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

Good morning. My name is Daniela, and I will be your conference operator. [Operator Instructions] This is Liverpool's Third 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 Grinan, Investor Relations Officer. They will be discussing the company's performance as per the earnings release for the third quarter of 2023 issued yesterday. If you did not receive this report, please contact Liverpool's IR department, and they will e-mail it to you or download it at the IR website as well. 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. These 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, Daniela, and good morning to everyone. Thanks for joining us. I certainly hope that you are all doing well. I will start by quickly covering the highlights of our third quarter results and devote the rest of the call to answer your questions. I am pleased to share with you that, once again, during the third quarter 2023, we posted strong results in almost all our key performance metrics while we continue to develop industry-leading strategic initiatives. Our consolidated revenues increased almost 10% year-on-year. Although we did see a sequential slowdown in Liverpool's top line, we continued to achieve double-digit revenue growth rates in both our Financial Services and our Real Estate business units. July was a very strong month for both Liverpool and Suburbia but during the rest of the third quarter we observed a moderating demand in both banners. Positive top line results were achieved despite facing a challenging base period as same-store sales for Liverpool and Suburbia during the third quarter of 2022 grew 19.3% and 16.1%, respectively. Comp sales for Liverpool grew 5.8% in Q3. And practically, all of this increase was explained by higher traffic. We continue to see our softline categories growing above average, particularly cosmetics, fragrances and accessories. In the case of Suburbia, same-store sales were 3.8% above a year ago, a sequential acceleration with a nickel contribution of both traffic and average ticket. General merchandise and men's apparel grew above average. Importantly, during the third quarter, we launched the campaign rediscovered Suburbia aimed of communicating the improved customer experience in all our stores. It is important to highlight that it seems like the sales deceleration that we observed during the third quarter was quite broad for perspective. ANTAD Departamental Stores reported a 3.5% increase in same-store sales during the third quarter and total of ANTAD apparel and footwear categories grew comps 3.3%, while general merchandise increased 3.7%. In spite of the small slowdown, our healthy inventory position allow us to maintain a disciplined approach regarding our promotions throughout the whole quarter, which together with a higher share of top line, resulted in a retail gross margin of 33.5%, a 110 basis points above a year ago. We closed the third quarter with our inventory growing just 2% year-on-year. The top line of our Financial Services business unit increased 27.6% versus a year ago. This reflects a 22.6% increase in our net credit portfolio as we continue to pursue a more aggressive growth in our credit card business. We achieved a 9.5% increase in the number of cardholders to reach 7 million, a new milestone. Suburbia in particular, grew its cardholder base by 18% to reach 1.5 million accounts. Furthermore, the share of sales we are on credit cards during the first 9 months of 2023 was 48.3% in Liverpool. This is 240 basis points above year ago, while in Suburbia, it was 30.6%, 350 basis points above. Revenues from our shopping centers grew 15.8% year-on-year as we were able to increase occupancy by 2 percentage points to reach 91.8%, and we continue to see healthy growth rates in the number of visitors to all our shopping centers. Our consolidated gross margin of 41.6% was 200 basis points over a year ago as the business segment mix effect together with above-mentioned improvement in our retail margin contributed to these results. Operating expenses with our bad debt provisions and depreciation grew 13.5% year-on-year. The main factors behind this increase were once again payroll expenses as we continue to face wage pressures, and we have increased our head count in both the digital and the technology departments. We closed the third quarter with an NPL ratio of 3.5%. This is 65 basis points above a year ago, and we were unable to offset the higher entry rates that we faced early in the year. To note, the NPL ratio for Liverpool was 3.3%, while Suburbia closed at 6.1%. As you already know, we decided to make an important change to the way we account for about debt provision in our currently -- in our quarterly P&L during this year. Accordingly, in Q3 2023, we provisioned MXN 664 million, double the amount that we posted a year ago. As we explained, this accounting change does not represent a material effect in our full year figures. For perspective, in 2022, the cumulative bad debt provision for the first 9 months of the year was only 1/3 of the total year. Our coverage ratio at the end of the quarter was 10.4% of the gross credit portfolio, and this is 10 basis points below a year ago. The balance of the bad debt reserve represented 3.3x the NPL balance. Our Q3 EBITDA of MXN 6.9 billion was 12.9% about a year ago, while our EBITDA margin was 16.8%, 50 basis points above the same period of 2022 as the strong consolidated gross margin allow us to more than offset the reduced operating leverage and a significant increase in our bad debt provision. Net profit increased 29% year-on-year. If we exclude the 40% improvement that we saw in our net financial expenses, which was mainly due to FX, our Q3 net profit was 19% about a year ago, reflecting the above mentioned strong operating results and a significant improvement in the contribution from Unicomer, albeit from a low base. 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 23% about a year ago, and our digital share was 23.4%, 250 basis points over the same period last year. Mostly active users of Liverpool Pocket increased 10% and downloads grew 6%. Total business to our digital platforms increased 22%. Our marketplace GMV grew 62% year-on-year, and we closed this quarter with 34% more sellers and 41% more SKUs. For perspective, almost half of our digital catalog is now coming for our marketplace. During the second quarter, the digital orders that were delivering 48 hours or less grew 28% year-on-year and accounted for 45% of the total orders. The share of Click & Collect was 38%, 4 percentage points above the same period last year, and direct store deliveries were 27% of total home deliveries, 1.7 percentage points above year ago. In the case of Suburbia, our Q3 digital share almost doubled to reach 3.3%. We now have a digital kiosk in almost 40% of our stores and we have developed fulfillment capabilities in all the Suburbia store base. Regarding Financial Services ecosystem, we continue to roll out our personal loans for our best Liverpool cash holders. We closed the quarter with a livercash portfolio of almost MXN 700 million, and this is 8x the balance we had a year ago. In the case of Suburbia, the Mini Pagos product is now available in all Suburbia stores. Cash flow from operations in the third quarter was MXN 2.2 billion, and this was significantly above the negative MXN 329 million that we posted in the same period of 2022 due to the above-mentioned favorable operating results and lower working capital requirements. CapEx during the quarter was MXN 2.5 billion, and this brought a cumulative investment to MXN 5.9 billion, almost 30% above a year ago. About half of this amount was invested in our Arco Norte project and another 31% was allocated to new stores, remodeling and expansion projects. Importantly, the remodeling of Liverpool Santa Fe, one of our flagship stores continues as planned. At the end of the quarter, cash on hand was MXN 14.9 billion, and our net debt-to-EBITDA ratio was only 0.37x. Regarding dividends, the first installment of MXN 1.57 per share was paid back on May 26, and the remainder of MXN 1.04 per share was paid just recently on October 13. In terms of new stores, we opened 2 new Suburbia stores during the third quarter, and we have just opened another 2 during the first half of October. There are still 4 new openings for Suburbia plan for the rest of the year to finish 2023 with a total of 10 new Suburbia stores. During the third quarter, we also opened a few new Liverpool Express units to reach a total of 14. Finally, on September 6, Unicomer formally filed a request with a banking regulatory agency in Peru, Superintendencia de Banca to withdraw forms intention to acquire CrediScotia Financiera. Concurrently, Unicomer signed a termination agreement with Scotiabank Peru for this transaction. That's it in terms of reviewing our performance during the third quarter. Now before we move to Q&A, let me share with you some other exciting news. As you probably read, we were included in the TIME Magazine and Statista, 750 best companies of the world listing. We are #4 out of 11 Mexican companies including this global ranking. The factors considered to prepare this list were employee satisfaction, revenue growth and progress in the ESG initiatives. Merco Talento just recently named the El Puerto de Liverpool as the best company in terms of reputation and talent attraction in the self-services and department store categories. Also, on October 17, Merco published its annual ranking of the company's with the best reputation in Mexico. El Puerto de Liverpool occupied the ninth place an improvement of 9 positions versus the 2022 ranking. Furthermore, the IGDS, which is the Intercontinental group of Department Stores, recognized Liverpool in its recent 14th World Department Store Summit, which was held in Dubai a couple of weeks ago, as the runner up in its most innovative department store in the world were. This competition was open to department stores across the world from a small to large, from premium to luxury evaluating their impact on customers, employees, community and stakeholders in general as well as the digitation and innovation over their businesses. In closing, we're encouraged by the strong operating results we delivered in the third quarter and the momentum that we have achieved in all our strategic initiatives. We believe we are ready for the coming holiday season and are looking forward to serve our customers everywhere, every day for life. Now let's move to Q&A. Thank you.

[Operator Instructions] Our first question comes from Ben Theurer. [Operator Instructions]

Yes. This is Ben Theurer from Barclays. The first one, I'd really like to understand a little bit better some of the dynamics you're seeing in the markets in regards to some of the consumer behavior down trading. How do you feel about the upcoming holiday season as it relates to the necessity to be aggressive on promotion to drive traffic into the stores? You flagged, obviously, the softlines continuously driving some of the traffic recently. But how do you feel about the upcoming season as it relates to the need to invest in promotioning? That would be my first question.

Yes. Thank you, Ben. Well, regarding your question on down-trading, we have not seen any, frankly. When we mentioned that the key driver for the increase that we saw in same-store sales, in the case of Liverpool was basically traffic since the average ticket only grew 0.4%, it was basically flat. That -- the driver behind that flatness, let's say, in the average ticket is more related to the business mix as softlines grow basically at 2x the rate that the hardline categories grew. And that was the key driver of the growth in same store sales. And that's why the average ticket was flat. The average ticket in the case of the solvent categories is much lower than the hardlines. In fact, I mean, looking at the numbers, the -- for example, the designer brands, as you know, we don't carry the luxury brands, what the designer brands that we carry in all our stores are doing pretty well. Most of the rents that we have in the high tier are also moving nicely. So again, we don't see any evidence of customers in Liverpool doing any down-trading. Now regarding your question in terms of the holiday season, we feel you know that we have a very strong promotional plan. We -- since we also finished Q3 with a very healthy inventory levels. We frankly don't have the need to be very aggressive on the holidays in order to push the merchandise. That's one very good news in terms of the profitability that we're expecting from Q4. So as usual, we are planning to have like a very strong promotional campaign for both the Venta Nocturna and Christmas and also especially the [indiscernible], which is coming just a month from now, basically. So we feel in good shape. And again, because of the discipline that we have had on the inventory side, we don't think that we will have to be over -- going overboard on the promotional side.

Okay. Perfect. And then my just quick second question is related the operating expenses, and you've highlighted, obviously, some of the investments, logistics, digital people. How much of an impact do you expect into the next whatever 2 to 3 quarters still to see from the increase -- from the wage increases and the change in the holiday schedule here in Mexico? How much of an incremental headwind do you think this is going to be?

Well, unfortunately that the next post Q4 this year, and frankly, I also expect the same pressures for all 2024. We continue to see a lot of pressure on the payroll expenses for us. We'll probably have once again a double-digit increase in the minimum wage, which is going to be announced in the next weeks. As far as I know, our private sector is pushing for a 12.5%, but I think most likely will be close to 20% since it's going to be the last year of current administration. We continue to have the pressures of the one extra percentage point that has to go into the pension plans of the employees, the reform to the vacation is already in the base, that's not going to be additional pressures. But importantly, the minimum wage also forces us to review the salaries for all the lower levels of organization, but there's also like an effect of -- in those levels, not only the people that only earn the minimum wage. So -- and of course, there's a major risk, which is currently still not a proof, but I'm sure you know there's a discussion going on in the Mexican Congress about the reform of the -- of going from 48 hours to 40 hours. And that we probably -- I mean like if it comes to pass in the Congress, that's going to have a major effect in terms of how we manage our payroll expenses. So that's just a risk as of this point in time, this has not been improved, but it's certainly something that we have to watch out.

Our next question comes from Andrew Ruben from Morgan Stanley.

Andrew at Morgan Stanley here. I just wanted to dig in a bit more on the gross margin. I mean it was a historically strong big year for your business. And you mentioned some of the mix effects, some of the improvements in the retail margin, but trying to understand these drivers that this is a level we should think as reasonable to hold going forward if there were some more temporary factors or mix items that you consider reversing. Just to get some more clarity given the performance in the quarter would be very helpful.

Yes, Andrew. Yes, there are 2 important drivers of the significant increase that we saw in the gross margin. The first one has to do with the pure retail margin, which increased 110 basis points. And that, again, the big driver there was -- I think there were 2 drivers. One was as you know the fact that the softline categories continued to perform very well and well ahead of the hardlines. And softlines, as you know, have a higher gross margin than hardlines in general terms. So that's one important factor that helped us in Q3. And the other one was that because we have -- we still we have had a healthy inventory position at the end of Q2, we were able to have a very good response in the first stage of the promotional season to clear out all the spring summer merchandise. So the majority of the merchandise that we have to promote or to markdown was moved in the first part of the promotional campaign, and we didn't have that much product left for the later stages of the promotion where we, of course, do higher markdowns in order to finish the clearance season in good shape. So that's another factor. I mean a lot of the merchandise that we cleared out was sold in the first stage of the markdown period and instead of the other stages. So those 2 things help us a lot in terms of the retail gross margin. And the other one, of course, was a business effect -- a business mix effect as both the Financial Services and the Real Estate business units continue to grow at very strong rates, double-digit, high double digits for both business units. So that was another help. As we move forward, I would tend to think that softlines will probably not continue to grow well ahead of hardlines, I think that things will tend to stabilize. Now we're back -- basically, we're back to the business mix that we have between softline and hardline before the pandemic. So I don't think that there's a lot of upside on that front anymore. And also, the growth rate that we're seeing both in Real Estate and Financial Services business should moderate going forward. So that's also going to be another, let's say, a headwind in terms of our gross margin.

Our next question comes from Alan Alanis from Santander .

Again congratulations for the results. Alan Alanis from Santander. I want to follow up on the mention that you said that softline is growing 2x faster than hardlines... Can you hear me there?

Yes, loud and clear.

Okay. Sorry. Is this a leading -- is the fact that softline is growing 2x faster than a hardline, a leading indicator that this further deceleration ahead, meaning people are not buying as many refrigerators or televisions, and instead, they're just buying apparel and perfumes and so forth? I mean, that would be the first question.

I'm not sure about that. Look, I think that the softness that we're seeing in hardline has a lot to do with what we saw during the pandemic both in the 2020 and in the first half of 2021. And we saw like a lot of people are buying things for their homes, buying computers, buying like new furniture, new chairs, new equipment to do exercise at home. And so I think that what we are seeing right now are still some kind of normalization that people -- those are not things that you buy very frequently. But as we are now almost 2 years behind that, I would tend to think that people -- I mean, going back again to take a look at these hardline categories. So I don't see that as a lead indicator, I think it's more of a normalization that we'll tend to think.

Got it. Okay. So it's more of an effect of base of comparison and normalization. And then my last question has to do with the -- I mean, I don't like to ask questions to management about the stock price. But I think in this instance, I think it's appropriate, I mean the Liverpool shares left the Mexican Bolsa index, and that caused a big decline in the stock and it's causing a lot of anomalies. On our calculations, your stock is trading below book value, which makes absolutely no sense. It is like if the market would believe that you have losses to perpetuity, and you're trading at 1/3 your historical P/E multiple and so forth. So it's a big anomaly. My question is, Enrique, how does management think about this issue about living the index and the lack of liquidity? And is there anything to be done? I just want to understand the thinking of management. So think that -- I mean I think that Liverpool, I honestly think it's a great company. And you're delivering great results but we're seeing this other issue around liquidity, and the lack of participation in the index that is impacting you.

We'll I'm glad that you don't ask about the stock price because in general terms, as management, we also don't answer questions about the stock price. But I can tell you that like we were frankly surprised by the fact that we -- I mean just a few days before Bolsa announced the new index all the indicators [indiscernible] that we were going to stay or eventually, what affected loss, as I'm sure you know, was one of the things that they've also looks at to make up the indexes, what they call the retail float. And in that regard, I mean, [indiscernible] we surpass us by that measure, and that's why they get into the index and were out. Again, we were surprised, but there's so much we can do. Frankly, the level of trading in our stock that we have seen since then has been quite high, frankly. Of course, a lot of people selling, but also, I mean, a lot of activity. And our focus is in order to execute our strategy, I mean that's what is in our hands, and that's what we're focused to do. So we're trying to do our best in order to make sure that the company stays competitive, that we deliver on the expectations that we and the market has in terms of business results. And that's, again, 100% of our time, we devoted to that.

Yes. And I think that's the right thing to focus. And maybe the high liquidity that we've seen recently is more of index funds that are just unwinding their positions and then things will normalize soon. Again, congratulations for the results.

Thank you, Alan.

Our next question comes from Camila Azevedo. [Operator Instructions]

I'm Camila Azevedo from UBS. So could you please comment about the competitive and promotional environment year-to-date? And how do you see your online competition behaving? Also, I would like to hear your thoughts on how is the marketplace contributing to your online offering? And if you could comment on how you choose your sellers, SKUs? And if you have any specific plans for 2024. That will be very helpful.

Yes. Thank you, Camila. Well, a competitive environment, as always, on retail is not like competition, it's tough. I mean -- as I like to say, I mean, probably the retail market in Mexico is the most competitive industry in the country. I mean, as you know -- I'm sure you know, I mean, there are a lot of industries where there's only one, two or three players, and they -- in our case, particularly in discretionary seller since the case of Liverpool department store, we compete with the sell services in several categories. We compete with specialty stores in several categories. We compete with the Costcos and the Sam's. We compete with -- and now obviously, with the pure players on the online business. So it's a very competitive market. But we haven't seen any -- the -- I would say, behavior in terms of people going like crazy on promotions or anything like that. I think that we're all behaving, let's say, on that front. I think that we're managing our business depending on the different strategies. But again, we don't see anyone doing some like a very aggressive promotions and being out of what with the rest of the market. So I think that's a good news. In terms of the online payers, of course, they continue to be very aggressive, not only in our case Amazon and Mercado Libre, which are the 2 huge ones but I'm sure you know also that SHEIN and Temu just recently are putting a lot of focus on the Mexican market. I'm sure, although there's no public information on them that they are [ accruing ] also very quite healthy roadways across, one of the things to watch out for the next several quarters. And now going to your marketplace question, well, marketplace is posting very good results. We expect to finish the year with the GMV in the marketplace growing basically 40% year-on-year, and that's basically in line with what we said at the start of the year. So we're going to be right on the money in terms of the growth that we expected. As I mentioned in my opening remarks, marketplace is now represents almost half of the SKUs that we have in our catalog. And I'm sure you also know that in our case, the marketplace or the 3P offer, we see it as a complement of our 1P of our merchandise that we see [indiscernible] stores. So it's not an open marketplace. So we are very careful with the sellers that we invite to become part of our marketplace. Not everyone can start selling just right away. In [indiscernible] it has [ hoped ] to a vetting process in order to make sure that it really complements our 1P offer and not competes head-to-head with, again, what we offer in our sales store. So that is basically what I can tell you in terms of competition in the marketplace.