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

Good morning. My name is Andrea, and I will be your conference operator. [Operator Instructions] This is Liverpool's Third Quarter 2024 Earnings Call. [Operator Instructions] Today, we have with us Mr. Gonzalo Gallegos, 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 2024 issued yesterday. If you did not receive the report, please contact Liverpool's IR department, and they will e-mail it to you or download it at its IR's website. Please note that this call is for investors and analysts only. Any questions from the media will not be taken nor should the call be reported on. Any forward-looking statements made during this 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 maybe 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. Gonzalo Gallegos.

Thank you, and welcome, everyone, to our third quarter 2024 earnings conference call. As you have seen from our third quarter results, we continue to experience strong revenue trends, while making strides in expense control. NPLs rose to 4.1%, a topic I will discuss further later in the call. Additionally, favorable exchange rate contributed to an increase in net profit of over 11% year-on-year. As usual, I will review our most important metrics by business unit. And afterwards, I will provide an update on our interest in Nordstrom. Let's start with revenue. During the third quarter, consolidated revenue reached MXN 46 billion, an increase of 10.4% versus last year. Retail revenue was 9.7% compared to last year, and we continued to achieve double-digit growth rates in financial services and real estate with a 16.3% and 11.9% increase, respectively. Same-store sales for Liverpool grew 7.6%, the highest since Q2, 2023. It was encouraging to witness the resilience in our customers, especially in the second semester of an [ electoral ] year tends to reflect lower economic activity. It is worth mentioning the solid performance of categories such as hardlines and cosmetics. Quarterly results were further benefited by strong performance in Liverpool's value-added services and income generated from our marketplace. On the other hand, Suburbia same-store sales of 7.6%, is lower than previous quarters due to a more normalized growth in its digital channel and the temporary closing of one of our Monterrey stores. Excluding these effects, we're encouraged by these results, especially considering the total ANTAD plan on footwear categories reported 7% growth during the quarter. We will keep enhancing our stores, while inviting customers to rediscover this world we experience. Inventory position at the end of the quarter reflects an increase of 20% versus last year due to early deliveries of winter merchandise to take full advantage of the full weather and to ensure inventory coverage for the upcoming quarter. We are expecting a normalization of inventory levels during October and November, and therefore, we were not anticipating risks on the overall health of our inventory by year-end. It's important to note that the sales slowdown we saw in the third quarter appear to be fairly widespread. For perspective, ANTAD department stores reported a 4.2% increase in same-store sales during the third quarter. As mentioned, total apparel and footwear categories in ANTAD saw no change in same-store sales, while general merchandise increased 4.4%. The top line of our Financial Services business unit increased 16.3% year-on-year, mainly due to an increase in our net credit portfolio of 16.7%. The overall value of the portfolio is increasing at a rate higher than sales growth due to increased cardholders, purchases of us and higher share of internal sales. For perspective, we increased the total number of cardholders 8.7% to reach almost MXN 7.7 million. Out of this, Suburbia cardholder base continues to achieve double-digit growth, reaching MXN 1.8 million, 16.3% above a year ago. The share of sales with our own credit cards during the quarter was 49% in Liverpool, 90 basis points above the year before, one in Suburbia reached 33%, 140 basis points above last year. Revenue from our shopping centers increased 11.9%, mainly driven by the acquisition of the Tampico, Altama Shopping mall improved lease spread and occupancy growth of 2.7 percentage points to reach 94.2%. Our consolidated gross margin of 41.8% was slightly above last year, mainly due to a more favorable business segment mix. Operating expenses with our bad debt provisions and depreciation grew 10.2%, returning to a more favorable level, when compared to our revenue growth. This increase is primarily driven by higher minimum wages, new pensions provisions, new stores and manpower intensive services. We continue to take actions to mitigate negative impacts both inside the stores and particularly in our corporate staff areas. As a result, consolidated operating income reached MXN 6 billion, representing a 7% increase year-over-year. Moving to NPLs. We ended Q3 with an NPL ratio of 4.1%, 63 basis points above a year ago. Despite the rapid growth of this indicator, it remains within normal parameters and it's still below the pre-pandemic levels of approximately 6% for this quarter. We have continued to closely monitor medium and high-risk customers, and we have proactively refinanced the debt of cardholders to prevent loan defaults. These actions have reduced entry rates and improve the overall health of the portfolio. Moreover, in Q4, we anticipate further improvements in NPLs driven by portfolio growth during the peak season. Accordingly, we expect a material improvement in this indicator, and we now anticipate NPLs at year-end between 3.1% and 3.2%, slightly above our guidance. In Q3, we recorded a bad debt provision of MXN 1 billion, a 57% increase from last year, driven by the raise of NPLs and overall portfolio growth. It is worth noting that we expect our full year provision to be in line with our guidance of MXN 4 billion. Our coverage ratio at the end of the quarter was 10.1% of the gross trade portfolio, while the ending balance of the bad debt reserve represented 2.7x the NPL balance. Q3 net profit of MXN 4.4 billion is 11.3% above last year, reflecting a robust operating performance and a favorable exchange rate. On the other hand, Q3 EBITDA of MXN 7.5 billion was 7.3% above last year. EBITDA margin was 16.3%, 50 basis points below the prior year. Turning to our digital channel. The GMV in the third quarter was 15% above a year ago. Liverpool's digital share has grown to nearly 25%, 138 basis points above last year, while monthly active users of the Liverpool poker app increased by 7.6%. In the case of Suburbia, Digital share reached 5.3% of sales, an increase of 1.6x and monthly active users of the Suburbia app increased by 2%. . Our marketplace continues to deliver strong growth. Total marketplace GMV during the third quarter grew 33% year-on-year, and we closed the quarter with 50.2% more SKUs and 33.6% more sellers. During the third quarter, digital orders that were delivered in 48 hours or less accounted for almost 49% of total, more than 4 full points above last year. The share of Click & Collect was 39%, 2.5 percentage points above the same period last year, and direct store deliveries were 34%, 6.4 percentage points above a year ago. Moving to other items. Q3 CapEx, including real estate trust was MXN 2.8 billion, reflecting a cumulative investment of MXN 8.5 billion, 42% higher than a year ago. This investment is mainly divided among logistics, store renovations, new stores and the acquisition of the Altama shopping mall. I am pleased to share that our expansion project for Galerías Metepec is nearly complete with an estimated opening date in mid-November. Operating cash flow for the quarter was a negative MXN 1.1 billion, bringing cumulative cash flow from operations to MXN 650 million. The cumulative result is fueled by strong EBITDA performance and the seasonal trends in our credit portfolio, partially offset by inventory buildup, income tax advances and the normalization of accounts payable. At the end of the quarter, cash on hand was MXN 18.2 billion, and our net debt-to-EBITDA ratio is 0.2x. Regarding dividends, the first installment of MXN 1.77 per share was paid on May 24, and the remainder of MXN 1.18 per share was paid on October 11. We would also like to inform you that on October 2, the company fully settled the Liverpool 2024 bond of MXN 3.9 billion using its own cash reserves. This decision reflects our strong liquidity position and prudent cash management. In terms of new stores, we opened a new Suburbia store at Apodaca Huinalá and another one in Reynosa, Tamaulipas. Also, we opened 6 new Liverpool Express units to reach a total of 35. Our boutiques continue to grow as we opened the third Toys 'R' Us and the first Babies ‘'R’' Us, both located in the Santa Fe District of Mexico City. These openings mark a significant step in both brands' mission to enrich the experiences of childhood and parenthood for Mexican families. BYD continues growing. Car sales during the quarter were 1,300 units, exceeding now our full year target. In August, we opened our first full-service car dealership in Guadalajara located at Galerías Santa Anita. Since operations started last year, Liverpool has sold over 3,200 units, making Liverpool one of the largest BYD distributors in Mexico. I would like to pause now because I know several of you are eager to hear about what is going on with our interest in Nordstrom. As we disclosed in our Schedule 13D filed on September 4 with the SEC, we formed an investor group with the Nordstrom family to take Nordstrom Inc. private. Under the proposal sent to the Nordstrom Board, Liverpool would own 49.9% and the Nordstrom family would own 50.1% of the equity of the private company. We are currently in discussions with the Nordstrom Board about our offer. And as a company policy, we do not comment on the status of ongoing negotiations. We look forward to updating you on our progress in the upcoming quarters. You know, what exciting news, Liverpool ranked 8 in Merco Empresas México 2024 and 11 in Merco Talento 2024 compared to last year's ranking, Liverpool improved one position on the former and 15 positions on the latter. Merco is a corporate monitor reference in Latin America that has been evaluating the reputation of companies since the year 2000. In July, Newsweek and Statista published the world's most trustworthy companies for 2024 in which Liverpool was ranked the 22nd most trustworthy retailer in the world and the second in Mexico. The rankings follow 3 distinctive pillars when evaluating companies trust customer trust, investor trust and employee trust. In September, S&P released their most recent corporate sustainability assessment results in which Liverpool improved 12 points compared to last year due to progress in our overall ESG strategies. Finally, I am pleased to share that Liverpool made an alliance with CONFE, the Mexican confederation organizations in favor of people with intellectual disabilities to offer employment opportunities for their community members. As of today, we have recruited 5 positions in both our stores and our corporate staff areas. Thank you all for joining us today. We appreciate your continued interest in our company. Looking ahead, we remain focused on executing our initiatives and capitalizing on the increased consumer demand in the upcoming quarter. Now let's move into our Q&A.

[Operator Instructions] Our first question comes from the line of Andrew Ruben.

Andrew Ruben from Morgan Stanley. I'd be interested to hear how you're thinking about the holiday season. You mentioned some of the ANTAD numbers were sales decelerated. On the other hand, we saw the inventory position had increased. So just trying to understand what kind of holiday season you're planning for both from the inventory side and in terms of your expectations for consumer demand?

Andrew, thanks for the question. We're preparing to have a very strong season. For perspective, we are expecting sales in the lower 2-digit range. And what we did is to make some advances on the winter merchandise to be fully prepared to cover that. As you saw in our report, we had an increase of 20% on our inventory. And that was the same level of inventory that we had back in October of last year. So what we expect from an inventory point of view is to stabilize more or less at that level. and that by November, we have an increase in inventory in line with our sales growth. So we're not anticipating risk on the inventory side, and we certainly hope to capitalize on the increased demand for the holiday season.

Our next question comes from Nicolas Riva.

I know Gonzalo, you said you don't want to provide a lot of updates regarding the Nordstrom potential acquisition given that you are in discussions with the Board. Perhaps I can ask it this way. With the information you have provided yet, which is your intention to own 49.9% of the company and therefore, don't consolidate, the investment, I believe, would be around $1.5 billion for Liverpool. In that scenario, what's your expectation in terms of increase in net leverage? Are you calculate an increase in net leverage from the 0.6x you reported at the end of September to 1.3x? I want to ask if that number, 1.3x net leverage that makes sense to you? And also in that scenario of an investment required of about $1.5 billion, what are you contemplating in terms of financing for the $1.5 billion? And if you would contemplate coming to the dollar bond market for that?

Thank you, Nicolas. We are anticipating an investment a little bit lower than that, maybe in the range of $1.2 billion to $1.4 billion. So we expect our net leverage to increase to between 1.0x and 1.2x. And from a financing strategy, we haven't decided yet we're keeping our options open. Certainly, with access of the international markets, that's one of the options that we're contemplating. Once we were clear on the size of investment and the timing of potential closing, we will review our whole plan to determine, whether we would issue probably a bump in Mexico or in the U.S. But at the moment, we are contemplating both options.

Our next question comes from the line of Daniela Muszkat.

Hello, everyone. Congratulations on the strong beat for Q3 results. The question is on the foreign exchange gains that you recorded. Can you just explain the different instruments that you're using? I see in the release that 63% of your cash is invested in U.S. dollars. But in the financial results, you had both aligned for exchange rate fluctuation as well as market-to-market on derivatives. So perhaps you could just share with us, if that's related to your cash position in dollars? Or at what level are you swapped because I see that your U.S. dollar debt is also fully hedged. So just to explain, so we can better calculate this FX gains or losses going forward?

Thank you, Daniela. Those 2 lines refer exactly to the 2 items you mentioned. On the one hand, our cash position is heavily shipped there towards a dollarized position. So around 60% of our cash is held in dollars. So as the peso depreciates, we generate FX gains on that position. So that's one item. And the second item refers to the cross-currency swap of our long-term debt. All our dollarized debt is fully covered with a derivative. So we did a cross-currency swap to turn that into -- in essence, into a Mexican peso debt and it covers both the principal and the coupons. So as the peso depreciates, we also generate -- generate an FX gain to cover the principal and the coupons.

Could you share with us the level that you swapped like the actual exchange rate and the date of the maturity of the swap?

Well, the maturity is linked to the bond maturity. So our next maturity date is in 2026. And we also have maturities in...

I can just get that information later. It's kind of a problem.

Yes. So it's 2026 and I believe, is 2030. So it's fully covered under our cross-currency swap.

Yes, I just wanted to know if there is short-term volatility, but it seems that you're locked for the next 2, 3 years. So that's fine.

Yes, absolutely. And for instance, in early October, we paid bond that we issued in 2014. It was a 10-year bond. It matured in early-October. So we pay that the conversion to pesos was MXN 3.9 billion, and it was fully hedged with our cross-currency swap. And so for the fourth quarter, we will reflect again on the derivative -- on the settlement of the bond. And from a volatility standpoint, we most of the volatility that we have now is related to our cash position rather than the long-term debt.

Our next question comes from the line of Ben Theurer.

This is Ben Theurer from Barclays. Just 2 quick follow-ups. First, as we look into your performance compared to peer performance ANTAD in both Liverpool and Suburbia there was a nice outperformance in the quarter. And I wanted to dig a little bit deeper as to what's been driving particularly a strong transaction volume still in the quarter because we know, it was a pretty challenging quarter. So if you could kind of dig into what's been driving those transactions in Liverpool. That's like one part of the question. And the other part is really is what's been driving the average ticket, so much higher in Suburbia. Was that a mix effect? How should we think about this performance as we go into the fourth quarter? So that would be like kind of my first set of questions. And I have a quick follow-up.

Thank you, Ben. Let me start with Liverpool. In Liverpool, we saw significant increases in -- mostly in the Hardlines divisions. I'm talking home electronics, sports -- so the overall Hardlines, all of the Hardlines divisions have double-digit growth. For instance, electronics had an 11% growth, and the other categories also in the 2-digit range. So we -- and it's a combination of strong some demand our promotions activity and good inventory management. On the softline side, particularly in cosmetics, we did really well because of the same reasons. And in the case of Suburbia, as you know, we have invested very heavily on maintenance, serve renovations, inventory and to offer more price points to our customers. So that has been driving traffic to Suburbia. And we have been doing some progress in the inventory, so we have had less discounts, particularly for the spring/summer season. So we didn't have to discount as much inventory as we did in previous years. So that helped the overall average ticket.

Okay. That makes sense, very clear. And then as we think about -- to see the kind of a slowdown on the digital side, it feels like it's [ struggling ] down. It's still elevated, obviously, but like quarter-after-quarter, it feels like it's a little bit less in terms of just G&B particularly at the Liverpool banner. Have you any explanation for that if we look at it, how it was coming down over the year-to-date and kind of like came down even further in 3Q. Just to understand like, if there's anything you particularly could do to address it and maybe get it back into the 20-plus percent growth, where it used to be and not so much in the mid-teens.