were planning to significantly slow down the number of new store openings, just to be it we were opening even all the way up to 10 to 11 stores per year. And now we announced that we were going to open 2, 3, maximum 4 stores per year. And we will be very, very selective in terms of the location of those stores to make sure that they look like winners from the get-go. So that's still our plan. We're not planning to open any new Liverpool stores this year. We will most probably open 2 new stores next year that were pushed from this year to the next. That's the one where we don't have any presence and a new store in Guadalajara in La Perla, the shopping center, it's a new shopping center, which we believe looks a very attractive location. So that goes for Liverpool. In the case of Suburbia, we have identified more or less between 5 to 10 stores that have structural issues in terms of profitability. And we're using that analysis in order to negotiate with our landlords' concession in terms of lease cost, hopefully, to move in most of those locations to 100% variable lease cost. So that's something that we're negotiating as we speak. And depending on how successful we are, we will close or not, at least some of those locations. Now having said that, because of the -- the socioeconomic levels of Suburbia, is targeting, we still believe that there's a huge opportunity to get to the 250 program that we announced for Suburbia. So we don't have any plans to ramp up the new store openings for Suburbia anytime soon. Until where the uncertainty goes away, we will open 9 new stores this year. And the number of new stores for next year is yet to be confirmed. But again, we want to take advantage. As soon as the uncertainty goes away, we want to take advantage of securing the more stores that we can in the short-term. And then finally, on boutiques, we're -- after this analysis, we are planning to close all the [indiscernible] first time new stores that we have, is that like 4 or 5. We are also closing some of the Pottery Barn stores that we have in the Duarte Shopping Center to consolidate all our offering for the southern part of Mexico City in Perisur. So that's also what we're doing. And frankly, we don't have any plans to open new boutique. We're going to be very, very selective with -- we are comfortable with that rightsizing. That's where we should be.

Our next question is from Mr. Joaquin Ley from Itaú.

Enrique, Antonino, I hope you're well. I have 2 questions. The first one is in regards to working capital dynamics. So historically, your inventory turns have been always pretty balanced with your days of payables, right? But in this quarter, because of obvious reasons, we've seen a big deficit thereof about 100 days, right, I'm thinking sales and increased support to suppliers. So how do you think about these 2 numbers converging again in coming quarters is something that we could see in the remainder of 2020? Or is it something more that we'll see in 2021?

Yes. Thank you, Joaquín. Yes, we're planning, yes. I mean, as you are pointing out, I mean, we saw a huge drop in trade payable because as we stop the receipts in our distribution centers. And that's because both, they were closed. And also, we negotiated with our suppliers the significant reduction in terms of the purchase orders. So all the things that we faced in Q2 were basically what we received in February and March of this year. We have more or less like 80 -- 75 to 80 days average term for trade payables. So as we now have rightsized our purchase orders for the balance of the year, we have now reopened our receipts at the -- particularly the plan, the solution center for soft lines, we are planning that, particularly in July and August, trade payables are going to grow back again to the normal levels. And they should continue to stay there. If you know, sales perform as we're expecting. And we don't see any new complete shutdown of the country in the next couple of quarters, we should be getting by the end of the year without any doubt to the normal levels of inventory returns and the percentage of inventory that's financed by our trade payables, which is usually between 85%, 90% and up to 100% by year-end.

Brilliant. And the second question, any update on the Arco Norte project timeline, CapEx deployment?

Yes. Well, the Arco Norte, as we announced, the significant reduction in CapEx for that for this year, we were forced to reduce the budget for Arco Norte that we have received in the schedule for this year. It was in the neighborhood of MXN 2 billion, and it was reduced to only MXN 200 million. And that we are now planning to -- for the go-live of the big-ticket operation in Arco Norte by April 2022. But that, again, will be heavily dependent on how the business is performing during the next couple of quarters and how the uncertainty for this year and the next is looking. So in general terms and this goes not only for Arco Norte, we are planning to use like 3 years for each of our projects that we have a schedule for CapEx for 2021. That's new stores, store remodeling, and also remodeling and expansion of shopping centers plus Arco Norte. What we're planning to do is to have a base plan but go back and see what's the month where we need to push the button in order to go forward with the project. And we will see what the environment -- how the environment is looking on macroeconomically wise, how the business is performing, and that will give us a signal on whether we should push the button or we should wait. So again, what I'm telling you for Arco Norte, it applies for the rest of the capital projects. We will be very cautious in the approach we will take, and then it will be 100% dependent on the expectations that we have for our financial performance.

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

The question we had here is more related on the marketplace. So you have some details there on the release and made some comments already in the prepared remarks. But can you please share how are you positioning your marketplace initiative to differentiate versus peers? And maybe give us a bit of color on the overall expectations here and how it fits in your digital strategy?