Falabella S.A. (FALABELLA.SN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Falabella Earnings Call. I'm Victor, your coordinator for today's session. [Operator Instructions] Present with us are Alejandro Gonzalez, CEO of Grupo Falabella; Juan Pablo Harrison, CFO of Grupo Falabella; Francisco Irarrazaval, CEO of Falabella Retail; Alejandro Arze, CEO of Home Improvement; Juan Manuel Matheu, CEO of Banco Falabella; Benoit de Grave, Chief Strategy, Transformation and Sustainability Officer of Grupo Falabella. First, Mr. Juan Pablo Harrison, CFO, will provide a summary of the consolidated results for the second quarter of 2025. Following his presentation, we'll open up the floor for questions. [Operator Instructions] Now we'll start with the conference with Mr. Juan Pablo Harrison.

Thank you, Victor. Good afternoon, everyone, and thank you for joining Falabella's Second Quarter 2025 Earnings Call. Before we discuss our results, please note that the management may make or refer to forward-looking statements during the presentation related to our company, its results, operations, expenses, strategy, potential restructurings and other similar matters. Such statements are based on assumptions and expectations of future events that are uncertain and contain risks. For further information on risks, please refer to the disclaimer displayed on the screen. The numbers provided during the call will follow IFRS guidelines, which are stated in U.S. dollars and routed to [indiscernible]. As a result, minor differences may occur compared to the published financial statements. During the call, we will discuss the second quarter results as well as the performance of our 5 growth engines. The CEOs of Falabella Retail, Sodimac and Banco Falabella will also provide insights into their respective businesses. Let's start with Slide 4. Overall, we continued the positive trend in both our retail operations and shopping malls. Mallplaza sustained its sales growth in all 3 countries, driven by an improved rental mix, the consolidation of our presence in Peru and the strengthening of our urban center strategy. At the same time, Tottus increased its revenue around 5% in both Chile and Peru, benefiting from the positive calendar effect of Easter and a beating of its strategy focused on delivering a strong perception of low prices and an enhanced assortment with a particular emphasis on food. I would like to highlight the performance of our ecosystems online channel, where GMV grew 19% year-over-year. Also, the sales from our sellers stand out, growing 36% during the quarter. Let me now turn it over to Alejandro Arze, who will share some remarks on Sodimac's operations.

Sodimac delivered a strong second quarter despite ongoing challenges in the construction sector, achieving improvement in revenues and profitability. We increased the EBITDA margin from 4.9% in second quarter last year to 5.5% during the second quarter this year. This performance is attributed to a specialized regional strategy, offering the right products and services at competitive prices through an integrated omnichannel platform. Our e-commerce continues to gain traction, growing 24% year-over-year during this period. We doubled our assortment and specialist sellers have continued to grow in Chile and Peru. During last quarter, 3P GMV represented more than 8% of online GMV. E-commerce is an area where we see growth potential, especially on 3P products. Today, we continue to face a challenging environment, but our objective is to accelerate sales growth through a specialist omnichannel experience, where our private labels play a differentiating role in our value proposition, and we continue to deepen our relationship with our professionals and retail customers. Now I will leave it with Francisco Irarrazaval from Falabella Retail.

Thanks, Alejandro. Last quarter, our EBITDA margin improved by more than 300 basis points, which was an increase of $38 million during the quarter, and that makes us very pleased, and we believe it reflects the progress of our strategy. We are also achieving 15% sales growth with double-digit growth across all 3 countries, where Colombia stood out with a 19% increase in same-store sales. E-commerce continued to be a key growth driver with online GMV growing 17% in the quarter. Our cyber events delivered outstanding results as well with growth of 20% in Chile, 26% in Peru and 10% in Colombia. In addition, our sellers keep gaining relevance, increasing their share by 3 percentage points, and we continue to improve the speed of deliveries. During the quarter, we continue to bring the latest first on Falabella through exclusive collaborations with local influencers and trending launches in tech and beauty. Our assortment keeps growing with the best brands, adding global names that customers love in all our core categories. We are enhancing specialist experience with more features such as shop the look and customized shopping journeys by category online as well as curated spaces in stores with initiatives such as Outdoors in the southern part of Chile and the consolidation of Active Women launched in the second half of last year. Looking to the future, our strategic focus is clear, reinforce our leadership in our key categories, fully leverage the strength of our developed e-commerce platform and continue integrating our ecosystem seamlessly from end to end. This clear strategic vision and disciplined execution give us the confidence to achieve sustainable and profitable growth in the long run, ensuring the latest is always first at Falabella. I will now leave you with Juan Manuel Matheu for some remarks regarding the banks.

Thank you, Francisco. We are very pleased with the bank's financial and operational performance this quarter. For the first time since the first quarter 2023, we achieved loan growth across all countries, marking a notable milestone. Portfolio quality remains solid with NPL ratios at healthy levels and net income increased by more than 80% compared to the same period last year. Purchases made with our payment methods continue to gain traction, growing 19% year-over-year, reflecting the strength of our simple value proposition and superior benefits. In parallel, our loyalty program continues to expand and simplify usage. [indiscernible] pesos is gaining momentum with increasing adoption and flexibility for customers to choose how and where to redeem their benefits. In our insurance business and consistent with the steps taken in Chile and Peru during 2024, in August 2025, Seguros Falabella in Colombia signed a 5-year strategic alliance with AXA COLPATRIA and MetLife. This partnership aims to further strengthen our insurance offering in the local market, reinforcing our commitment to delivering relevant and competitive solutions to our customers. In terms of profitability, our bank in Chile posted an ROE above 20%, while Peru reached 15% and Colombia 8% -- we remain focused on sustaining profitability in Chile and improving it at Peru and Colombia with a clear emphasis on enhancing return on equity. As an example, in Chile, we executed a capital reduction of approximately $70 million during the quarter, ensuring adequate capital levels to support healthy growth while maintaining Basel ratios above both market averages and our internal risk appetite. These results clearly reflect the strengthening of our strategy, discipline, execution and our ability to deliver sustainable value to shareholders in a dynamic market environment. I will now turn the call back to Juan Pablo.

Thanks, Juan. As we saw in the previous slides, as well as hear from our CEOs, we delivered strong results in all of our growth engines with solid revenues growth and margin expansion. Sodimac increased its EBITDA margin from 4.9% to 5.5%. Falabella Retail rose from 4.7% to 7.8%. Tottus drove its margins from 7.4% to 7.8%. Meanwhile, Mallplaza reached 80%, up from 76.1%. And finally, Banco Falabella jumped from 14.5% to 25.9%. These improvements are driven by better gross margins and operational efficiencies, especially in inventories management and the profitability of the e-commerce channel on the retail side and the growth of the consolidated loan book with healthy risk levels on the digital bank side. As shown on the graph, we have consistently improved our performance on a year-over-year basis since first quarter '23, reaching a consolidated EBITDA margin of 14.9% on second quarter '25. The upward trajectory reflects the successful execution of our strategy, the resilience of our business model and the strength of our ecosystem. In line with these positive results, our operations continue to generate strong cash flow. Nonbanking businesses saw a 49% year-over-year increase in cash, supported by EBITDA growth. We have strengthened our financial position. Net financial debt decreased to $2.4 billion, and our net debt-to-EBITDA ratio for the nonbanking businesses improved to 1.9x. Meanwhile, our maturity profile remains well balanced. Now I will leave you with Alejandro Gonzalez, Grupo Falabella's CEO, for some closing remarks before we get into the Q&A portion of the call.

Thank you, Juan Pablo. Good morning, everyone, and thank you for joining us. I'm proud to share that our 2025 second quarter results reflect a solid and broad-based performance across the 5 growth engines of our ecosystems. We've seen positive momentum on multiple fronts from retail and digital banking to real estate and digital platforms. Falabella Retail led revenue growth, supported by strong store performance and a rise in e-commerce, as Francisco mentioned. Our digital bank continued to scale, surpassing 8.1 million active customers and showing healthy portfolio growth across all markets. These achievements are the result of a focused strategy, agile execution and the commitment of our teams. I want to thank each and every one of them for their dedication and drive during the second quarter. Looking ahead, we see exciting opportunities to continue expanding our ecosystem. E-commerce remains a key growth engine, and we are enhancing our digital capabilities to better serve our customers and sellers. Mallplaza's expansion plan is progressing well with over 80,000 square meters being added across 7 malls in Chile and Peru and the launch of a new premium outlet format. In Peru, our supermarket business is gaining traction and in Mexico, Sodimac is strengthening its presence. We also see great potential in leveraging AI to deepen customer relationships and personalized experiences across channels. At the same time, we remain focused on improving profitability in a challenging environment. We're making disciplined investment decisions and managing costs with rigor, ensuring that every initiative contributes to long-term value creation. Our EBITDA margin improvement and net income growth are clear signs that our strategy is working, but we know that there is more to do. We're confident in the path ahead and our is grounded in 2 key factors. First, our offering continues to be preferred by more customers every day as reflected in rising satisfaction metrics and expanding market share. Second, we're increasingly aware of the relevancy and scale of the synergies among our 5 businesses, which complement each other to deliver a compelling and differentiated experience to our more than 36 million customers. Thank you.

[Operator Instructions] Our first question will come from the line of Melissa Byun from Bank of America.

I just wanted to explore 2 topics. First, on the bank, how sustainable are the current levels of profitability in Chile? And are there structural reasons why NPLs should remain below historical levels, either related to the market or your underwriting or collection abilities? And then on SG&A, do you see additional opportunities to reduce expenses or improve productivity? And then how are you thinking about personnel costs and potential offsets going into 2026 when we see a further reduction in working hours in Chile?

Melissa, for your questions. The short answer would be yes. Profitability in Chile, we believe it's sustainable. We believe that the improvement in NPLs that you mentioned are sustainable, although we think that with an increased growth of our portfolio, they could rise. We believe that during the last, I would say, 1.5 years, we actually were not growing as we expected. So now our growth in interest income and fee income will more than compensate an increase in NPLs. Regarding SG&A, we also believe that we have it really very much in control. Actually, during the last months, we have increased our spending in marketing, increased our spending in loyalty expenditures that we also believe that could be moderated in the future. Another line that we are also increasing in the last months is the salary of our developers to further strengthen our digital transformation. So summing it up, we will think that results are strong, results are sustainable, and we will keep with the same levels of profitability going forward.

Melissa, Juan Pablo here. Just a further explanation from a corporate or group level for the G&A evolution. As we have mentioned, we remain focused on maintaining discipline in our expenses. From a consolidated point of view, we expect our expenses growth will remain in line with inflation across all of our markets. While some business units such as Falabella Retail, Sodimac, Tottus may have high expenses during the second half of the year due to -- mostly due to an increase in sales volume, this is going to be offset by tighter expenses management in other areas. As Juan Manuel already mentioned -- sorry, first in our e-commerce operations, we are taking advantage from greater maturity and scale, allowing us to be more efficient and contribute the e-commerce operation to improve our operational leverage. Regarding the bank, Juan Manuel already mentioned, we have combined this discipline in the e-commerce with the cost discipline in the bank operations, supporting an overall expense stability across the group.

Our next question will come from the line of Irma Sgarz from Goldman Sachs.

I just wanted to follow up on the growth. You commented a little bit on the online channel, which I feel has really sort of found its stride now. Could you just explore a little bit more sort of the key drivers that you believe have been responsible for this better growth across both 1P and 3P between traffic, conversions and ticket? You also mentioned obviously sellers continuing to ramp up in terms of their sales on your platform. And any -- yes, would love to sort of get a little bit more of your view of what you really feel sort of has come together in a major way to drive this growth? And then any commentary around the profitability of the online channel would be really appreciated. And I'll jump back into the queue.

Thank you, Irma, for your question. This is Alejandro. E-commerce is a key growth driver for Grupo Falabella strategy. You know that and allow us to deliver comprehensive and omnichannel experience. We're seeing the potential of our platform as more customers and sellers are choosing our platform every day. We've improved delivery speed and reliability. And in the last quarter, total GMV grew by almost 20% with GMV from sellers increasing by 36%. But I'll let Francisco to give you more flavor on the business.

Thanks, Alejandro. Thank you, Irma, for your question. As you may know, in Falabella, the e-commerce is like a top priority for Falabella Retail, where we aim to be a benchmark across 5 key categories. We have been focusing on attracting top brands and the latest trends, supported by a unique multi-specialist platform and continuing improvement in navigation such as shop the look alongside AI-powered content and marketing strategy. These efforts are delivering results, visits and conversion rates have each grown by around 5% each, while the average ticket remains stable from last year to this year. In terms of profitability in Chile, close to 70% of our EBITDA improvement of the quarter is explained by the progress made in the online channel through an improvement in gross margin due to our specialty value proposition and the higher weight on the garment side, greater operating leverage, sorry, because of the increase in the volume and the sales and higher revenue from both product sales and value-added services such as Falabella Media, fulfillment services and logistics overall.

This is Alejandro from Sodimac. In Chile and Peru, sales grew more than 30% in the first half of 2025 versus the same period last year, driven by the launch of our own website. This growth was supported by a 15% increase in site visits, a higher conversion rate, thanks to improved user experience and 6% rise in average ticket due to a better product assortment. As a result, we have been able to better dilute the fixed cost and improve the channel profitability through tighter logistic control.

Our next question comes from the line of Felipe Ballevona from Santander.

Congrats on the results. You have been able to maintain your expenses increasing roughly at inflation for 2 quarters in a row. For how long do you think you will be able to keep carrying this out with revenue increasing at current levels of high single digits? And my second question is regarding AI, but I believe it was Alejandro, who mentioned it in the presentation. Can you give us more color on what AI initiatives you're currently carrying out? And by how much do you think you will be able to increase your current productivity with this technology?

Hi Felipe, Juan Pablo here. As I mentioned in the first question, we are 100% focused today and remain our expenses in a very efficient level. And we are not seeing any changes in this trend during the short or midterm. So it's something that we are 100% focused today, and we will plan to give this way during the next months.

And I'm sorry, on the AI question that you have, let me share with you some insights and then I'll let the different businesses to elaborate on that. As I said, we're very excited about the opportunities that AI is unlocking for Falabella. It is allowing us to understand our customers more deeply than ever before, anticipate their needs in some cases, simplify their lives at every touch point. This technology is not just about automation. It's about making every interaction more relevant, seamless and customer-friendly. At Falabella, we are fully committed to leveraging AI to deepen our omnichannel value proposition. Today, we're working on several AI-driven initiatives across all of our business units and countries with a clear goal of delivering a simpler, more personalized and more convenient experience for our customers, whether they shop online, in-store or interact with our digital banking app in general. So as I said before, I'm going to leave it with Francisco and then Manuel and Alejandro to further develop on the users that we're having in different business lines.

It's Alejandro. Felipe, thanks for your question. Let me give you some like real-world examples. Let's say you're browsing a web page right now, the likelihood of you seeing an image or an advertising within the web page that was generated by AI, I think it's over 1/3. So let's say that 1/3 of the images that we have in the catalogs are -- were generated by AI. Let's say you buy something from our web page and you have to contact our customer service later on, the likelihood of you being attended by a generative AI chat is more than half again. Let's say you're browsing in social media such as Instagram, the likelihood of you watching an advertising ad that was generated by an AI-powered tool, I think it's 100% today. So most of the segmentation, most of the optimization, most of the generation of the images are being done with AI. And those are some examples I came up with. And maybe Juan Manuel can give you some more.