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

Good morning. My name is Sophia, and I will be your conference operator. [Operator Instructions] This is Liverpool's Second Quarter 2022 Conference Call. [Operator Instructions] Today, we have with us Mr. Graciano Guichard, Chief Executive Officer; Mr. Enrique Guijosa, Chief Financial Officer; and Mr. Enrique Grinan, Investor Relations Officer. They will be discussing the company's performance as per the earnings release for the second quarter 2022 issued this week. If you did not receive the report, please contact Liverpool's IR department, and they will e-mail it to you. Please note that this call is for investors and analysts only, and questions from the media will not be taken nor should the call be reported on. Any forward-looking statements made during this conference call are based on information that is currently available. They 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 most recent annual report. Please refer to the disclaimer in the earnings release for guidance on this matter. I will now turn the call over to Mr. Enrique Guijosa.

Thank you, Sofia. Good morning to everyone, and thanks for joining us. I hope you and your loved ones are all doing well. As usual, I will go through the highlights of our second quarter results and leave the rest of the call for Q&A. First of all, let me point out that the second quarter of 2022 was the first one in quite some time that we have compared against the prior year on an apples-to-apples basis, as we did not encounter any special situation due to the pandemic in this year nor in 2021. Perhaps the only exception was in terms of the duration of our Venta Nocturna promotions for both Mother's and Father's Day, where we decided to go back to the usual 3-day promotion during the weekend instead of a week-long event as we not have to recover lost ground due to store closures. I am glad to share with you that Q2 2022 was a very strong quarter across the board. We saw robust growth rates in our top line, in our EBITDA and in our bottom line. We move forward in all our strategic initiatives. Our total revenues grew 13.4%, and our 3 business segments posted double-digit top line growth rates. Retail sales grew 13.3%. Interest income reached 14.2% and revenue from our shopping centers was 15.2% above a year ago. For perspective, our total revenue of MXN 42.6 billion is almost 20% above Q2 2019. Same-store sales for Liverpool posted a 14% increase, while Suburbia reached 5.1%. The latter reflects a challenging base period as we offer aggressive markdowns to get rid of obsolete inventory. We see customers returning to some degree of normality going back to offices and special locations, such as weddings and valuations. For perspective, ANTAD Departmental Store sales reported at 12.4%, excuse me, increase in same-store sales during the second quarter, while the apparel and footwear categories grew 14.0%. Our retail gross margin of 32.8% was 270 basis points of a year ago. We continued to show great discipline in terms of inventory management, and this has allowed us to have higher levels of sales at full price and lower markdowns. For perspective, Suburbia's gross margin was 8 percentage points above the year ago. Our gross margin performance was also helped by a more favorable product mix as our top line categories continue to recover the share they lost during the pandemic. For perspective, our retail gross margin was 80 basis points above Q2 2019. Our consolidated gross margin improved 250 basis points to 39.2% due to the above mentioned improvement in our retail marketing and a small mix effect. Operating expenses with our bad debt provisions and depreciation grew 11.5% year-on-year. The main factors behind this increase are: number one, the variable expenses that grow in line with sales, like commissions to our sales associates, credit card fees and packaging materials; Number 2, the 22% increase to the minimum wage at the start of the year; Number 3, new hires, particularly in the technology and digital departments. And finally, number 4, general inflation. We have started to be less conservative in our credit card business in terms of origination, overdraft, line increases and cash withdrawals. Still, we closed Q2 with better-than-expected NPL ratio of 2.4%, 70 basis points below a year ago. The bad debt provision in our P&L during Q2 was MXN 527 million. Although, this was 2.5x above a year ago, this has to do with the sharp reduction that we observed in our NPS from Q1 to Q2 in 2021. For the first 6 months of the year, the bad debt provision was MXN 258 million, basically flat versus a year ago. Our bad debt reserve coverage ratio was 10.4% of our growth portfolio. This is 140 basis points below a year ago. When measured against our bad debt over 90 days balance, we closed the quarter at 4.7x. Both coverage ratios are conservative. Our net credit portfolio grew 16.2% year-on-year, and our total cardholder base was $6.3 million, almost 9% above a year ago. Our Q2 EBITDA of MXN 7.8 billion was 28% of a year ago, while our EBITDA margin of 18.3% was 210 basis points better. This was due to the improvement in retail gross margin and operating leverage. For perspective, our EBITDA margin in Q2 2019 was 16% flat. Net profit of MXN 4.5 billion was 48% a year ago due to the above-mentioned operating performance and lower interest expense. Turning to our balance sheet. Our total inventories grew 27.5% year-on-year. This increase is due to normalization of receipts and advanced purchase orders for categories still facing supply issues and also for the big ticket items to facilitate the transition to Arco Norte later this year. Although, there are some categories with high level of inventory like patio furniture and fitness equipment, we think they do not represent material figures and should not translate into profitability issues for the balance of the year on a total company basis. For perspective, if we compare our inventory level against the same quarter in 2019, it is 25% above, while our retail sales are 23% above. Cash flow from operations during the second quarter was MXN 5.4 billion. This was MXN 3.2 billion below a year ago due to higher working capital and income tax advance payments. Our CapEx during the second quarter was MXN 1.6 billion. This is a 50% increase above a year ago. This brought the first semester total CapEx to MXN 2.7 billion, and almost half of this amount was allocated to logistics and technology projects. Our stockholders are decided to pay a dividend of MXN 1.70 per share on their March 10 general assembly. The first installment of MXN 1.02 per share was paid on May 27 and the remainder of MXN 0.68 per share will be paid on October 14. At the end of the quarter, cash on hand was MXN 23.6 billion, and our net debt-to-EBITDA ratio was only 0.18x. We're planning to pay our Liverpool 17-2 local bonds or certificados bursatiles, which is due on August 19 for a total amount of MXN 1.5 billion with our own cash. Suburbia opened 4 new stores during the second quarter to bring the total number of openings in the first semester to 6. During the second semester, we plan to open 2 Liverpool stores, one in Tijuana, which is the only large city in Mexico without a Liverpool store and the other one are the new Mitikah shopping center in Mexico City. For Suburbia, we're expecting to open another 9 stores. We continue making significant progress in all our key strategic initiatives. Our digital GMV was 17.2% of a year ago, and our digital share was 24.1%. This is 27 basis points above a year ago. Our Marketplace GMV increased 50% year-on-year as the number of sellers and SKUs in our 3P platform were almost 90% above a year ago. For perspective, our marketplace SKUs account for 40% of our digital catalog. The number of visits to our digital platforms were 6% below a year ago, but this was due to the above mentioned reduction in the duration of our key promotional events [indiscernible]. We continue to make strides in the speed with which we deliver our digital orders. The share of deliveries that reach our customer homes in 5 days or less was almost 20 percentage points above a year ago. Furthermore, the share of home deliveries that were shipped directly from our store grew more than 2x to 19.3% as we continue to leverage our store network, which as you know, is one of our key competitive advantages. Importantly, the normalization of our customer traffic to our stores is helping us to gradually bring back Click & Collect to the pre-pandemic levels. Click & Collect in Q2 was 35.1% and was 9 percentage points above the same quarter a year ago. The transition of our Big Ticket logistics operation from Huehuetoca to Arco Norte continues to right on schedule. We started to receive merchandise from our key suppliers in May and the final stage of moving all our inventory kicked off in July. We expect to complete the transition by the end of August. On May 11, we announced that we have signed a letter of intent with Actinver with the objective of defining the terms of a strategic alliance to offer savings and investment products to recurrent and potential customers of El Puerto de Liverpool. Importantly, the execution of this alliance is subject to signing the final contracts once we obtain the approval of the banking regulator. On July 7, we launched our RUC, or Unique Customer Registry project. This is a key initiative in terms of convenience and security for all our digital customers. One very important functionality is our virtual cards, credit cards, we are now able to complete the end-to-end origination process for our cardholders on our digital platform. In just a few minutes, our potential cardholder will know if our lending was approved and if so, will be able to start using our credit card right away, both on our digital channel and also in our stores using our wallets. Also, on July 7, the Mexican Stock Exchange announced that we were going to be part of the S&P/BMV Total Mexico ESG index for the very first time. This is certainly a milestone for us and reflects the progress we have made on the ESG front in the past 12 months. Finally, on the rating agency front, just a few days ago, S&P announced that our rating for global debt issues was maintained at BBB or the perspective improved from negative to stable, while Fitch announced that our rating on specific were kept at BBB plus and stable respectively. Well, the gross profit in terms of our performance during Q2 2022, let me share with you now a few challenges that we are foreseeing for the second semester. The first one has to do with Mexico's lacklustre GDP growth, which is now expected at only 1.8%. And in fact, this does not reflect a significant slowdown and even less a recession in the U.S. at the end of this year as the Fed normalizes monetary policy. The second one has to do with inflation. As you know, inflation in Mexico was 7.4% in 2021, and we'll probably close this year around 8%. High inflation levels involve the purchasing power of our customers. And as wages are not growing in real terms, they need to dedicate a bigger share of wallet to basic staples, leading spending on discretionary items as a second priority. Furthermore, high inflation excess pressure on our gross margin and our operating expenses. The third one has to do with continued supply chain disruptions. Although, we have seen an improvement in the availability of our merchandise, there is still a long way to go to normalize fulfillment levels. Although, the macro is certainly challenging, we are confident in our ability to overcome this environment and deliver strong results for the full year 2022. Thank you very much. Now Graciano and I look forward to take your questions.

[Operator Instructions] Our first question comes from the line of Irma Sgarz. Please state your company name and ask your question.

My name is Irma Sgarz from Goldman Sachs. Very helpful to also have the outlook for the second half of the year. I was just curious sort of how you think about sort of positioning yourself for this environment in terms of just how you're planning for inventories. On the one hand side, you still cited some supply chain bottlenecks, but at the same time, obviously, you have to be mindful of a potentially continued weakness in the discretionary demand. So just curious sort of how you're positioning for Suburbia and also for the Liverpool in terms of the outlook for the environment, changing assortment or in terms of pricing, taking different decisions? And then second question, just on Suburbia, obviously, I would imagine that part of the performance that we're seeing that over is to do with the markdowns that you had to do -- is to do with the weakness maybe in the consumer or the inflationary impact on that consumer that format is targeting. But in terms of operational sort of more on the micro level or a company-specific level, what changes are you making? What actions are you taking specifically for the second half of the year to try and close the gap in terms of performance that you have for sense of sales compared to both inflation but also for the ANTAD Departamental Stores overall.

Do you want to -- I'll take this one, Enrique. I'll start with Suburbia. Actually, the markdowns were taken last year because last year, we had excess inventory. So that's why you see not a big increase in sales and a big increase in margins. That actually is going to answer the first question. In Suburbia, we plan to have inventory -- a lot less inventory than what we had last year, not because of the economy or the macro perspective only, but because last year, we had an excess inventory by a ton because we closed January and February. So this year, Suburbia is going to work a lot leaner. We are going to see these good margins all throughout the year, and we're going to see a better inventory turnover because of the lack of excess inventory we're going to have. So that's for us is key for the results this year. And in terms of Liverpool, it really, really varies a lot through category. For example, as Enrique said, sports equipment like treadmills and stuff, we are seeing a significant decrease in sales. And on the other hand, suits and shirts, we're seeing a good increase. So we're planning to keep up those trends always very careful with the inventory. And in the moment, we see that a particular category is going to slow down, we will certainly introduce promotions or margins fast enough to get rid of the inventory. Having said that, we have significant bets on some categories, in particular, especially TVs. This year, we're going to have the World Cup in the second half of the year, which usually increases that by a big percentage. And also, we have a big bet on cell phones.

Our next question comes from the line of Alvaro Garcia. Please state your company name and ask your question.

Alvaro Garcia, BTG. One follow-up actually on Irma's question on sort of gross margin at Suburbia. Do you think -- I mean, just given the competitive pressures of that specific segment, whether it's Coppel or whether it's some of the newer players, SHEIN, et cetera, do you expect sort of more gross margin pressure? Do you feel like you should price your products maybe a bit lower given the competitive dynamics there? That's my first question. And then my second question is on supply chain. I think you mentioned that it's a bit better than it was last year, but if you can give us a bit more color on sort of order dynamics with clients and if maybe you're somewhat back to pre-pandemic levels, that would be very helpful.

Yes. Do you want to take those Graciano?

Yes. So I'll start with the gross margin in Suburbia. No, we actually feel we have a good product and price -- quality price combination. We believe the gross margins this year are going to go up in Suburbia compared to what we had last year, mainly, as I said, because a Suburbia inventory control. Although, we have a tough competition there, we have a good value proposition. And some of the actions I didn't answer that on Irma's prior question. Some of the actions, we are taking and probably you can -- if you go to the stores, you can start seeing them by now, improve the quality of the stores maintenance, look, neighborhoods of the -- of all the different sections and the stores, plus we need to improve our omni-channel experience. So we are introducing also kiosks on every store. So Suburbia stores with that omni-channel picks up because it hasn't taken pick up from Suburbia. So we believe Suburbia margins are not going to go off. In terms of the supply chain, again, Liverpool sells a lot of items. So it varies a lot through category for example, some categories whose sales have slowdown maybe as kitchen, furniture, those sort of things. Supply chain is not an issue anymore. There are other categories you all know about the chip shortages. And in closing, it is improving. It might not be quite at pre-pandemic levels because sometimes China closes a city and it affects everything that is built there, but it's getting close to it.

Our next question comes from the line of Luis R. Willard. Please state your company name and ask your question.

This is Luis Willard from GBM. So Enrique, my question is about the dynamics of the credit portfolio. I mean net portfolio is now around 12% above pre-pandemic levels. Credit cards are also up, before that time, mostly coming from Suburbia. So my question is, what is driving this increase in the net portfolio? And more importantly, is it coming from new customers or customers that used to have the credit card and then exited the system and now are back or maybe it's just an accumulation of balance of existing customers?

Yes. I think that, first of all, I mean what's driving the increase in the portfolio has to do with the performance of our top line, of course. So particularly, in the case of Liverpool, I mean, sales have been doing the double-digit growth and this obviously flows right away and directly to our portfolio. The other one has to do as I pointed out in my opening remarks that we're also seeing an increase in the number of cardholders, both in the case of Liverpool and in Suburbia, we're seeing higher origination levels. We have been fine tuning. Our origination scoring model in order to be more precise, we have started to give also credit to people that will have any information in the credit bureau. So our cardholder base of 6.3 million accounts at the end of June was 9% a year ago. So really, it's a combination of those 2 things, which will also -- I didn't explain a lot, but we are also being more aggressive. I mean, given the very low levels of NPLs, which frankly have been surprising to us. I mean, the delinquency rate continues to perform very, very well, stably below the levels that we're used to that we were more on the 4% to 5% range. And now we're well below that. So we're starting to be more aggressive in terms of overdraft, for example, for people that are buying Big Ticket items. We now have the ability to assess the credit worthiness all the way down to a section level. So we know that the delinquency rate for people that buy Big Ticket items is usually lower than other things like cell phones or apparel. So we're being more aggressive on giving even like 2x the credit line when a customer or a cardholder wants to buy a Big Ticket. And then he or she doesn't have the line of credit, we have the overdraft that we can approve the purchase. So that's one of the things that we're doing. We're also increasing the credit lines. We're also being more aggressive on the cash withdrawals where we will have been because of the risk in what we have been very tight in terms of that great offering throughout the pandemic. Now we feel confident to start little by little opening the gates again. So those are just a few things of what we're doing in order to increase the portfolio and also increase the productivity of the portfolio.

So in a nutshell, it's basically coming more from origination and/or new, let's say, products or lines rather than people that are making partial payments on their balance. Is that correct?

Well, the payments continue to be on the high side. And that's one of the reasons we continue to see our delinquency rates slow. I mean we continue to be surprised by a number of what we call [indiscernible] that we have in our portfolio, which used to be in the 15% to 20% range. Now it's depending on the month going all the way up to 40%. So in that sense, we are not seeing that a different behavioral risk what we have seen in the past. So I think it's a combination, again, of the strong sales and a bigger number of cardholders.

Our next question comes from the line of Rodrigo Alcantara. Please state your company name and ask your question.

This is Rodrigo Alcantara, UBS. I have the questions here, if I may. First one, on the digital card, I was wondering if you can remind us what percentage of your current customers are already with under this virtual card? And if you could possibly enumerate like the benefits that you see as compared to the traditional physical card, perhaps on data analytics and some of those attributes? And the second question would be regarding the same-store sales guidance. I mean you remember you were quite conservative at the beginning of this year, even though you had a very robust first quarter, do you reiterate your guidance both for Suburbia and Liverpool. So I'm just wondering if that's -- if this is still the case, I mean, should we continue working with the same guidance. I think it was 5.5% for Liverpool, 8% for Suburbia, if I'm not mistaken. So also, I would appreciate your comments on the guidance for the full year 2022.

Yes, Rodrigo. The virtual or the digital card is brand new. I mean, we just went live on that functionality just a couple of weeks ago. And we have already seen -- we have already implemented quite some time, probably like 1.5 years that you can fill out your application for a credit card online, both if you were approved, you still have to go to the store to pick up your plastic. So you could not buy right away on the digital channel or in the store, you have not going to the credit card cart to pick up your plastic. So that's -- with this new functionality, we just implemented, you can now do the end process, so you can fill out your application online. When you go through the approval process very quickly, and you get the approval in the -- that's case, right that range just a few minutes. And then I think that the significant change is that you will now be able to with -- once we were approved to buy on the digital channel right way. So you will not have to go to the store to pick up your card and in order to be able to buy on the digital channel. I think you can do with right away without waiting anymore. So we believe that's a big convenience feature for our customers. So we're very excited. We will, of course, report on the products we have paid on that front in Q3, where we expect to see the big bump. We have already noticed that the digital application was already our #1 originator channel. So but again, you could not complete the process without going to the stores. So again, that's going to be the disadvantage. In terms of data, really, there's not going to be a big change because, I mean, again, the only difference is that you will not have to pick your plastic. So we will still be able, as we can do that today to monitor very closely for the Q2, both online and on the physical stores. So that's already in place. That's something what we do. That's something that we are starting to, as you know, the personalization to our customers, combining the data from the digital channel and the physical channel, which is something that we have is very unique, of course, as being omnichannel. But again, those capabilities are already in place and are not going to change because of these digital credit cards. Now going to the same-store sales, well, needless to say, I mean, the performance in the first semester was well above what we expected, particularly in Q2. I mean we already knew that Q1 was overall very strong because the comparison -- the base was very easy in because of the culture of the stores in Central Mexico in Q1 2021. So we already knew that Q1 was going to be really strong. But you're right, we announced that we were expecting same-store sales growth for Liverpool in the 5% to 5.5% range from April to December. And in the case of Suburbia, we were expecting an 8% to 8.5% range also in -- from April to December. We are -- as we speak, we are updating what we call our best guess, let's say, our forecast for how the end of 2022 is going to look, which is something that we do at the same time that we prepare our budget for 2023. So the first thing we would do is, to forecast how we are looking at sales for the balance of the year as the second semester and also use as a base to project and budget 2023. So we still do not have the final numbers but I can tell you that probably, I mean, we're going to assume that Liverpool same-store sales will grow around 10% in the second semester. And Suburbia same-store sales are going to be close to 8% in the second semester. So that's significantly above in the case of Liverpool was well -- we had before, and of course, reflects that we are seeing a customer is more resilient to all the macro challenges than what we thought at the beginning. So we're expecting a slowdown as we reported Q2 same-store sales for Liverpool were 14% of [indiscernible] we expect it to go down to 10%, but still double-digit growth. I hope that is helpful.

No, no. That's perfect. So 10% Liverpool for the second half and 8% for Suburbia, right, same-store sales?

Correct. Yes.

Our next question comes from the line of Andrew Ruben. Please state your company name and ask your question.

Andrew Ruben at Morgan Stanley here. I just want to dig in a bit more on the differences between the second half and the first half and that you had, what seemed like very strong results, both on the top line and margins even through 2Q. So with this outlook for the second half, some of the items you spoke about, is it more of your general expectations? Or did you see some of these sales and expense headwinds already start to occur during July? I'm just trying to better understand what seems like increased caution following what has been a very strong first half for Liverpool?

Thank you, Andrew. You're right, it's more a function of being cautious. I think that we frankly have been surprised again by the how resilient customers have been. Again, you have to bet at the start of the year with inflation at 10%. And inflation, of course, in food and basic merchandise is running at 12%, 15%, that's rolling the purchasing power of our customers. Also the middle class were ended up, they are starting to travel again. So spending money that they didn't spend in 2020 or 2021 because they basically were not traveling. So you will assume that we expect that since we only sell discretionary items, we will see a slowdown. So month by month, we have been surprised again by the resiliency. And in fact, in July, I can tell you that all the way up to yesterday, Liverpool sales are 20% of July a year ago. And Suburbia sales are 17% above the a year ago, shocking. We continue to be very, very surprised. So I think that the numbers I mentioned before about 10% and 8% for Liverpool and Suburbia. I think that, again, we expect to see a slowdown eventually and hopefully continues not to be delayed. But again, it's more of a cautious stance instead of something that we're seeing right now.

Great. That's very clear, and I appreciate the additional detail.

Our next question comes from the line of Antonio Hernandez Velez Leija. Please state your company name and ask your question.

This is Antonio Hernandez from Barclays. Congrats on your results. Actually, a follow-up on the previous question on Andrew's question, I mean, thanks for the light that you provided on even July numbers is being quite high year-over-year for both formats. Just wanted to get a little bit more light on maybe if there's any change at least in terms of credit use or how maybe credit card holders are maybe behaving differently comparing July or even end of the second quarter versus the beginning of the second quarter? Have you seen any type of a trend there?

Yes. Thank you, Antonio. Not really. I mean the things that I explained before in terms of being more aggressive on greater front in terms of origination, in terms of overdrafts and increasing credit lines. Frankly, our gradual change is not that -- like going from a very conservative stance to a very aggressive like posture overnight. I mean it's something that we do little by little. So no, I don't think that what the performance that we're seeing in sales has to do in a major way with these changes, I mean, they obviously help, but I don't think that they are like significantly accelerating our sales. I think that, again, they're tailwind but again, it's not definitely the most important one.

Okay. Understood. And just a follow-up, any change also in terms of ticket and traffic within the -- for example, within the last weeks in July or maybe the beginning of the second quarter, any change in trend there?

Well, in terms of the -- for example, in the case of Liverpool, the average ticket in Q2 was only 3% above a year ago. So the majority of the increase that we saw in same-store sales came from traffic grew like 11%. And again, average ticket was like 2.8% above a year ago. So that's not to say that we are not seeing higher prices in some categories. I think that it's more of a mix effect, the fact that the average ticket is only growing 3% and it has to do with the fact that we're seeing a lower growth rates in the Big Ticket items, especially things that had to do with the home, which we were very, very strong through pandemic. And now we're seeing big increases in formal apparel. As Graciano was pointing out suits and formal shirts and all kinds of shoes and sneakers are flying on the sell. So those things are performing better. So although, the average ticket is not growing a lot. I can tell you, for example, that the -- for shop lines, our average price at this point in time is like 8% a year ago. And in some categories like white goods or washing machines or refrigerates that we're seeing prices like 15% to 17% a year ago. So we are seeing certainly on inflation. We have been passing through inflation, but the mix is kind of like giving us a different mix that we're observing is giving us like a very small increase in the average ticket.

Our next question comes from the line of Marisol Andrade from Credit Suisse.

It's Marisol Andrade from Credit Suisse. I was just wondering about the increase we saw in provisions this quarter. I just wanted to know if we should expect this level of provisions going forward? And my second question would be how much of -- how much does marketplace represent from your online sales?

Yes. In terms of the provisions, I mean, in terms of guidance, we said that we were expecting to close the year with an NPL of a little bit above 3%. It was like 3.05%, the one we announced. So we were certainly and still respective note that NPLs are going to go up against the current very low levels. So we are not like changing that as we point at this point in time. We also announced that guidance the charge in our P&L due to market provisions for the full year was going to be MXN 1.2 billion, and that was going to be a 35% reduction year-on-year. And although, probably the provision is going to be a little bit higher because of the volume effect, again, that sales are growing ahead of what we expect a few months ago. So that will probably increase the MXN 1.2 billion a little bit. We're not expecting a major change at this point in time. And so that's still our guidance for the full year. So we are still expecting a significant reduction in the provision in our P&L in the prior year. And so that's what I can tell you in terms of provision and bad debts. The other question that you had was in terms of the marketplace. Marketplace accounts more or less for like 16% of what we sell in liverpool.com.

Our next question comes from the line of Sergio Matsumoto. Please state your company name and ask your question.

Yes, Sergio Matsumoto from Citigroup. Graciano, Enrique, question on your buyers' predictions for the fourth quarter. How are they seeing the consumer lifestyle in Mexico at that time, particularly in terms of apparel merchandise on what type of procurements they have done because you might see a couple of scenarios of a hybrid model working both from the office and home or more of a full normalized environment with social gathering and travel. And just curious on like the levels of these -- the levels and the types of these high-margin merchandise like apparel and accessories and cosmetics?

Yes. For example, there are certain categories that are certainly going to slowdown compared to last year. For example, the pants, pajamas, those type of things, sporting clothes are also kind of not going to grow as much as they did last year. And there are some certain categories as more events. Not only the office is coming back, but also weddings, first communal those type of things. So formal or semi-formal attires are coming back, ties definitely not, no. We haven't sold ties since the pandemic began. But those are more or less -- we are not full to add back to normal because we still have the numbers of last year's really moved. So we cannot use last year as a comparison. But again, as I said, we are coming back to normal little by little. And in certain categories, shoes, women's shoes, handbags, we are doing really well. A kids, for example, we're expecting a really good back-to-school this August because last year, we didn't have a back-to-school not a really tough back-to-school. So there are some areas that look really good for the foreseeable future and some that are not going to do as well. I hope I answered your question.

Yes. Understood and I agree with the ties. I don't think I bought one in quite some time. Another question, perhaps maybe for Enrique, I believe, correct me if I'm wrong, but I believe there's a guidance of kind of like maintain that 16% from last year for EBITDA margin. But year-to-date, it's already at 17% and typically, the fourth quarter is seasonally higher margins, so would you say there's perhaps some sort of a structural step-up in the margin versus pre-pandemic or not quite so?

No, I don't think that -- I would love to tell you that we are seeing a structural step up but I think that it has to do with some special effects like, for example, provisions, as I said this year are going to be only like MXN 1.2 billion where we usually also numbers of MXN 2 billion, MXN 3 billion or even higher, of course, depending on the cycle of credit that is giving us a big help in terms of our SG&A, of course, and margin. So I think that it will be hard to say that that's the new normal. I think that we're shooting to keep our EBITDA margin around 16.5%. I believe that's more or less a sustainable EBITDA margin level based on what we are forecasting right now. But I think that if we end this year above that, I don't know, 17%, I think it's going to be hard to maintain that in the next couple of years.

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Yes, we can hear you.

Yes, please state your name and then the company please.

I'm [indiscernible] from Compass Group and most of my questions have been answered. I have one left regarding CapEx. The guidance of the year was around MXN 10 billion if I remember correctly, your -- the accumulated is around MXN 2.7 billion. Do you think you are going to reach the MXN 10 billion coming in the guidance or you are going to stay the old one?

Yes, we are -- thank you, [ Parlina ]. Yes, we are always, I think I said year-on-year, I mean, we're very optimistic on our CapEx guidance and then we're not that fast in terms of deploying the cash, you're right, I mean, we said that this we were expecting CapEx of MXN 10 billion. We saw an acceleration of our CapEx deployment in Q2 that as I stated in my opening remarks, we grew 50% year-on-year. But still, I think that although we have a lot of backlog of projects like the Arco Norte project spending a lot of money I'll speak in order to complete how we need to be ready to have the full operations by the end of August, early September, they are big ticket items. I think that we're probably going to end the year at MXN 8.5 billion in terms of CapEx.

Okay. Thank you. And those MXN 8.5 billion, 50% is going into logistics, right?

Yes, I think it's a combination of both logistics and IT or technology.

Okay. Very clear.

Thank you.

Our next question comes from the telephone line ending in 9790. Please state your name and company and ask your question.[Operator Instructions]

Hi. This is Bob Ford at Bank of America and congratulations on the quarter and the great start to July, Graciano and Enrique. Graciano, can you talk a little bit about how you're balancing algorithm-based inventory planning with some of the big bet overrides that you mentioned and maybe how that's impacting markdown activity? And on a side note, I understand the bet-on TVs with the World Cup at the year-end, but can you explain a little bit what's behind the bet-on cell phones? And how should we expect Arco Norte to impact how you distribute inventory, the implications for greater 1P breadth, 3P fulfillment, fulfillment times generally and incremental efficiencies. And then lastly, there certainly doesn't seem to be any impact on Suburbia right now from low-priced cross-border e-commerce. But how are you thinking about that over the long-term, particularly if we begin to see kind of a fintech overlay on some of the cross-border stuff?

Okay. Thank you. The [ went overweight ] TVs is pretty clear and cell phones what we have been seeing is that our customer is preferring to buy open cell phones from us and that's that we have been doing and that has allowed us to have the correct inventory we needed and not dependent on the carriers necessarily. So that has given us a big boost on cellphones. Arco Norte, Arco Norte remember that the part we opened is big ticket. We are opening softline on the end of 2024 and 2025. So for big ticket is going to be a necessary buffer because at the later season November, December last year and all the other previous years, we already had a trouble shipping correctly because we have too much stuff on our warehouse that was not built for that much items. So that addition is going to not change a lot deliveries for softlines. But we are also -- Arco Norte is not only Arco Norte, we're also building 7 regional depot centers where we're going to test 2 next year in Guadalajara and Monterrey, where they're going to help me have inventory closer to the customer, but not at the store level. So it's going to help me replenish the stores in less than one day and also deliver faster to my customer because then the customer is going to get his or her merchandise directly from the stores. So that's going to allow me to deliver to the customer in 24, 48 hours and also replenish that store in the same amount of time. So -- but that's going to be gradual because this part of Arco Norte is big ticket.

Understood. And then when it comes to just trying to reduce some of the markdown activity with the algorithms, are you beginning to see material benefits in that regard? And then I was hoping if you could just touch on that cross-border theme as well, please?

On reduced mark downs what -- we actually learned on COVID is that we could lead do the same with less. So especially in Suburbia, we were having excess inventories. So it's not that much of the algorithms yet because we are having a pretty robust project called planning assortment and allocation, which is exactly that where you have artificial intelligence, but that not, we only have the planning part already set up. We are still missing assortment and allocation. The next part which is allocation and which has those algorithm, but more artificial intelligence is going to come next year. And in terms of the low price, we need to remember that 50% of the commerce in Mexico is not legal, it's contraband. So actually, that's a lot bigger -- a lot bigger impact than the e-comm still coming through. If we can fight that illegal commerce in Mexico, the potential for brands like Suburbia, but also Coppel and [indiscernible] all those stuff, it's huge. It doesn't compare to the merchant maybe Alibaba chain or whatever. But who still have to get the government help with that one.

And do you see a political will there or maybe not in this administration?

I don't know, yes, I'm not sure.

I apologize for asking the question.

Thank you.

We have time for one more question today and it is a follow-up from Irma Sgarz. Please ask your question.

Yes, I apologize I got temporarily disconnected and someone may have already asked the question, so please feel free to just refer me to the transcript. I was just wondering, you've now sort of stabilized at about 24% online penetration, if I'm not mistaken. When you sort of think at this new normal or whatever you want to call it, post pandemic maybe, where do you see it sort of going from here? Do you see it sort of gradually sort of shifting up? Do you think at some at some -- in some categories, you may actually see sort of a reversion still back down, electronics for example, you sort of see some degree of normalization there that actually implies that some of the online penetration gets reverted again? Or do you sort of see it now sort of from this level actually continuing to shift up?

I don't see it going down in any categories. There are some categories where we are not doing a good job, cosmetics, for example, where we have lot of opportunities. So I see it gradually growing up in general, but in some categories significantly growing up in the next couple of years. And with marketplace, I see that we have a pretty big potential in terms of being in the top mind of the customer in terms of things that you would not normally look for today in Liverpool or Suburbia. So now I see it gradually growing up in general.

And if -- thank you and if I may just squeeze one last thing. From the marketplace sellers that you have on the platform, is there any service or any sort of functionality that they are asking for that you're not yet providing that you feel could help or could be meaningful going forward?

Yes, for example, we still have not massively rolled out fulfilled by Liverpool. But what we already introduced and is working pretty well is -- I don't know how we call it, but it's when you have for example, Adidas, a nice runout of shoe sites on my stores, it immediately turns up on the web page, but it's through marketplace. It's inventory from the vendors. So I already have this mixed -- this mixed input where if I run out of a special model or iPhone for example, then in terms the inventory from Apple. So those type of things that are -- that only omnichannel merchants can do are really working for us. And I'm really and Enrique answered the sales of market bid, but today we already have at any moment, 50% of our SKUs are from marketplace. So we are going to see a very big rise on sales from that.

Arco Norte is going to give us additional capacity, big ticket items to really increase -- fulfilled by which is something that are big ticket sellers have been asking for. And we were not able to be very responsive because of the constraints that we have in terms of capacity we were talking. So that's one of the things that Arco Norte will allow us to do.

Great. And I imagine that's pretty unique capability that you'll be able to offer there.

Absolutely. That's one of the big differentiator for us something that will -- I think will help a lot in terms of selling, yes.

Thank you. That concludes your question-and-answer session. I would now like to hand the call back over to Enrique Guijosa for some closing remarks.

Well, thank you very much for your attendance and we'll see you in Q3. Take care. Bye-bye.

That concludes today's call. You may now disconnect.