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

Good morning. My name is Joe, and I'll be your conference operator. [Operator Instructions] This is Liverpool's First Quarter 2023 Earnings Call. [Operator Instructions] Today, we have with us Mr. Enrique Guijosa, Chief Financial Officer; Mr. Jose Antonio Diego, Treasury and Investor Relations Director; and Mr. Enrique Grinan, Investor Relations Officer. They will be discussing the company's performance as per the earnings release for the first quarter of 2023 that was issued yesterday. If you did not receive the report, please contact Liverpool's IR department, and they will e-mail it to you, or you can download it from the company's IR website. 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 earnings call are based on information that is currently available, which is subject to risk and uncertainty 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. 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, Joe. Good morning to everyone, and thanks for joining us. I hope you all are doing well. As usual, I will start the call covering the highlights of our first quarter results. After this, I will share with you a couple of exciting news, and I will devote the rest of the call to answer your questions. We started 2023 on a strong note as we saw sequential improvements in most of our key performance metrics, but we continue to make strides in our strategic initiatives. Our consolidated top line during the first quarter increased 16.5%, and our 3 business segments posted double-digit growth rates. Retail sales grew 15.4%. Interest income from our credit portfolio increased 27.3%. And revenue from our shopping centers was 17.3% above a year ago. Same-store sales for Liverpool grew 15%, and almost 90% of this increase was explained by higher traffic. We continue to see our Softline categories growing above the average. In the case of Suburbia, same-store sales were 3.1% above a year ago, and the key driver was also traffic as we observed a slight reduction in our average ticket. For perspective, ANTAD department stores reported a 5.6% increase in same-store sales during the first quarter, while total ANTAD apparel and footwear categories grew comps 10.0% and general merchandise, 4.2%. In terms of new stores, on January 24, we opened Liverpool Parque Tepeyac in Mexico City. This is our sole Liverpool new store for 2023. Suburbia opened 2 new stores during the quarter, one in Tijuana, which is our fourth store in this metro area, and another one in Navojoa. These 2 new store openings strengthen Suburbia's presence in the northern part of the country. Retail gross margin of 32.2% was 45 basis points below year ago. This reduction was due to the normalization of our promotional activity as we were able to carry out the clearance of our 4 winter merchandise with enough inventory for the first time since the pandemic. This was partially offset by a more favorable product mix. The top line of our financial services business unit increased 27.3% year-on-year. This reflects a 23.2% increase in our net credit portfolio as we continue to pursue a more aggressive growth in our credit card business in terms of origination, offered reps, line increases and cash withdrawals. For perspective, we achieved a 10.9% increase in the number of cardholders to reach 6.8 million. Suburbia, in particular, grew its cardholder base in 25%. Furthermore, the share of sales with our own credit cards was 46.3% in Liverpool, 180 basis points above a year ago, while in Suburbia was 27.3%, 221 basis points above. We closed Q1 with an NPL ratio of 2.8%, 38 basis points about a year ago and basically in line with our expectations. As I mentioned in our Liverpool Day, we decided to make an important change to the way we account for our bad debt provision in our quarterly P&L during 2023. We are now looking at the full year picture instead of just the figures for the current quarter. We believe this change provides greater transparency and minimizes volatility in our quarterly profits. Accordingly, in Q1 2023, we provisioned MXN 403 million, and this represents a swing of almost MXN 700 million versus what we did in Q1 2022 when we posted a reserve reversal of MXN 269 million. Our plan is to close the first semester of 2023 with a cumulative provision that represents about 50% of the total year. For perspective, in 2022, the first investor provision was only 14.4% of the total year. Our coverage ratio at the end of the quarter was 10.6%, 70 basis points below a year ago. Revenues from our shopping centers grew 17.3% year-on-year as we were able to increase occupancy rates by almost 3 percentage points to reach 91.4%, and we continue to see healthy growth rates in terms of visitors. Our consolidated gross margin of 40.5% was 16 basis points above a year ago as the business segment mix effect allow us to more than offset the above mentioned retail gross margin reduction. Operating expenses with our bad debt provisions and depreciation grew 15.3% year-on-year. The main factors behind this increase were: #1, the variable expenses are grow in line with sales like commissions to our sales associates, credit card fees and packaging materials; #2, the 20% increase to the minimum wage at the start of this year; #3, the new laws on vacations and pension plans, which became effective this year; #4, above-average salary increases on investment in new talent, in logistics, technology and digital; and finally, #5, general inflation rate. Our Q1 EBITDA of MXN 5.2 billion was 5.3% above a year ago, while our EBITDA margin was 13.8%, 1.5 percentage points lower when compared to 15.3% in the same period of 2022. It is very important to highlight that the above mentioned change in the way we account for bad debts in our P&L plays a significant role in these comparisons. If we exclude the bad debt provision from both this year and the base, our EBITDA grew 20%, while our EBITDA margin improved 43 basis points. As I said in the beginning, we continue to move forward in all our key strategic initiatives to strengthen our omnichannel ecosystem. Digital GMV in the first quarter was 33% above a year ago, and our digital share was 24.5%, 280 basis points above the same period last year. Monthly active users of Liverpool pocket in Q1 increased 27%, and downloads of our app grew 16%. Our marketplace GMV grew 62% year-on-year, and we closed the quarter with 22% more sellers and 44% more SKUs. For perspective, more than 40% of our digital catalog now comes from our marketplace. During the first quarter, the digital orders that were delivered in 48 hours or less grew 39.1% year-on-year, and they accounted for 39% of total orders, which was basically flat versus a year ago. The share of Click & Collect was 36%, and it was 4 percentage points over the same period last year. And the [indiscernible] store deliveries were 20% of total home deliveries, almost 4 percentage points above a year ago. Turning to our balance sheet. Total inventories grew 20.7% year-on-year. Considering that in 2021, we were still facing merchandise shortages as a result of the pandemic, we do not think this level represents a risk to our 2023 profitability. On the other hand, accounts payable to suppliers increased 21.8%. Importantly, the balance for this account includes our supplier finance program. Cash flow from operations during the quarter was negative MXN 4.2 billion. This was MXN 2.1 billion better than 2022. Our largest uses of cash during the quarter were working capital, mainly inventories and trade payables. CapEx during the quarter was MXN 1.1 billion, 2.1% above year ago. Almost 60% of this amount was invested in new stores, remodeling and expansion projects. Importantly, the remodeling of our Liverpool Santa Fe, one of our flagship stores, continues as planned. The Arco Norte project accounted for almost 30% of the total investment during this quarter. We have just reduced our CapEx for the full year, and we now believe that our 2023 investment will be in the MXN 9 billion to MXN 10 billion range, around 10% below the previous guidance. We still expect logistics and technology to account for close to 50% of the total investment. At the end of the quarter, cash on hand was MXN 18.5 billion, and our net debt-to-EBITDA ratio was only 0.28x. Our shareholders agreed to pay a dividend of MXN 2.61 per share under March 16, 2023 General Assembly. This results in a payout ratio of close to 20%, which is significantly above the 13% [indiscernible] we are distributing to our shareholders as dividends before the pandemic. The first installment of MXN 1.57 per share will be paid on May 26, and the remainder of MXN 1.04 per share will be paid on October 13. Well, thus in terms of reviewing our performance in the first quarter of 2023. In order deals, on April 12, we opened our first showroom for the BYD electronic vehicles brand in Galerías Insurgentes. We expect to open our first full-service BYD dealership, including a workshop in the second half of June in our Perisur shopping center. Finally, another exciting news, earlier today in New York City, we announced our partnership with WHP Global, which is the parent company of Toys"R"Us. The partnership will bring this iconic brand to Mexican customers for the very first time through an omnichannel offering of stand-alone flagship stores and e-commerce. This represents a significant milestone for the brand's global expansion and will strengthen Liverpool's positioning in this strategic segment. The stores will offer a wide range of toys and games from top brands, including exclusive private brands from Toys"R"Us. The digital launch and the first flagship store is planned for holiday 2023. Now let's move into our Q&A.

[Operator Instructions] Our first question comes from Antonio Hernández.

This is Antonio Hernández from Barclays. Congrats on your results and the new announcements. My question is regarding your nonretail business. Well, leasing -- in terms of leasing, you mentioned the occupancy recovering and basically posting very good results. What are your expectations ahead in terms of profitability and in terms of growth in this format, in this division? And basically, have you seen any specific trend during the year?

Yes. Thank you, Antonio. Yes. As I said, we once again saw very strong growth rates in the revenue from our shopping centers. The Q1 growth rate was 17.3%. And we see, as you mentioned and I said in my opening remarks, we're seeing higher occupancy rates. We have had a positive commercial activity. That means that we have more, like, people, like, leasing, instead of people, like, abandoning the space in the shopping centers for several months now. We see also healthy growth rates in terms of the number of cars, number of visitors to our shopping centers, which, in turn, also help us in terms of the revenue that comes from the -- more shops that we have in the aisles of the shopping centers and also all the activity regarding the marketing and promotional activity that goes on inside our shopping centers with the islands and also all the advertisement that we have inside our shopping centers. So we believe that the double-digit growth rate will continue for the rest of the year. And that's -- we're expecting that the growth rate for the full year will be closed also to 17%, showing this recovery of this important segment for the company. This in terms, obviously, will help a lot in terms of profitability. As you know, the real estate division has a very high EBITDA margin billing. So this, of course, helps us a lot in terms of the overall profitability of the company.

Okay. So basically contributing because of, of course, because of this higher proportion in terms of sales mix, but also better profitability within the real estate division?

Yes, yes. Also better profitability within the real estate division.

Okay. Because of these different initiatives. And just a quick follow-up and maybe a little bit more technical. These promotional activity that you've mentioned within the shopping centers aisles and so on, is this being managed as well by Liverpool and Suburbia's marketing teams and so on? Or is it a different part of the advertising that you offer to third parties?

No, it's managed by a different team. I mean we have a different marketing team in our real estate business, which is separate from the Liverpool. And it's also separated from the Suburbia. In Suburbia, we basically have -- in total, we have 4, let's say, advertising teams, one for Liverpool, one for Suburbia. And we also have a marketing team in the credit card business. And finally, the one that manages the advertisement for shopping centers, both in terms of advertising our shopping centers and also managing the commercial space for people that want to have promotional activities inside the shopping centers.

Our next question comes from Camila Azevedo.

This is Camila Azevedo from UBS. So my question is about operating expenses in Mexico. There are discussions to lower the working hours from 48 to 40 per week. So considering what we have seen in your OpEx line, do you think this regulatory change could have some material implications for your headcount of -- or labor expenses?

Thank you, Camila. Well, I think that we're still analyzing what's going to be the effect in our payroll expenses from this change. I mean it still has to go through, if I understand, through the Senate. And it has to be still, like, has to go through the, I think, 17 of the local Congress or the Chambers of Deputies in the States. So as my understanding, it still has some way to travel. But yes, it will continue to put pressure in our payroll expenses. As I pointed out in my initial remarks, I mean we're seeing a lot of, as you know, initiatives on the labor front from the government, starting with the minimum salary, which, in turn -- which pressure not only the people that, like, earn the minimum salary, but also in the lower ranks of the -- our frontline employees. Also, what happened in terms of the new vacation law, the new pension law as well. So all in, I mean, that's putting several hundred million pesos more of additional expense in our OpEx this year, and as has been the case, frankly, in the past several years. So this will be another factor, which I still don't have the exact figures. We're still analyzing what's going to be the implication.

Our next question comes from Ulises Argote from JPMorgan.

Ulises Argote from JPMorgan. So my question is related there to the same-store sales performance. Is there any room to update that guidance that you provided for the 7% to 8% growth, therefore, both Liverpool and Suburbia banners, given the results that we saw for the first quarter? And also to what do you attribute that big gap between the Liverpool performance and the broader ANTAD figure there for department stores? Any color that you could provide there would be really helpful.

Yes. Thank you, Ulises. The answer to your first question is no. We are still not ready to update the guidance that we provide for the same-store sales increase for the full year, which is, as you pointed out, 7% to 8% -- in the 7% to 8% range. I mean, although we saw a very, like, successful first quarter, it's important to highlight that this was basically due to the fact that in January and also February, we're very -- we observed double-digit growth rates in the case of Liverpool and also for Suburbia in January because we finally had a clearance -- a normal, let's say, clearance of the fall/winter merchandise, which was not the case in 2021 because of our merchandise shortages. So in the margin, we are seeing a slowdown. I'm sure you have seen the figures from the ANTAD for March, which were very soft, particularly for department stores. Our numbers were a little bit better, but not a lot. So we're still, like, cautious on the balance of the year as we're still expecting a slowdown in terms of consumption due to inflation and due to several factors going on in the Mexican macroeconomic environment. So we are still keeping our guidance. And going to your question on the difference between Liverpool and Suburbia. I think that Suburbia is still like a challenge for us, obviously. I think that part of the gap has to do with the socioeconomic segment. I think that the challenges for the lower socioeconomic levels in Mexico are higher because they devote a significant -- a larger portion of the other income to basic staples, which, as you know, inflation in food. And basic staples in Mexico has been well above -- general inflation has been more on the double-digit side. So that's, for sure, like, the impact on that on the lower socioeconomic levels is much higher because of the share they devote to this kind of merchandise. And the middle class, which is the target of the Liverpool banner. But we also know that we have, like, still way to go in the product we're buying and how we are allocating the merchandise to each other. One of the Suburbia stores, we still have, like, important opportunities there. And in fact, we have been doing some significant changes in the leadership of the buying department in Suburbia. We have changed basically 3 of our directors for women's, for men's and also for children's. We have replaced people that came with the acquisition from Walmart with people that has a very successful career buying clothes in Liverpool. So that, I'm sure, will be an important reinforcement for the balance of the year and also for next year. So as we said in the Investor Day, we're expecting that Suburbia will have a better second semester. But the first semester of the -- certainly, we're still facing some challenges there.

That's perfect. Super clear. And just to kind of fine-tune a little bit there. The second question was also related to Liverpool performance versus the broader ANTAD figure. But I don't know if that answer that you gave on Suburbia and maybe like the different socioeconomic segments that they target, do you think that, that also explains kind of the gap versus ANTAD? Or is there anything else there?

Could be. I mean, it could be. I mean, I'm sure that the way that Coppel has got their numbers, basically the softness that we have seen on the overall ANTAD numbers indicate. And I'm not familiar with their numbers, but we can infer probably that they have had lower growth rates. So I think that also, I can point out, I'd say in terms of Suburbia that maybe the lower socioeconomic levels are seeing, like, more challenges in the middle classes in terms of their purchasing power for sure. Now interesting dynamic there is that in terms of your payment methods, we have seen cash and debit card usage going down and credit card usage or share both our own credit cards and the bank credit cards gaining share. So -- but I don't know if that's another indication that the consumer is in pressure. They don't have necessarily the cash on hand to pay cash or to pay the debit card, and they're relying more and more on the credit card side.

All right. Perfect. That's super clear, and congrats on the results.

Thank you, Ulises.

Our next question comes from Irma Sgarz from Goldman Sachs.

Just a follow-up on the CapEx guidance that you provided, as you pointed out in your opening remarks, is slightly below what you had initially indicated. Apologies if I missed it, but is there a specific segment or part of the CapEx envelope that you'd call out that justifies this slight reduction? And that's my first question. And then in terms of second question, just as you think about delinquency and credit provisions and sort of credit approval for this year given the dynamics on the -- both on the rates and inflation side for somewhat lower income cohorts that obviously, I know you're tilting more towards the higher end, but for those part of your credit, those parts -- cohorts in your customer base that tilt more towards lower income, are you already restricting credit? Or how do you think about sort of risk-taking there for 2023?

Yes. Thank you, Irma. Well, in terms of CapEx reduction, I mean, as you know, I'm sure you're all aware that we generally understand that we provide the guidance we understand by a significant percentage. And we're trying to be more assertive on really, like, making sure that the number that we provide is the one that we're going to spend. So that's what -- we review very carefully our CapEx the last couple of months on our projects. We don't have any, frankly, any, like, particular project that is being delayed. It's just a revision of really the actual, like, disbursements that we are expecting for each of the projects, and that's why we revised down our CapEx by basically, like, MXN 1 million versus the figure that we have provided beforehand. So again, it has nothing to do with that major products being delayed. It's just a matter of fine-tuning the cash disbursements that we are expecting and hopefully being more accurate in terms of the CapEx for the full year than what we have done in the past years. So honestly, for CapEx, we're still expecting more than 50% of the overall CapEx to reinvest in the technology and also in terms of logistics, particularly the Arco Norte, the second phase for the Arco Norte project, which is for softlines, as you know, finalizing just some minor things that we still have to finish on the Phase 1 for big ticket. And also, it's not a big investment, but also some minor equipment for the [indiscernible] that we're expecting to open this year. So that's it in terms of CapEx. In terms of our risk management for the lower income level. No, we're not doing anything special or being more, like, careful in the origination of nuclear lines for the lower socioeconomic levels. We continue to be -- to have the same approach that we have had in the last several quarters. In fact, if you see the number of new cardholders for Suburbia, they increased 25%. That gives you like a signal of what's your risk appetite in that segment. We see NPLs for Suburbia particularly around the low 5 -- in fact, 5.2% for Q1. It's certainly above previous year, but still nothing to worry about. Frankly, in the business model for the credit card for Suburbia, we can certainly accommodate a higher number of NPLs, way higher than what we have right now. So we, again, are feeling okay with the way we are managing our risk right now. We don't intend to do any short-term adjustments with what we're seeing to date.

Our next question comes from Joaquín Ley from Itau BBA.

And my question is around the recent announcement of the agreement with Toys "R" Us. So if you could shed some more light on that, please. I mean what's the potential of that business in terms of number of stores and contribution to sales? What would be the CapEx involved? What kind of agreement is that? Is that a JV? Is it license contract based on fees or royalties? And then from an operating perspective, I mean, we've seen that brand closing in a number of countries recently in the last few years, I believe the U.S. included. So what do you see the opportunity is in Mexico opposite to what just happened in some other markets?

Yes. Thank you, Joaquin. Well, in terms of the agreement, it's basically a royalty agreement. We're going to pay a royalty to the parent company of the Toys "R" Us brands, WHP. And we're going to have the full management of the operation in Mexico. So we decide the merchant as the way we like. We also decide the pricing. We decide the promotional activity. So it's basically more or less the same agreement that we have for the Williams Sonoma brands. So again, it's a royalty. In terms of -- with the -- we're still fine-tuning. I mean it's going to be, frankly, a nonmaterial investment. You see, I mean, these are, like, a small flagship stores. We're talking of, like, maximum 1,500 square meters. And that's the largest one. More of that's going to below 1,000 square meters. So they're a small investment in terms of CapEx. And we're seeing this as a defensive move. We want to make sure -- I mean we have a very big presence in the toys segment in Mexico. We want to make sure that we continue to be the leader. So when the owners of the Toys "R" Us brand approached us, we thought that this was also a way to protect our, like, our presence here, the toy segment in Mexico. And it's not -- I mean we didn't commit. I mean I am not, like, I share with you the number of stores that we're planning to open, but they are, like, just a handful of stores. We didn't make the mistakes that we did in prior agreements for these kind of plans where we commit to open dozens of stores throughout Mexico. We frankly didn't have the [indiscernible] that we expected, and we have closed down the majority of them and just kept the half which are profitable. So in this case, we were very careful in the number of locations that we promised to make sure that we have all of them contributing on the profit side of the company. Quite frankly, it's going to be a small operation. And we have seen that U.S. is -- that now Toys "R" Us has a presence inside the Macy stores. And it's going well. In fact, that was the first approach that the owner of the Toys "R" Us brand made to us was to have Toys "R" Us inside the Liverpool stores. And we said no, we're not willing to share the profitability of what's also inside the store, which again is very successful for us and to share with another one pay royalty for a business that we are already like making inside Liverpool stores. So we decided to go stay with the stall and stores and the e-commerce business.

Okay. So this is going to be reported within your boutique's division?

Yes, absolutely. It's going to be managed by the same people that manage the Gap and the Banana Republic and the William Sonoma brands.

[Operator Instructions] Our next question comes from the line of Felipe Cassimiro.

I'm from Bradesco BBI. It's actually a very quick one on the contribution from online sales to the growth. Same-store sales of Liverpool has been very, very strong, right, and also online. So I just wondered if you could share with us the contribution of the online to the same-store sales of the quarter. And going forward, what is your expectations for online contribution in the next quarters?

Yes. Well, as we said, I mean, online increased its GMV 33% quarter-on-quarter. And if you see the same-store sales for Liverpool grew 15%. So I would say that probably, like, online represents, like, basically 25% of the total business. So I will say that probably 3 percentage points of the overall increase of the Liverpool same-store sales came from online. And we continue to expect online to keep growing at a very healthy rate for the balance of the year as we shared with you in our Investor Day.

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

Well, thanks a lot. I think that it was a very quick call just to share with you the Q1 figures. We don't have a lot in terms of sharing additional news because the Investor Day was just a few weeks ago. So thanks a lot for your presence, and we'll see you in the Q2. Thank you very much. Have a nice day.

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