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'll be your coordinator for today. [Operator Instructions] In the first part, Mr. Juan-Luis Carrasco, Head of Investor Relations, will present the highlights of the period, along with the summary of the consolidated results for the fourth quarter of 2020. Following this, Gaston Bottazzini, CEO, will present the strategic update of the company. And we will 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 2020 Earnings Call. Joining me today on the call are Gaston Bottazzini, our Chief Executive Officer; and Alejandro González, our Chief Financial Officer. 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 statements. I will start the call by going over the key financial highlights of the period. And afterwards, I will turn over the call to Gaston. Let us begin reviewing Slide 11 to go over revenue and margins. During the fourth quarter of 2020, the company consolidated revenues reached $4.2 billion, 14.8% increase on a year-over-year basis. This is mainly explained by a 20.7% increase in revenue from the Retail businesses across the region, partially offset by lower revenue from the Banking segment. The retail formats in Chile stood out: Department stores, with an increase of 41%, home improvement with a growth of 45.5% and supermarkets with 40.8%. Banking operations registered a 26% drop in revenue, mainly driven by the 17% contraction of the loan book on a year-over-year basis. Gross profit reached $1.5 billion in the fourth quarter, representing a 19.9% increase year-over-year, which is mainly explained by a higher contribution from home improvement in Chile resulting from the increase in sales; and an improvement of over 5 points in margins in department stores Chile, which also increased sales and was able to retain margins; and supermarkets in Chile as well, which also saw a strong increase in sales, along with over 2 points improvement in margins. Also contributing to the higher margin were the Chilean banking operations, explained by lower risk costs. All of this was partially offset by lower contributions from banking operations in Peru resulting from higher risk costs and department stores in Argentina. Turning to Slide 12. EBITDA reached $652 million during the quarter, representing an increase of over 60% on a year-over-year basis. This increase represents an improvement of over 4 points in margin, mainly explained by greater contribution from the retail operations in Chile, together with greater contributions from the banking businesses in that same country. This was partially offset by lower contributions from banking operations in Peru and Colombia. Net income for the period reached $195 million during the fourth quarter of 2020, explained by higher contribution of profits from home improvement in Chile, Banco Falabella Chile and department stores in Chile as well. This was partially offset by losses in department stores and our businesses in Argentina. It is worth noting that in this quarter, the company registered an extraordinary loss of $86 million related to a write-down in the book value of our operations in Argentina. The adjustment made to the book value of these assets is made in the context of the process that we're executing to close some stores and in evaluating strategic alternatives to reduce exposure to that market. If we exclude the extraordinary loss, net income for the period would have reached $280 million, representing an increase of 153% on a year-over-year basis. I will now turn the call over to Gaston.

Thank you, Juan-Luis. Good afternoon, everyone, and thank you for joining us today. As we continue to navigate the COVID-19 waters and the challenges that the pandemic is bringing, I would like to take stock of where we are as an organization. In the first place, I would like to recognize the incredible efforts that every part of our organization has made and is continuing to make the best out of this very difficult time. I would also like to express our support to everyone that has suffered the consequences, either directly or indirectly, of this pandemic. At the same time, and in spite of the many challenges that this pandemic has represented for us, it has also brought us many opportunities to accelerate our business development strategy and our digital transformation. I have described the challenges that we have faced at length during our previously quarterly calls, which include the way we have had to adapt the way we work in our organization. The many store closures that we faced and the challenges of the surge in online sales and the implications they had on our logistics as well as the fact that we could no longer rely as we have done before on click & collect. This has resulted in a very important surge and has demanded a lot of adaptation on our part, including developing ship-from-store capabilities that we didn't have. But in all, it turned out, we delivered 30 million orders in the region this year, which is basically 4x what we did in 2019. On the fourth quarter, we were able to deliver strong performance, capturing positive and strong momentum, but more importantly, it marks a change in our trajectory and underpins the value of our ecosystem strategy. This was the result of some very positive short-term impacts. For example, the sharp increase in household disposable income as a result of individual pension fund withdrawals, as well as the dedication of household funds to consumer products, given that they were not spending so much in entertainment and travel, the continued online momentum that we saw and strong earnings and results in the banking operation resulting from a sharp improvement in risk. At the same time, this strategy is -- or the trajectory that -- there is a trajectory of improvement that is sustainable, we think, in the longer term. As part of this, we see a higher online penetration across all formats that is being sustained even after consumers return to the stores. We are also seeing a lot of online customer acquisition, and we have a lot more exclusively online customers that we did before, which translates into less cannibalization between channels. Also, as we -- as online sales increase, we are seeing a more balanced online sales mix between apparel and higher-margin categories compared with the lower-margin categories, and this is part of what lies behind margin improvement. And finally, we have an efficiency plan that we have executed that has been made with a very long-term view as it is focusing on adapting organizational structure to a new environment rather than pursuing short-term cuts that we would have to lose over time. Throughout the year, we have taken the opportunity to accelerate our digital transformation and strengthen our physical-digital ecosystem. We have made the decision to integrate our e-commerce platforms under falabella.com, and we are in the process of executing that strategy. This will allow us to consolidate traffic that today is spread out across different domains combine -- and combine the offering of 7 million products with -- I'm sorry, 7,000 million products with the offering of 10,000 sellers as well as our own retailers. It will also allow us to enrich our proposal -- our value proposition to sellers and make that more attractive for them, and it will allow us to be much more efficient in our technology development as well as in our logistics development. We have also decided to combine our logistics for home delivery into a home delivery unit, integrating all of our logistics assets, but also integrating all of our logistics technology developments, both for 1P and 3P. And in the third place, we have advanced in the digitalization of our financial business. We introduced the first 100% digital credit card, and we are in the process of introducing the first 100% digital current account. The result of this is that in the fourth quarter, we made a very, very strong improvement in the number of digital credit card opening, and we reached the number of 250,000 digital credit cards opened over 2020, and this has been including Chile, Peru and Colombia. This not only has an impact in our growth, but also in the efficiency of that growth and the efficiency of customer acquisition since many of these openings are made in our e-commerce banners. We have also improved our digital processes for transactions and in particularly for loan origination, and 44% of the consumer loans originated in 2020 were made digitally. And finally, we launched Fpay, our digital wallet and payment processing portal with a very strong focus in our internal banners. We integrated the payment processing portal across our e-commerce platform and single checkout payment gateway. We gained tractions with contactless payments through QR codes in our physical code -- in our physical stores and started the process of acquiring third-party network with 3,000 associated stores. Finally, we advanced in adapting our operations to new environment through a company-wide efficiency effort, which eliminated redundancies, centralized some of the corporate functions and support functions, and in general, optimized our overhead. The efficiency plan we executed, as I said, is made with a very long-term view, and it is focused on adapting our operations and structure to the new environment. We have had a very important cost during 2020 and is already generating savings, but we will see its full impact during 2021. We will take advantage of these savings to redeploy resources toward our ecosystem, while at the same time, reserving our financial strength. In 2021, our focus will remain on accelerating the execution of our strategy, which includes opening stores in the formats we have declared that are our priorities, such as home improvement in Mexico and Brazil, such as the development of the IKEA stores and the development of food retail in Peru. At the same time, we will launch our integrated e-commerce platform during the second quarter of this year. We will put a lot of focus on marketplace and our expanded proposal for sellers, focused on fulfillment services, payment processing and financing solutions to sellers. We will continue to enhance our apps, focusing on expanding app functionality, both for e-commerce and for store functionalities. We will continue to advance in digitalizing our customer experience, focusing on growing adoption of digital products, including Fpay, including the acquisition of nonbankerized customers through much more efficient financial products. And we will deploy our integrated payment portal with automated financing solutions for customers. In loyalty, we will continue to grow our open loyalty program, including opening this program to sellers and including much better value proposition to find new customers. In summary, during 2020, we have built very important foundations for the growth and performance going forward. Our team is very committed to the strategy and is very energized by the trajectory in which we have embarked lately. Thank you very much. And with that, I will open to Q&A. Operator, please open the line for questions.

[Operator Instructions] Our first question is from Andrew Ruben with Morgan Stanley.

Great. And congratulations on the quarter. A lot of ground to cover, but maybe to focus on Fpay. It seems like you're making a lot of progress there. We saw the TPV numbers. Could you talk maybe a bit more broadly about the road map in terms of new services? It seems that the strategy is focused on acquiring both consumers but also sellers and merchants. So can you kind of talk about both sides of the ecosystem, what you're doing to drive uptake?

Thank you, Andrew, for your question. Yes, the way we see Fpay is it's going to be a great engine for growth of the ecosystem because it's going to facilitate -- it's going to bring a lot of advantages to consumers and to sellers. And therefore, we are working on both sides of that equation. The way we are thinking about the strategy is to focus, first, on our e-commerce platform; secondly, on our stores; thirdly, on our sellers; and only after that, to focus on the open market, both the digital and the physical markets. Of course, we are on a race and there is competition, so this is not something we can do in a very fast manner, but we do believe that building critical mass in our own e-commerce platform is very important to be successful in the other 3 or 4 horizons. That's why you are seeing that very large growth in TPV because we are making all our efforts so that most of the transactions, or our goal is that all of the transactions in our e-commerce platform, both marketplace and 1B are facilitated by Fpay. When you go to the stores, we are implementing QR. We did that about 8 months ago, started, and we are doing a rollout. We have a significant percentage of transactions at the store level being performed with QR in Chile, and we are making progress by launching that in Peru and Colombia as we speak. And in terms of going to the outside the ecosystem and into independent stores, we are, I would say, in experimentation mode. We have 3,000 external stores that are mostly either stores with which we have alliances through our loyalty program or stores that are part of our seller base. And those are going to be our 2 main areas of focus in going outside the ecosystem. In terms -- that's in terms of the customer base, both from consumers and sellers or merchants. From the point of view of the services of Fpay, Fpay has a very strong focus today on conversion. We have achieved much better conversion with Fpay than with all of the external solutions that continue to live within our e-commerce platforms. And that's very good news for us because it gives us a point of differentiation, but it also gives Fpay a point of differentiation in terms of our -- eventually when we want to make it attractive for third parties. The second area of focus is fraud. We have made significant investments in fraud models, most of them proprietary. For -- and that partly would lie behind the good conversion rates, but also lies behind much lower fraud levels than we see with external solutions. And then the second wave after those initial, which we think are very important hygienic characteristics of a payment system, the next horizon is to have financing solutions, buy now, pay later, for our consumers; and capital -- working capital financing for ourselves. And the other one is to integrate our loyalty program into the payment system so that both from a redemption perspective for consumers, but also from the point of view of sellers, the ability to leverage the loyalty system to enhance the value proposition or differentiate themselves within the marketplace becomes relevant for them and also a source of monetization for us.

Got it. That makes a lot of sense. And just on that consumer side, so you mentioned some of the initiatives you're going to fold into the system. But in terms of driving initial uptake, what are your levers between marketing, cash back? And what are you seeing in terms of stickiness for customers that start to use the app?

So today, the -- as I told you before, most of the transactions are done within our ecosystem. So stickiness within our ecosystem is relatively easy because of the improved performance. I think the challenge for us is to drive usage outside the ecosystem eventually. We are experimenting with -- of course, with cash back with different aspects, and in particular, with our own loyalty program to leverage our own loyalty program to drive usage. But I wouldn't be able to tell you right now what is really proving more effective or efficient from a marketing point of view in relative terms. I'd say on that area, we're still in a lot of experimentation rather than very clear on what are the silver bullets that we need to use.

Got it. That makes a lot of sense. It seems like it will be a very valuable tool.

And our next question comes from Irma Sgarz with Goldman Sachs.

Yes two quick questions, if I may. Firstly, on -- when you look at the retail margins beyond the moment of the pandemic, and I think it's fair to say that, obviously, 2021 is still going to be, to some extent, impacted. But when you just sort of think a little bit more medium-term and you put everything together that is happening in terms of investment, savings that you can redeploy to -- that you are committed to redeploy into tech investment and digital transformation investments. At the same time, you also have a mix in terms of -- depending on sort of where your retail formats are growing a little bit more than some others. The mix is obviously shifting a little bit. So -- and there's a geography mix, of course. So if you had to put everything together and sort of think about the consolidated retail margin, how do you think about that? Sort of does it go back to historical levels? Or is it just going to be a little bit lower going forward just because of digital transformation, but with higher top line growth? So that's the first question. And then if you could just expand a little bit more on the outlook for Banco Falabella. I know that digital, obviously, is a great opportunity here, and you've made significant progress already. The data from the fourth quarter was very encouraging in terms of provision reversal. When you think about sort of growing the portfolio, approval rates and the appetite for risk in 2021, where would you -- how do you sort of see that, let's say, that road map for 2021 on Banco Falabella? In Chile, I think, predominantly.

Okay. Okay. Thank you, Irma, for the question. So in terms of retail margins, there is no question we're seeing extraordinary retail margins, and these are not going to be sustainable in the longer term because they are driven by a purchase program and a demand that is way beyond our purchase program. So what are the measures we are taking to make sure, even though these margins are going to go down, they go to levels that are still attractive and are still sustainable in the long run. The first one is to make sure that our purchase program are as adapted to demand as possible, and we're making a lot of inroads in that, in how to make sure we minimize the level of markdowns. I think we've learned a lot over the last couple of years, and we have incorporated a lot of analytics into that. The second aspect is that the -- given that the proportion of online sales in total sales is growing substantially, we are, I think, at the point where we are seeing that the impact of margins -- on margins of that shift is decreasing, because our logistics is becoming more and more efficient. So -- and we are also adapting the infrastructure of our stores to make it more efficient. So we are putting a lot of effort in the efficiency of the distribution infrastructure, so that the -- I'd say the phenomenon that we had where you have this shift between physical stores and online, but you have the growth of online infrastructure or the infrastructure you need to serve the online sales, together with preserving all of the infrastructure you need in the stores, that we make a better balance of those 2. And I think the good news is that we're seeing less cannibalization. So as long as we are able to continue to acquire online customers and keep those online customers over time, we are going to have a much healthier balance of channels, and our logistics is improving efficiency as we speak, making it less of a burden as that channel grows. And I think the third one is that traditionally or at least until, I'd say, 18 months ago, we -- all of the online sales, or a majority of the online sales, were driven by big-ticket sales, which are, in general, low-margin items. So we had -- with the shift from offline to online, we also had a shift of mix, which had an impact on margins. During the past year and hopefully going forward, as we see people getting more comfortable with buying apparel online, and we're also changing our policies and making it a lot more flexible so people continue to buy apparel online. And the good news is it is happening in spite of the store reopenings. That also improves the overall margins of the online sales. So I think the combination of all of that makes us believe that even though margins are going to drop down to levels closer to normal, they will be better than historic. In terms of Banco Falabella Chile, I'd say that rather than an appetite for us to lend, what there is, is a lack of appetite of the markets to borrow. And that is because of, I think, a combination of factors. One factor during the pandemic has been uncertainty about the future. Another factor has been the level of liquidity that people had, not only because of the pension fund disbursement, but also because the level of expenditure in categories like entertainment and travel were substantially down. So people had a lot of liquidity and not so much appetite for borrowing. We have continued to invest and develop our origination models. And as you saw, our risk has come substantially down as a result of people paying both bad debt and debt that was current. So now our challenge, and we are seeing some initial positive dynamic, is to start to originate again. And just to put some numbers behind that, the fourth quarter was actually flat in terms of our stock -- loan stock in Banco Falabella, Chile. And we are starting to see some initial growth in 2021.

Our next question comes from Emilio Acevedo with Santander.

I have 2 question. First one is related to the inventory levels in Chile. I would like to have more colors on why the lower level of inventory there. Is it related to higher demand or any other factors related to that? And the second question is more color also in the home improvement whole performance that we saw across the regions. What would be the strategy behind that good performance in home improvement?

Thank you for your question, Emilio. So in terms of inventory levels, you see across the board in all formats a lowering of inventory levels. In general, if you think across all formats, it has to do with demand that has been higher than our predictions. But in one particular case, which is the case of home improvement, and in particular, in Chile, there is an additional factor, which is that there has been over-demand for shipping capacity. So we were not able to replenish imported goods in the local market as fast as we would have liked to. We have been able to do -- to maneuver with local supplies. But even in that case, given that part of the reason is actually increased demand, our overall inventory levels are way below what we consider the optimal levels. I think you mentioned home improvement and the increased demand in home improvement. This has been a format that has been strong throughout the pandemic. I think it has to do mostly with customer behavior and customer -- the availability of resources, given that people cut down on other categories because of restricted mobility, a lot of the emphasis of the household expenditure was on the improvement of their homes. And you see that in the mix of our sales. Our mix, we have basically 3 engines in our home improvement business. One is the final consumer, the other one is the specialist or the contractor, and the third one is medium and small businesses. Basically, most of the surge in demand was driven by the first engine, by final consumers, by households. And the strategy has been to be very active and very close to those households, and in particular, through one-on-one marketing and commerce. And we've also seen a very relevant growth of commerce in a category that, in general, had not seen such good growth in commerce. So we reached levels, actually, commerce in home improvement grew more than many other category. What we are seeing now, actually, and it's part of our strategy, is a return of some growth coming from contractors and specialists and some growth coming from SMEs. We expect that to continually recover during 2021.

Our next question is from Rodrigo Echagaray with Scotiabank.

Gaston, in your earlier opening remarks, there was a lot of focus on the long term, which is great to hear. As you invest in all these different pieces of the puzzle, obviously, to remain the market leader long term, what would you say are the missing pieces? What is it that you're further behind, I guess, as you continue to build this ecosystem?

Let me think about that question. So I think if I have to think about relevant missing pieces, obviously, because we have thought about the pieces and we have put a lot of thought into this, it's very hard to identify something that is missing. And that's part of the challenge. The challenge is that we are investing, as you said, at the same time, in payments; in logistics; in e-commerce, and within e-commerce, in retail and in marketplace. So those are the 4 fronts. And of course, that's the customer-facing part of the investment. And then you have to invest in parallel with in all of the infrastructure that supports that, and in all of the information security that is necessary to drive all of those fronts with confidence. But to your second question, which I think is more -- probably touches more on the pain points, where do we think we are further behind? I think what we're trying to catch up as fast as possible is in logistics. We have made a lot of investments in logistics, in our logistics infrastructure, our distribution centers, our transfer centers. I think today, we are putting a lot more focus on the logistics technology. The warehouse management systems, the order management systems, the tracking systems for our orders and the integration of all of those. That is a very uphill road and journey for us because, of course, all of that technology was initially designed to support stores. And if you ask me where we are further behind, that's probably where we are further behind today, and we're putting more focus to improve. The good news is that we have found a lot of ways to make strong improvements. As you have seen, our service levels in logistics, which suffered during the middle of the pandemic. We were able to revert that, and we have much, much better service levels today. But we are building a lot more technological infrastructure for growth. And I would say that's the area where we are further behind. But of course, as you touch on e-commerce, on marketplace and on payments, in all of those, we have a lot of work to do.

No, that's very clear. And if I can just ask a follow-up. So on logistics, where would you say -- I mean, it's a never-ending -- obviously, you would have to continue to invest long term. So it's -- there is no end point. But where would you say you are in this catch up? Or I guess, when do you think we'll be able to more clearly see all the recent investments? Or in other words, when do you feel most of the orders will be delivered in less than x days? Just conceptually speaking.

So we -- in very tangible ways, we have set a target for ourselves to deliver most of our orders within 48 hours. Of course, you have the drop-ship orders and some edge cases that cannot fit within that because they are either cross-border or whatever reason. But we are trying to put everything that we can within the 48-hour window. We think we will achieve that in the fourth quarter. But in terms of when we will you see improvement and news, I think as we, in the second quarter, launched the e-commerce, the integrated e-commerce platform, some of the logistics improvements will come together with that. In terms of better order tracking, in better -- in terms of faster integration between, as I said, order management systems and transport systems, et cetera. And also in terms of some of the value-added services we want to provide for sellers.