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

Good day, ladies and gentlemen, and welcome to the Falabella conference call. My name is Carmen, and I will be your coordinator for today. [Operator Instructions] In the first part, Mr. Juan-Luis Carrasco, Head of Investor Relations, will present a summary of the consolidated for the fourth quarter of 2019. Following this, Gaston Bottazzini, CEO, will present a strategic update of the company, and we will then open a question-and-answer session where Mr. Gaston Bottazzini; and Mr. Alejandro González, CFO, will be available to answer your questions. [Operator Instructions] Now we'll start the conference with Mr. Juan-Luis Carrasco.

Thank you, Carmen. Good morning, everyone, and welcome to Falabella's Fourth Quarter 2019 Earnings Call. Joining me today are Gaston Bottazzini, Falabella's Chief Executive Officer; and Alejandro González, Falabella's Chief Financial Officer, along with the rest of the Investor Relations team. I will start the call by going over the key financial highlights of the period. Afterwards, Gaston will share key strategic remarks before opening up the line for questions. I would like to remind you that since January 2019, we began implementing IFRS 16. 2018 figures were not restated, therefore, they're not comparable. To support the analysis, we have included pro forma figures for the consolidated business and by segment at the end of the presentation. Moving over to Slide 3. I would like to highlight our strategic priorities as we continue advancing in transforming Falabella into a digital and physical ecosystem. These are: differentiate our value proposition, scale up logistics, financing and payments, data analytics and business intelligence, technology platform development. Let's turn to Slide 4. We are pleased with the continuous growth on our online channels, which represent 23% of our department store sales, 4% of home improvement and almost 2% of Tottus. Total net merchandise value increased by 28% year-over-year, reaching $399 million (sic) [ $398 million ] over the last quarter. On our financial division, online financial products sales reached $371 million, a 28% (sic) [ 29% ] increase over the last year. During the quarter, we continued growing Linio where NMV grew 83% driven by growth in Peru, Chile and Colombia. Let us turn to Slide 8 to go over the key financial highlights of the period. Consolidated revenue increased by 1.6%, reaching $3.5 billion this quarter. Gross profit decreased 4.7%, totaling $1.2 billion. And operating income contracted 32.8% year-over-year and 37.4% when adjusted by IFRS. Moving on to Slide 11. Here, we take a closer look to our operating income. Operating income for the quarter reached $236 million affected negatively by IAS 29 by $33 million. This was partially offset by a positive impact of $16 million related to IFRS 16. Linio affected the results negatively by $16 million (sic) [ 14 million ]. Moving on to Slide 12. Here, we present our financial leverage ratios. As of December 31, 2019, our net debt-to-EBITDA was 3.48x with a debt duration of 4.9 years. Now I will turn over the call to Gaston. Afterwards, we will open up the line for questions.

Thank you, Juan-Luis. Good afternoon, everyone, and thank you for joining us today. During 2019, we faced a challenging consumption environment in Chile, which put pressure on sales and margins across all our retail formats. As a result of this, we increased markdowns, which had an impact on our margins and, on the other hand, also executed a less aggressive purchasing program, which allowed us to close the year with healthier inventory levels. At the same time, we adapted to this environment by improving our efficiency, both at the management and store level. Toward the end of the year, the events in Chile after October 18 led to the disruption in our retail operations also across all formats. Although we reacted quickly, effectively mitigating damages, the impact on sales and property was considerable. We took safety measures focused on improving our store safety as well as improving protocols to speed up store closings as well as openings. Throughout October and November, our priority was to ensure the safety of our customers and our teams. Losses on property and inventory are completely reflected in our financial statements as well as partial recoveries from insurance claims. As of today, 6 of our 205 stores in Chile remain closed. We continue to closely monitor events in Chile going forward. Outside Chile, we remain focused on expanding, particularly in markets and formats where we see opportunities for growth. In Mexico, we continue committed to expand our footprint with our comprehensive home improvement proposal. Today, we have 6 stores and plan to open 3 to 6 stores yearly in that country. Peru is our core market for growth in the grocery business. We continue expanding our per Hiperbodega format, along with our Tottus format, targeting to add 30 more stores by 2023 on top of our existing 78 stores. We continue advancing to deploy IKEA across Chile, Colombia and Peru and look forward to the first 2 openings in 2021. In Brazil, we remain focused on improving performance for our existing operation. As we continue to see positive developments, we will increase our pace of store openings in that country. Finally, in Colombia, our financial and retail businesses continue to benefit from positive trends. In addition to physical expansion, we continue to make progress in the execution of our digital strategy. We continue working to be closer to our customers every day and serve them better. We are seeing our customers responding positively to these commercial proposals. For example, in Linio, we continued increasing our product assortments as well as bringing in more sellers over time, boosting online traffic by 104% over the year. Click and collect or pick up in store is today our most valuable functionality by online customers through the surveys we run with them. It represents over 60% of our falabella.com orders. We currently have developed 135 cross-format pickup points, which allows customers to pick products from any one of our formats in any one of the stores we operate. And as an example of the impact of this initiative, 22% of customers that pick up products in Tottus make purchases in that grocery store. We have had a very positive Cyber Monday event at the beginning of October with a relevant participation of falabella.com and Linio, which saw 37% of sales conducted through smartphones. Our CMR credit card also continued to be the preferred payment method in that channel, accounting for 70% of sales during the Cyber Monday event. In sum, total NMW (sic) [ NMV ] for our online business reached $1.2 billion in 2019, while online sales of our retailers grew 22% that year. Our financial business continues to expand, particularly leveraging online channels. Online origination of financial products for both CMR and Falabella -- and Banco Falabella, grew 29%, reaching $1.3 billion during 2019. Also, our customers have responded favorably to the 100% onboarding process we have launched during the year. And as of today, 12% of the new openings during 2019 were made 100% online. We look forward to continue expanding our financial services proposal with the upcoming launch of Fpay. Fpay will be our digital wallet aimed to provide a simple, safe and easy-to-use payment method. It will allow our customers to consolidate all of their payment methods, including payment methods from third parties, into one app, allowing them to make online and physical payments while also performing person-to-person money transfers. Fpay will allow us to expand functionalities to our existing customers but will also allow us to attract new customers, particularly nonbank customers, by offering them a free account to make cash transfers and payments. The addition of a digital wallet to our ecosystem will allow us also to increase contact ability with our customers while increasing conversion rates and bring -- in the operational expenses of our physical retailers. In summary, in spite of a challenging 2019, our business fundamentals remain strong, generating $1.5 billion of EBITDA, along with $1.7 billion of consolidated operating cash flow, providing a strong resource generation to fund our organic growth and business building capability plan. As our plan dictates, we will continue improving our IT infrastructure and digital capabilities. However, we expect softer pressure on our margins going forward, considering that most of the key logistics-related spending is completed, and these investments will generate efficiency and enable growth, both of our e-commerce and digital banking, going forward. Thank you very much, and we will open to Q&A.

[Operator Instructions] First question is from Antonio Hernández with Barclays.

I have 2 questions. The first one is regarding Chile. You -- and of course, it was weaker as expected during the quarter. But could you give more light on how has performance recovered since then? And of course, while -- the trend, while it has been sequentially improving, at least, most of the year, but could you give you more light on your expectations for this country throughout not only this quarter but throughout 2020? And my second question would be regarding revenues in Peru and Colombia. They were strong. And I wanted to know if you can give more breakdown -- and you gave some breakdown in the press release, but could you provide more color on how sustaining is this performance?

I'm sorry, Antonio, but you came through very softly, and I couldn't completely grab the question.

Sure. The first one is on Chile -- can you hear me there?

So I'm sorry, the question is about margins in Chile or overall sales in Chile or both?

Yes, overall performance in Chile, which, of course, have improved sequentially, what -- how do you see performance in this country for the whole year versus last year? And second question would be revenues in Peru and Colombia. They were strong. While you already provided a breakdown in the press release, could you give more color on how sustaining this performance is?

Okay. So in Chile, the -- what we saw, of course, during the last quarter, has a strong impact of the October 18 incidents and thereafter. And what we saw in -- the performance that you see overall in the quarter really has 2 impacts. One is this impact from the crisis, and the other one is that the Christmas season was actually better than we expected in terms of sales, which gives you an overall performance that is lower obviously than the previous year but overall better than we expected. As we move into January and February, what we see is that overall sales performance are relatively flat with an improvement in margins. And this is a result of basically what I commented in the initial remarks that we have been more conservative in our purchasing programs, particularly during the last part of last year. And therefore, even though we have flat or even slightly lower same-store sales -- and this is also a result of these 5 stores that are not -- that are closed right now as a result of what happened after October 18, basically represent about 2% of the sales depending on the format, and that has an impact on same-store sales this year. So it's relatively lower or flat same-store sales depending on the format with better margins. Regarding Colombia, I would say is that the performance that you see, particularly in department stores but overall in all of retail, has to do, in my opinion, mostly with the commercial activity and the commercial aggressiveness of the team in Colombia, which allowed our operation there to outperform the market. What we see going into this year is continued healthy performance, not significantly improved from previous year. And you also asked about Peru, in Peru, I'd say last year, overall, in spite of uncertainty at the political level, overall economic performance was -- and retail performance was good for us. It's softened a bit towards the end of the year and beginning of this year.

Our next question comes from Andrew Ruben with Morgan Stanley.

I was wondering if you could provide some more detail on sales by format. In Chile, we were a little surprised to see, really, the resilience of department stores but then underperformance, though, of supermarkets and, to a lesser extent, home improvement. Just any color you could provide on the 3 formats would be very helpful.

So I think on department stores, what you see as resilience is a result of the comment I made. The reality is that all of our -- or most of our department stores are within malls, and they were less affected in terms of property damage from the crisis. And therefore, all of our department stores are in operation today versus what we had in September. And what we had is really an impact during the crisis and then somewhat compensated by a better-than-expected Christmas. In the case of supermarkets, probably the opposite is true. In December, we had 12 of our supermarkets not operating. And during December, we put many of them in operation. Today, we have 3 that are not operating. So what you see during the last quarter is not only the impact of the crisis itself but also the impact of having several stores closed almost until the end of the year. As we go into this year, we see closer same-store sales than to prior year, but the impact of those 3 or so stores is still visible in our same-store sales -- not in our same-store sales, I'm sorry, in our overall sales. In the case of home improvement, the sales again has a similar story, maybe not as severe but a similar story, to supermarkets in the sense that we had several stores closed right after October, and we gradually put stores in operation. Today, we have almost all stores operating in Sodimac except for to Sodimac stores and one Imperial store that are not operating. And therefore, overall sales are closer to last year.

Got it. Okay. That's very helpful. And just a quick follow-up on margins here. The color on logistics is interesting. I guess I'm just curious, I think you had mentioned promotional activity at the end of the quarter. Just wondering what segment that was in and if it was more temporary or if that's a negative impact to margins that we should think persisting into 2020.

In terms of promotional activity, overall, 2019 was an exceptionally highly promotional year as a result of, I'd say, consumption dynamics that were lower than expected, which means that we had higher inventories than we have demand. As we finish 2019, we finished the year with much healthier inventory levels. And already today, we are seeing much more normal promotional activity. What we mean by normal is that we still have, of course, promotional activity which is part of the dynamics of the business, but it's in line with the progression of the different collections and seasons rather than strong sales that, in part, also delay or cast a shadow over the new season that's coming in. Today, we are much more in line with what you would expect is a clean store with a new season and not remains of the prior collection still being in sale at the store. And we expect 2020 overall will be more like what we are seeing today.

Our next question comes from Nicolas Larrain with JPMorgan.