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. At this time, all participants are in a listen-only mode. In the first part, Mr. Juan-Luis Carasco, Head of Investor Relations, will present the highlights of the period, along with a summary of the consolidated results for the third quarter 2020. Following this, we will open a question-and-answer session. [Operator Instructions] Now let's start the conference with Mr. Juan-Luis Carrasco.

Thank you, Carmen. Good afternoon, everyone, and welcome to Falabella's Third Quarter 2020 Earnings Call. Joining me today are Alejandro Gonzalez, our Chief Financial Officer; and Juan Manuel Matheu, Chief Executive Officer for Falabella's Financial Services Division. I would like to remind you that numbers presented during the call will be stated in U.S. dollars and rounded to millions. Therefore, certain differences may arise with the published financial statement. I will start the call by going over the key financial highlights of the period. And afterwards, we will open the line for questions. Let us begin reviewing from Slide 5 onwards to go over the key highlights of the period. Over the quarter, we delivered strong growth in retail business revenue, sales growth continue across all retail formats in the region whose consolidated revenue increased 18% year-over-year, driven by a strong performance in Home Improvement in Chile, Peru and Brazil. Also supermarkets in Peru and Chile delivered very well, along with department store. The strong and sustained performance of the online businesses has been key to sustain this result along with the recovery in sales of the physical stores. Turning to Slide 6, we will highlight that we continue to see a solid recovery in the performance of our physical stores. During the third quarter, we were able to open most of our stores, substantially recovering performance across physical channels. Total gross sales reported a slight decrease of just minus 2% on a year-over-year basis, which compares very favorably to the minus 46% that we saw for the second quarter of 2020. We closed September with 94% of our stores open. And as you can see in the chart, we continue to see a positive evolution of strong performance across the region. Continuing to Slide 7, I would like to highlight that online sales continued to grow strongly during the second -- during the third quarter. This positive momentum of e-commerce has been maintained since the beginning of the pandemic. We delivered more than 10 million orders in the region during the quarter. And within the context of reopening physical stores, online penetration reached 29% at a regional level. The performance of e-commerce operations in Chile continues to stand out. Standout. GMV grew 4.5x on a year-over-year basis during the quarter, and marketplace sales of Chile grew 7x during the third quarter. In department stores, home deliveries increased 15x compared to the previous year and the falabella.com app has reached 40% share over the total sales. Moving on to Slide 8. I would like to highlight that our banking operations continue to show positive trends as digital channels continue to gain relevance for the consumer, while the loan book risk has been showing improvements. In Chile, 80% of the payments on monthly credit card statements are now made digitally. And during the quarter, more than 75,000 credit cards were opened digitally in the region. Fpay continued to gain traction and has exceeded 350,000 registered users in Chile as the wallet continues to add new functionalities such as digital coupons and higher degrees of integration with third-party merchants. TPV over the last 12 months ending on the third quarter grew 3.6x on a year-over-year basis. Turning to Slide 9. We highlight that back in September, we announced the creation of a single e-commerce platform under the brand falabella.com. This platform will concentrate all of the group's retail offerings, including department stores, home improvement, supermarket, Linio and financial services. The traffic and products offerings of more than 7 million from all the e-commerce platforms and the 10,000 marketplace sellers that we have will be brought together under a single site. This integration will be focused on boosting the flywheel effect, where more traffic will drive more sales, attracting more sellers to the platform allowing us to the assortment while enriching the proposal and making it more attractive to customers. It will also allow us to enhance the offer of digital financial products and services, together with our loyalty program. Let us now start reviewing the key financial figures for the period. Turning to Slide 11, we can see that consolidated revenue increased 11.8%, reaching 3 $3.2 billion. This was mainly driven by a 26% growth in department stores and 25% increase in home improvement both in Chile and also supermarkets in Peru that grew 40% year-over-year. Gross profit recorded a 6.6% drop, resulting from lower contribution from Mallplaza and the banking businesses associated to higher risk costs compared to the last year. The prior was partially offset by a higher contribution from home improvement in Chile and supermarkets in Chile and Peru. Turning to Slide 12. We highlight EBITDA and net profit. EBITDA decreased EUR 30.6 million, down to $227 million associated to lower contributions from Mallplaza and the banking operations. This was partially offset by improvements in EBITDA margins across home improvement in Chile and supermarkets, both in Chile and Peru. Net income reached $6 million, explained by lower contributions from Mallplaza, the banking operations and department stores in Chile. This was partially offset by a higher contribution from home improvement and, to a lesser extent, supermarkets. We will now open the line for your questions.

[Operator Instructions] It's from Andrew Ruben with Morgan Stanley.

So questions on the e-commerce angle. So the consolidated offering makes a lot of sense. Can you talk more about the front end consumer-facing. Can you talk more about what you're doing on the back end, integrating system logistics and where you are in this process in general.

Thank you, Andrew, for your question. This is Alejandro. As you mentioned, we're unifying all the e-commerce units in one single platform. We're also unifying the home delivery operations of our retails under one single division. Part of the -- what we're doing on the back end of this is that we will be leveraging on the existing distribution centers that each format has evolving them into cross stock model to consolidate all the volume, along with transfer centers to support last mile deliveries. Also in that end, physical store will continue to play a key role for click & collect deliveries. And in small cities, they will also play a role in transfer centers and in some cases, shipping from stores. So the priorities here are basically turn our proposal to provide most, I would say, competitive fulfillment solution, not only for us but for sellers, for third party sellers, with leading logistics for exchange from returns, which is a relevant issue here. And as I said before, leveraging on our store networks. And part of this is basically done to generate synergies for last-mile infrastructure cross formats and also improving our tracking data availability on parcels. But that's the most relevant part that we're doing on the back end that probably will not be phased on first-party by customers.

Our next question is from Rodrigo Echagaray with Scotiabank.

Just a question on how had distribution, I mean, there's not a huge increase on deliveries, 15 fold, I believe. What kind of role is the new Santiago distribution center playing as you tweak your delivery strategy throughout this pandemic? There were some issues at the beginning, but how has that evolved throughout the pandemic?

Well, the situation has evolved, if you allow me to basically describe, what we had on second quarter, and we described this in the last conference call, was basically a very hard and expected growth on the -- especially on the home delivery because we didn't have the option of click & collect. Please keep in mind that before this pandemic, especially in the department store, click & collect was over 60%, 55%. And without that option or with that option being minimized to a very low level, most of their parcels were basically sent in home delivery. In that sense, the service level has recovered to levels similar comparable to those that we had before the pandemic. But as you mentioned, this is still a very, very relevant challenge that we have moving forward. And in that sense, I think it's pretty relevant to highlight, the most relevant issues were related to 3P orders, the challenge that we were having, where we diverted to a model in which sellers were shipping directly, given the scale of orders that we were having. But everything that's 1P that's continues to be delivered from our DCS is working pretty fine and where -- as I mentioned before, we're recovering the levels of service that we had before the pandemic. And to complement this and to point out with the integration of the home delivery units, as I mentioned before, we will evolve into a cross stock model to consolidate all the volume. And that will certainly allows us to get a high degree of synergies. And in that case, we will also be able to offer, I would say, better and improve our fulfillment services for third-party sellers because we think that in the long run, as you can see in the numbers that we presented in the third quarter, not only 1P is growing very high, but also 3P.

Great. And if I may, what kind of -- what categories are you seeing that are growing the fastest, both on 1p and 3P?

There's something in which we have seen a change, I would say, probably from mid-August, stronger in September, and that's a trend that we're seeing after the third quarter. When the pandemic started, certainly most of the products that we were not only 1P and 3P, were basically hard products, electronics, computing products that, in most of the cases, had a lower margin. And I would say, a lower take rate also from a 3P perspective. But that's something that's starting to change. We're starting to see, as I mentioned before, strongly from September, 1P is getting accelerated specifically in apparel. We've seen a strong growth. But this is not only based on the feature that we have our stores more open than before. But also, what we're seeing today is that people are getting more accustomed and they're feeling more comfortable buying apparel online than probably what happened and what we saw during the second quarter. And that's a good trend when we start seeing how this should look moving forward. And also, let me highlight home improvement, which is basically mostly 1P. We've seen a strong acceleration during this period. People continue spending on home renovation, furniture and Do It Yourself. So we're seeing also a high, I would say, increase in that. And please keep in mind that we're entering -- spring starts is basically the relatively high season for the home improvement business. So we -- that's also something that I would say we are very comfortable and confident on the performance of that based on the level of operation that we're presenting today. And keeping in mind that we're still under epidemic. So we're still following a tight control on the operations that we're having. But I would say the outlook, the perspective that we see as we can keep operating like we are today, having a high weight in apparel compared to what we had in second quarter and also home improvement having a good ride. It certainly come on the positive side.

Our next question comes from Irma Sgarz with Goldman Sachs.

A couple of questions that I think, to some extent, come back to comments that you've already made in your opening remarks and in the release. But can you -- I don't know if it's hard, but can you sort of identify how much of the recovery in demand can -- was due ultimately to the pension fund withdrawals? And how do you think about this sort of impulse to demand lasting beyond this period of the withdrawal? Are you already seeing sort of an impact of this tailing off, starting to fade? And what levers can you pull on your side to potentially offset the potential slowdown maybe on the credit side, maybe on sort of product launch side, I'd be curious to hear about that. And then the second question is if you can just comment a little bit about the outlook for the mall operations and generally, in terms of mall traffic. Do you feel occupancy, delinquencies, rent losses and so on, have already bottomed out and you're seeing sort of traffic coming back as we're seeing in some of the other Latin markets. I'm specifically talking about Chile, of course. But -- and do you think that you need to make additional concessions on rental contracts?

Thank you very much for your question. About how the pension fund 10% withdrawal has impacted us, it's hard to come up with a firm number. We have seen a consequent move -- most of the money -- I mean to start, let me give you some background. Funds were withdrawn on August 10. I would say by September, most of the money had already been withdrawn from. We started seeing strong increases in sales of all of our retailers in August, I would say, and September. And probably, given the size of the amount of money, it would probably more, I would say, associated with the increase that we've seen in hard goods, I would say. Don't forget that we were already being having a good strong momentum before that. And I would say probably driving to electronics, computing. But aside of that, we've seen increase in apparel. And that's something, the strong recovery that we've seen, as I mentioned before in September and that we have continued seeing after that, I would say it's not so related to what the 10% withdrawn could or would explain on that sense. And if you see different estimates that we've seen from some economies, big part of that money may have already been spent. There's -- I don't know if you're aware, but there's another eventual 10% that may be coming to the market that has been approved recently on the representative chamber, and it's passing to the Senate, and everyone is expecting a relatively swift approval. But as I said before, hard to come out with a number. If you see, we were still having strong numbers before this. And then if you think that most of the use of this could have been already done in August and September, we’re seeing today, specifically during the month of October, and the trend that we're seeing in November is probably more related to the fact that we are seeing a high degree of openings of our stores. We're seeing -- every store that we are opening is having a very strong performance. And when I say this, please keep in mind that I'm not using the 2019 base. But certainly, the comp that we're going to be having on the fourth quarter for next year are on the low side given the social situation that we have in Chile, we had in Chile last year. But even if you compare that to the numbers that we had in '18, we're having a positive performance. So that's why I anchored the point that I'm confident that at least the growth that we're seeing in apparel is more related to a change in the confidence on the customer. And certainly, a more positive attitude by in pause on one-time by the better, I would say, environment, given this 10% withdraw, but also based on the situation that we're seeing on the pandemic. And then if you allow me, let me go to back to the shopping mall situation because what we're seeing today, certainly, we're bottom-up, as you mentioned. We came at some point, the GLA opening that we -- I mean, the GLA rents that we were getting were in the low 30s or ballpark 30%. As of September, that number went up to 65%. So what we're seeing is that as we are able to open our stores as we're able to open our shopping malls, people are very, I would say, keen into going to these places. We're still having some restrictions in terms of the total amount of people that we can receive. But given the, I would say, the improvement of the pandemic situation, and I do realize, and I mentioned this before, we know this is a volatile period, and we know that we're seeing some situations in the northern Hemisphere with the pandemic getting worst, but as we're getting into the, I would say, the warm stage in the Southern hemisphere, the numbers that we're seeing, and this is basically applying to Chile, Peru and Colombia is improving. And so we're not seeing a worsening the situation on the shopping malls. We haven't been required to make any further, I would say, resignation or restricting operations or discounts like we did before. And please allow me to point out something that I think is pretty relevant when we think about the, I would say, the near term. In the most relevant countries in which we operate Chile, Peru, Colombia, the government basically have made -- there's certain consensus. They have done some announcements about that strict lockdowns may not be the most effective way in slowing the escalation of this pandemic. Therefore, if they allow us to work even with some limitations or some restrictions in terms of hour, the response that we're seeing today from the customer is a clear proof that we have a pretty strong way of business. And if you put on top of that, the capabilities that we had before and that we have been able to improve during this, I would say, third quarter, specifically in this creation of this e-comm platform that we are doing and this consolidation of the home delivery platform will certainly place Falabella in a very strong position for the, I would say, for the near foreseeable future.

Manuel, here, if you allow me to complement on the financial services part, the first part of your answer that you might ask. The 10% disbursement of the pension funds had also had a very important impact on the financial business. And I would say that roughly 1/3 of those disbursements were for financial debts or payments, 1/3 went to saving accounts or saving products and 1/3 went into consumption, okay? And that had a very important impact in our case. First, in the improvement of the -- our credit portfolio. Just to give you some figures, on September last year, that was before the social unrest and before of the COVID crisis, 85% of our credit balances and 89% of our consumer credit portfolio was up to date. Today, after this 10% disbursement, those percentages rose to 88%, so from 85% to 88% in terms of credit card balances and from 89% to 91%. So we are currently with a healthier portfolio that even before the social unrest and the COVID crisis. Second thing that we observed is a very significant increase in the balance sheet in 7 accounts. We were already growing an important way in these balances. But in the order of 40% to 50% increase in saving balances. And after the disbursement, we saw that those growth rates went up to 90% year-to-year, okay? And last, what we also observed is a very important gain in market share of debit cards as a mean of payment. So those were the 3 impacts that we observed in financial services in terms of this 10% disbursement.

Our next question comes from Anthony Hernandez from Barclays.

Actually, most of my questions have been answered. But just a follow-up point on interconnect and home delivery. As far as I recall, you mentioned that we click & collect levels have recovered to pre-Covid-19. But could you also give a little bit more of a breakdown from a regional perspective? How will they change between the different countries?

Thank you, Antonio, for your question. I had some issues like listening to your question, but I heard that it was about click & collect. So let me tell how click & collect is performing. As I mentioned before, and this is something that we've seen regionally in Chile, the numbers relatively higher than some other countries. But with the exception of Colombia, the click & collect numbers are all, I would say, in the ballpark number of high 60%, 70%. That number went down, in some cases, given some lockdowns in areas, it was certainly down to 0. In some others, went down to -- given the restricted hours that we had, like 10%, 15%, 20% eventually. That's the number that's recovering. And that's the number -- I mentioned that because it is a model. When you realize that give or take, more than 2/3 of your sales or click & collect, it is a model that basically customers value a lot, not only because of the comfort of having the control of when you're having the product. Also because it's very convenient for returns. And what we have been implementing in the last period is a high degree of automation in click & collect, and that's something that will increase in the coming months. So we're seeing a big increase in that, still far from getting to the numbers that we had before the pandemic. But the rates that we are seeing are very, I would say, encouraging. So that's certainly a positive. But as I mentioned before, it's going to be very dependent on the openings that we're getting. And since we don't have a vaccine yet and how the pandemics evolves.

Our next question is from Nicolas Larrain with JPMorgan

Most of them have already been answered, but I wanted to understand, Alejandro, if you could share some color on how you're seeing competition online during the pandemic. What tone of consumers have turned into the online. So I wanted to see how you're looking at the landscape between the local players, international players, if you can? And also, I understand that, of course, the online was also boosted by the Cyber Day, what we had in Chile during the third quarter. I understand was not the case last year. So do you have like any sense on how penetration would have looked like without this base effect if you have the estimation?

Thank you, Nicolas, for your question. You are aware that normally, we don't talk about particular competitors that we have. But let me give you some flavor on, certainly, the competitive environment before we were allowed to start opening our stores was all basically thrown to e-commerce, where we have a -- everyone was -- and it was basically the only game in the markets in which we are operating. Now what we have been seeing lately, certainly, there's a lot of, I would say, competitive pressure. But all the, I would say, the investments that we've done in the past, they are paying tribute. And you mentioned the cyber. Truly, maybe the numbers were not as I would say, great as the numbers that we would join probably in the previous month, but please keep in mind that since April this year, we have been living kind of a constant cyber event. And -- but we still had a very good cyber event. We do believe -- and I mentioned this, this is our estimate. So keep in mind that there are no, as of today, there are no reliable objective data about the industry. But if you take the numbers that the chamber of commerce came out with, we certainly grew over them. The industry went up 41%, certainly. And I would say the other change that we had is that the margins that we started seeing were higher than those that we had in previous events. Basically because, as I mentioned before, we have been able to put more categories. And the -- I would say, the trend has been evolving into only having, I would say, low-margin categories into a more diverse spectrum of products, more apparel. And certainly, that certainly benefited us because we are more than just one key relevant payware leader in apparel in this. And I would like to highlight also the performance that we had in marketplace. 3P, it went by 7x in Chile. And then again, this is based on -- and this is consistent with the growth that we've been having during the last 2 quarters. But I think it's relevant to mention also that when we start seeing these trends moving forward, certainly, the weight and the mix of product that we sell that historically was biased to electronics or, I would say, low-margin categories, big tickets. Certainly, that is a change that's a relevant change. And also the fact that we are growing big time in the use of apps. About 40% of the transactions that we had in this cyber were done by the app. And that's another change, but I think it is worth to highlight. And that's -- I would say, the most relevant part of this, I would say, the competitive environment that we're seeing.

Our next question is from Andres Ortiz with Crédit Suisse. .

I would like to talk about the level of gross margin that we saw, particularly department stores. Could you give us a sense of how much of this 700 bps came due to the increased level of home deliveries? And how much of it went -- was the result of a more it's higher -- lower.

Thank you, Andres, for your question.

I'm sorry?

There were some sound issues, sir. Andres, are you still with us?

Yes, yes. So the question is how much of this 700 basis points compression came from being more price competitive and how much of it was the result of increased logistics cost due to increased home delivery penetration.

Thank you, Andres, for your question. As you mentioned, during the third quarter, we continued to face margin compression. And as you said, this is basically resulting from markdowns and lower relative weight of apparel dragging margins. If I need to take this and we aggregate this 700 basis points that we had, I would say that most of it, give or take, more than 2/3, it would be related to the mix of products. And I mentioned this because that is something that is changing. That is something that it is evolving today as we see most of our customers feeling more comfortable with. So of this, give or take, 700 points, probably 4.5% would be the lower mix. So basically, we're selling more low margin products. And the rest will be certainly related to markdowns and promotional activities. So I would say, 2/3, 1/3. And I mentioned that because if you start seeing these moving forward, there are some things that you can probably say that we are considering them like one-timers that things that should maybe not be in the scenario. And like, for example, the weight that we're seeing in products, it's highly likely that given what we've seen lately. And given the confidence that we're seeing in the customer, in the future, we should see in the online business, specifically in 1P, a higher percentage, weighted higher weight in the -- in our percent of sales online of higher-margin products like it can be apparel or small-sized products. Look, the other part that we mentioned, I would say, markdowns, it's something that's going to be related to I would say, inventory management we can have or the industry can have. And I would like to take -- to the last part of your question that you put on the gross margin, that would be in the EBITDA margin. Related to the increased cost in, I would say, operational logistics and the home delivery effort that we have been -- that we've been doing in the last -- I mean, since the pandemic started. Please keep in mind that we increased our home delivery during the third quarter by 15x. In that sense, a big part of this, this is something in which we are working hard. We have been increasing the efficiency in this. One of the main reasons why we structured the home delivery unit, what's for this. So that's something that probably you should expect improvement in this, driven, among other things, by a migration towards a unified home delivery unit, as I mentioned. So to summarize this, of this impact that you're seeing in the gross margin, the 2 things that you should probably consider as something that we're managing and something that we may not be able to control because it is logistics. If they keep, the market keeps demanding a high level of home delivery orders, that's something that you may see in our results moving forward. But on the other hand, on the positive side, I think that you may not, we expect not to see as much as you saw this third quarter is the fact that we should have an increase in the relative mix. And also, we should be going hard in the marketplace that should also be allowing us to get a better outlook in margins looking forward.

Understood. And second question, if I may. Could you comment on what sort of developments are you currently pursuing in your digital factories? What new functionalities could we expect to be launched in the next couple of quarters, particularly in payments?

Sure. Andres, let me comment on that. First, let me tell you a little bit what we have accomplished this last third quarter. And then let me move on to what we are expecting for the following quarters, okay? This last quarter, we launched [Foreign Language] in Peru and Colombia. This product can be open in our e-commerce platforms, and the customer can benefit from our promotions immediately, okay? During this third quarter or during last year, third quarter, we opened 5,000 of these cards in Chile. While this last quarter, we opened 75,000 of this product in Chile, Peru and Colombia, okay? Second, thing that we did this quarter was the integration of CMR and Banco Falabella's apps and webs in Chile, which we believe is very positive at this release, the opening of banking products for our CMR customer as well as to actually deploy a lot of functionalities that we had for the Banco Falabella platforms, okay? Third, we launched a fully automated sale finance solution in Linio Chile. We started in Linio and towards granting credit to noncredit card holders that is directly disbursed to the merchant, okay? And then the customer base to Banco Falabella. And fourth, we commercially launched Fpay wallet in Chile, reaching the 350 Fpay wallets that Juan has commented in the beginning, okay? That was this last quarter. Moving forward, what we expect to launch in the fourth quarter is our fully digitalized checking account in Chile. We had a very good positive results with our credit card, our 100% digital credit card and we are planning to do the same with our checking accounts. We are also going to start using machine learning risk models for credit card opening in Peru and Colombia. We already do that in Chile, and we think that, that will be very positive in terms of leveraging all the data that we gain from our ecosystem plus the credit bios available in the market. Third, we're going to start operating our Fpay wallet in Peru. In the first quarter of 2021 or so, we expect to scale up our working capital loans that I mentioned that we did -- or that we are doing at this moment for Linio, for all of the merchants of our marketplaces, leveraging our recently announced new integrated e-commerce platform. So that is basically what we have done and what we are planning to do in the immediate future.