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. All lines have been placed on me to prevent any background noise. This is El Puerto de Liverpool Quarter 2023 Earnings Call. There will be a question-and-answer session after the speakers' opening remarks, and instructions will be given at that time. Today, we have with us Mr. Enrique Guijosa, Chief Financial Officer; Mr. Jose Antonio Diego, Treasury and Investor Relations Director; and Mr. Enrique Guijosa, Investor Relations Officer. They will be discussing the company's performance as per the earnings release for the second quarter of 2023 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 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. 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'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 very much, Sofia. Good morning to everyone, and thanks for joining us. I hope you're all doing well. As usual, I will start the call by quickly covering the highlights of our second quarter results and devote the rest to answer your questions. The second quarter of 2023 was once again a period with both strong results in almost all our key performance metrics and continued progress in our strategic initiatives. We were able to achieve robust top line growth rates in our three business segments, and our consolidated revenue increased 11.8% year-on-year. Retail sales grew 9.8%, interest income from our credit portfolio increased 26.7% and revenue from our shopping centers was 46.1% about year ago. It is important to highlight that the latter includes a one-time effect of MXN 225 million as we were able to reach a judicial agreement to sell an old insurance claim due to a property damage in one of our shopping centers. Without this effect, real estate revenue growth will have been still a very strong 25.3%. Same-store sales for Liverpool grew 9.3% and 2/3 of this increase is explained by higher traffic. This reflects the strong results we achieved in our key promotional events during this period, namely our Venta Nocturna for Mother's Day and the Hot Sale. We continue to see our Softline categories growing above average, particularly women's apparel, footwear and accessories, cosmetics and fragrances. In the case of Suburbia, same-store sales were 1.3% above a year ago. and the key driver in this case was the average ticket as we observed a reduction of almost 1% in traffic. General merchandise and hardlines grew above average while apparel lag. Importantly, during the second quarter, we finalized the implementation of the new layouts, brand IDs and signage for all Suburbia stores. For perspective ANTAD department stores reported a 4.1% increase in same-store sales during the second quarter. Total ANTAD apparel and footwear categories grew comps in 2.9% and while general merchandise increased 4.6%. There were no new store openings in the quarter for both Liverpool and Suburbia. As you already know, in the case of Liverpool, we will not have any openings during the rest of the year. As for Suburbia, we are reducing our new store plans for 2023 from 15 new stores to 8. Some of the projects that we have in several shopping centers have faced delays. Our rate of gross margin of 32% was 80 basis points below a year ago. This reduction was due to the above-mentioned successful promotions and higher logistics expenses which were partially offset by a more favorable product mix. The top line of our Financial Services business unit increased 26.7% year-on-year. This reflects a 24.1% increase in our credit portfolio as we continue to pursue a more aggressive growth in our credit card business. For perspective, we achieved a 10.5% increase in the number of cards holders to reach 6.9 million. Suburbia in particular, grew its cardholder base in 23% to reach almost 1.5 million. Furthermore, the share of sales with our own credit cards during the first semester was 48.5% in the case of Liverpool, this is 240 basis points above a year ago, while in the case of Suburbia, it was 30.1%, an increase of 340 basis points year-on-year. As mentioned before, normalized revenues from our shopping centers grew 25.3% year-on-year as we were able to increase occupancy by 3 percentage points to reach 92.2% and we continue to see very healthy growth rates in the number of visitors to our shopping centers. Our consolidated gross margin of 39.6% was 40 basis points above year ago as the business segment mix effect allow us to more than offset the above-mentioned retail gross margin erosion. Operating expenses without bad debt provisions and depreciation grew 10.3% year-on-year. The main factors behind this increase are the same ones I mentioned in our conference call for Q1. There were mainly payroll expenses, the variable expenses tied to our sales volume and general inflation. We closed Q2 with an NPL ratio of 3.0%. This is 60 basis points above year ago. and 30 basis points higher than what we expected at the beginning of the year as we were unable to offset the higher entry rates that we faced early in the year through a more efficient collection. To note, the NPL ratio for Liverpool was 2.8%, while Suburbia's closed at 5.8%. As you already know, we decided to make an important change to the way we account for our bad debt provision in our currently P&L during this year. Accordingly, in Q2 2023, we provisioned MXN 884 million, an increase of almost 70% year-on-year. This allows us to close the first semester with a cumulative provision that represents about 50% of the expected amount for the total year. For perspective, in 2022, the first semester provision was only 14.4% of the total year. So as you can see, this is a significant change. Our coverage ratio at the end of the quarter was 10.0%, 40 basis points below a year ago. Our Q2 EBITDA of MXN 8.7 billion was 11.8% above a year ago, while our EBITDA margin was 18.3% in line with the same period of 2022. These figures include both the positive and one-off in our real estate business unit from the insurance settlement. And on the negative side, the new way to account for our bad debt provision. If we normalize for these two effects, our Q2 EBITDA was 10.4% above year ago, and EBITDA margin was 17.9%, 20 basis points below the same period a year ago. As I stated at the beginning of this call, we continue to move forward in all our key strategic initiatives to strengthen our Omnichannel ecosystem. Digital GMV in the second quarter was 28% above a year ago, and our digital share was 27.1%, 300 basis points above the same period last year. Monthly active users of Liverpool Pocket increased 38% and downloads grew 24%. Our marketplace GMV grew 60% year-on-year, and we closed the quarter with 34% more sellers and 19% more SKUs. For perspective, almost half of our digital catalog on solar marketplace. During the second quarter, the digital orders that were delivered in 48 hours or less grew 32% year-on-year and accounted for 47% of total orders. This is 80 basis points above a year ago. The share of Click & Collect was 40%, 5 percentage points above the same period last year. and direct store deliveries were 32% of total home deliveries. This was 10 percentage points above a year ago. During this quarter, we opened our first fulfillment centers, one in Monterrey, and the other one in Villahermosa. In the case of Suburbia, our Q2 digital share doubled to reach 3.7%. We now have a digital kiosk in 1/3 of our stores, and we have implemented fulfillment capabilities in 2/3 of our store base. Finally, the new order management system for big-ticket items is now up and running in all Suburbia stores. In the financial services ecosystem, we continue to roll out our personal loans offer to our best Liverpool cash holders. During the first semester, almost 10,000 customers accepted our livercash product for a total origination of more than MXN 400 million. This allowed us to close the quarter with a livercash portfolio of almost MXN 0.5 billion. Furthermore, transactions with our wallet in Liverpool increased 3x year-on-year. In the case of Suburbia, we completed the rollout of the Mini Pagos product, which is now available in all Suburbia stores. Turning to our balance sheet. Total inventories grew 7.7% year-on-year, which is a meaningful reduction when compared with the 20.7% increase that we registered in the first quarter. Cash flow from operations during the quarter was MXN 2.2 billion, and this was MXN 3.2 billion less than 2022 due to higher working capital namely our credit portfolio and also higher income taxes. CapEx during the quarter was MXN 2.3 billion, almost 50% above year ago. This brought the first semester investment to MXN 3.4 billion. Almost half of this amount was invested in our Arco Norte project, and another 40% was allocated to new stores remodeling and expansion projects. Importantly, the remodeling of Liverpool Santa Fe, one of our flagship stores continued -- continues as planned. At the end of the quarter, cash on hand was MXN 15.8 billion, and our net debt-to-EBITDA ratio was only 0.35x. Recorded dividends, the first installment of MXN 1.57 per share was paid on May 26, and the remainder of MXN 1.04 per share will be paid on October 13. In other news, on April 12, we opened our first showroom for the BYD electric vehicles brands in Galerías Insurgentes. On June 14, we opened our first full-service BYD dealership, including a workshop in our Perisur shopping center. Finally, we concluded a limited assurance report by PwC on the ESG section of our annual integrated report and the updated version is now available at our Investor Relations site. Furthermore, we also published a list of changes on the metrics covered under this review. It's important to highlight that this is the first time that we undergo a third-party validation of the ESG metrics. This reflects El Puerto de Liverpool's commitment to ESG under Laguea for the footprint corporate strategy. Well, thank you very much. That's it in terms of reviewing our performance during Q2 2023. We continue to show strong operating results. And as you've heard, meaningful progress has been achieved in all strategic initiatives. We can now move to our Q&A. Thank you very much.

We will now conduct the Q&A session. [Operator Instructions]. Our first question comes from the line of Sergio Matsumoto. Please state your company name and ask your question.

Good morning. It's Sergio Matsumoto from Citi. I want to understand -- if you could help us understand the Suburbia customers that seem to be somewhat under pressure. And perhaps if you could maybe describe them how today's shopping behavior for that segment of the population is different from the slowdowns that you've seen in the past? And also, if you could describe your strategy to help stimulate those sales with the new store layout and et cetera.

Yes. Thank you, Sergio. Well, as you know, the target of Suburbia is basically the lower such economic level. So that's very different than in the case where the focus is on the middle class. I'm sure that with the high inflation that we are seeing in Mexico in the past several months, which has been improving, but still will be above the [indiscernible] target. And in particularly, the inflation for basic staples that's food and beverages is still in double digits that has certainly eroded the purchasing power or basic or Mexican families, more particularly, I think that the lower socioeconomic levels have been hit harder because, as you know, they devote the majority of their income to this basic needs. So I'm sure that that's one of the things that it's hurting the Suburbia customer. In fact, based on the information that we have, and we have seen -- and I'm sure you have seen as well the numbers that Walmart has reported in the previous two quarters for apparel basically in the negative figures. And rhetorically, we also heard from some other retailers that are focused on this lower such economic levels that they're having a hard time with these customers. And on the other hand, if you see the ANTAD reading for Q2, for apparel the increase was only 1.9%, which is still low. So Colin, I think that this is hurting certainly the real customer. And to complicate things even more. I think that you know the informal sector, the information that we're having has been growing, and we see like merchandise coming into Mexico, probably smaller without paying any taxes being sold in this informal markets, and that's a strong competition to total -- for us in this lower socioeconomic level. So I think that's what we can tell you in terms of what we see as the factors of what's going on with the suburb customer. We are -- as I said, we have just achieved the rollout that we did in order to significantly improve the image of the Suburbia stores. I think that you go to a Suburbia today, what you can see is the a better image of Suburbia store with a new layout, with new colors in the walls. The identification of all brands like it's clearly displayed and it's easy to navigate now for our customers. So in that regard, we feel very confident that the customer is noticing those changes. But unfortunately, the macro headwinds in that socioeconomic levels are not helping us to see the lift that we are expecting in terms of same-store sales. For the second semester, we still are hopeful that the things will improve with the new fall and winter merchandise. It's already [altering] to the store. Fortunately, we have played very well in terms of inventory. So we don't have -- even though Suburbia has been performing below the expectations that we had at the beginning of the year. we have been able to maintain our inventories in good shape. We don't have any excess inventories going into the second semester. So that certainly is good news in terms of profitability. And again, we are hopeful that with the new fashion merchandise will arrive in the -- for the second semester, we will see the numbers in the case of Suburbia in the second semester to achieve same-store sales between 7% to 8% in the second semester and total sales close to 10% in the second semester for this format.

Great. Thank you. Look forward to seeing the new Suburbia stores with the new image. Thanks a lot.

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

Hi. Good morning, can you hear me?

Yes, I heard your earlier.

Yes. Maybe a couple of quick ones, if I may here. On the Livercash, if you can comment on what's your longer term, I mean, how much of your portfolio you want to -- or your gross loan you want to allocate here for consumer credits, just to get an idea of how big could be -- could get liver cash in the mid- to long term. The second one, if you can comment on same-store sales apparel for Liverpool would be helpful. So the think -- I mean private label is much more lower, right, than what you've seen Suburbia, right? But the thing that you have a couple of brands there at Liverpool as well. If you can comment there on the health of the brand of your apparel catalog at Liverpool, forget about Suburbia. And the third one would be, if you can just elaborate on your initial comments, Enrique. Did I hear, well, that you said that half of your total catalog, it's marketplace. Is that correct? What you mentioned? That would be all. Thank you Enrique.

Yes, going to that easy one is the last one. Yes, you heard right, almost half of the catalog see in our digital platforms. comments over the marketplace. So we have seen a significant increase on that on that business. And we saw a 60% increase in terms of the which is very strong. So as we said in our Investor Day, we think that marketplace will continue to be one of the key growth vehicles for years to come. So going to your first question in terms of Livercash, I mean, I think that we're still testing the waters. I think today, we're offering that product only to the very best the low-risk customers for the Liverpool cardholder base. So we have been like almost at 40% of what we expect in terms of the store rate but still very, very early in order to tell you, frankly, how big this can be. We'll continue to be very careful in how we roll out this to make sure that we have the right balance between higher risk that comes from these personal loans. and how well access is this product. I think it is too early to tell. What I can tell you is that we think that there is a big potential. I think you see the percentage of the total credit lines that we have. extended to our cardholder base. How much of that total is today occupied by purchases from our customers or the portfolio. We -- I would say, probably we only have like 25%, 30% of the open-to-buy occupied. So we have a significant chunk of the credit line which the cardholders are not necessarily willing to occupy for additional purchases. Both the merchandise, but they might be interested in getting a personal loan and quicker -- in a quick way. So an easy way. So again, very early to tell, but we are hopeful that this has a very promising outlook. Now on the -- in terms of the liver provider levels, you're right. I mean in the case of Suburbia almost 2/3 of we sell in terms of product comes from private labels. In the case of Liverpool, to be in the low 20s range. So is significantly below. As you know, in the case of Liverpool, the brands, the international or local brands that we have are very important in our merchandise mix. And we have -- we use -- private labels very selectively in order to complement that very strong international and local external brands offering. They're performing well. I think we're happy. They're also performing well on the hardline section. There, we -- I think, they play a bigger role in all the items that we sell for the home of our customers. We have several brands that are doing very well. So that I can tell you overall.

Yes, right. So just to make sure I understand, so you said private label that Liverpool are performing well, meaning sensor shells in line or perhaps above what ANTAD in the industry is growing? Is that the correct rate?

Yes. Well, as you know, I mean, we said at the same-store sales for Liverpool grew basically at twice what we observed in the departmental store for the ANTAD. So the Liverpool banner performed very well. And the Softline categories in general, grew ahead of the Arland categories. So in the general mix, again, private labels are growing, I would say, very much in line what we see in the rest of the solvent categories, which is again well above what we see in the total market.

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

This is Antonio Hernandez from Barclays. Just two quick questions regarding this Suburbia follow-up from Sergio's question regarding the underperformance. And also in terms of the openings that you're now lowering the amount of openings expected for the year. In terms of CapEx and investments, what should we consider? And also the older Suburbia opening that you won't have this year? Are those -- should we expect those next year then? Or how are you seeing overall. And a quick follow-up would be regarding the [indiscernible] that you mentioned had a negative effect this quarter?

Yes, Antonio. Thank you. Well, yes, we are lowering the new store plans for Suburbia for this year. But frankly, it has more to do with the delays in terms of the negotiations with the shopping centers which on delays in the construction of some new shopping centers. So it has more to do with, I would say, external factors that we don't control rather than a willingness or decision on our side in order to stop or significantly reduce the number of Suburbia store opening. So that's very important to highlight that it's not like that our own decision, it has to do more with external factors. Having said that, yes, we believe that all these 7 stores that we are not going to open this year, we'll move to next year. And we hope that for next year, we will have a very -- the right balance between store openings between the first and the second semester [indiscernible] or next year, we're probably going to target to open 15 stores. So shooting to get hopefully to 20. So the idea is to catch some of the delays that we faced this year for next year. In terms of CapEx, friendly, the capital investment for our Suburbia store is around MXN 45 million, MXN 50 million. So the delay of this 7 new stores would reduce CapEx more or less, I was saying around MXN 300 million. So that's what you could expect in terms of the CapEx that we announced. So our CapEx what's going , we probably now between MXN 8.5 billion and MXN 9 billion, a little bit below what we announced in the previous call. So that's from the perspective in terms of the Suburbia store openings. And I didn't get the second question. Can you repeat it?

Yes. Thanks for question of Suburbia. The second question is regarding the [indiscernible] the security in the [indiscernible] that you had an impact from it this quarter. If you could provide us a little bit more light on that and what should we expect going forward?

Well, I guess the how strong has been the peso has been a surprise to all of us that I think you can ask and answer, all of it. The majority was that we're going to see you the peso trading at MXN 16.8 per dollar in July 2023. A year ago, we have said there was no way that was going to happen and this is what we're seeing. So when we prepare the bonds of MXN 250 million of the bond that we had a listed in 2026 in order to reduce the concentration that we have for the debt in that year. we decided that it makes sense to leave the retail, which was tied to that bond open, thinking that the probability that the peso was going to like be above the 19 peso more or less threshold that we have in the swap for that financing, that the priority the peso was going to be above MXN 19 was higher than a stronger peso. So we decided to leave that MXN 250 million derivative open. Obviously, that has not happened. I mean the peso has rate more than it's almost like MXN 2.50 in the past 6 to 7 months. So that you multiply that times 250 that we have opened derivative. That's why the total loss related to the derivative is in the neighborhood of MXN 600 million, which is you add up all the losses that we have seen in the past -- basically, in the past two quarters that you're right precisely to that amount close to MXN 600 million. We believe that we should be close to stop there and that the peso will probably stay, I guess, around these levels or if you see the expectations are that we're going to be looking at a weaker peso by the end of the year. But frankly, I mean, God knows. So where we are, we don't have any plans to get rid of this derivative. Because we are in the worst part of the cycle, I guess, and the maturity is until 2026. So we'll keep the derivative for some time. hoping that the peso like will head to like weaker levels in the years to come, we recover, hopefully, all of these paper losses that we have recorded in the past 2 quarters. I hope that it was a loan explanation, I hope I was clear.

Our next question comes from the line of Luis Yance. Please state you company name and ask the question.

This is Luis Yance from Santander Asset Management. Two questions. One, I guess, a related question to the strength of the Mexican peso -- perhaps if you could talk a little bit about the impact that it may have or it has on your imported goods, perhaps if you could remind us what percentage of sales at this point are coming from imported goods, how much flexibility you have to change as we look into the next couple of quarters and you've been buying, and given what you said in terms of inventories being lean, I'm guessing you've been buying much more favorable exchange rates, the new collections, et cetera. So what happens in that sort of scenario? Do you need to pass it all those benefits to the consumer? Could you try to keep some of that and not may be reflected into better retail margins. And I guess the impact it could have on the average ticket, which so far, what we saw in both formats that has been grossed below inflation. Just wondering if we were to see the Mexican peso. I'm not saying MXN 16 and change, but maybe around MXN 17. Is it possible or conceivable to see actually average ticket going down year-over-year mainly because of that effect? And I guess a related question to that is, how could that play into potential be more aggressive on the promotion side, given that strength of the [Maxipan] but that is especially for Suburbia, as you were saying, the idea is to reactivate sales in the second half, could that play a role? That will be my first question.