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

Good day, ladies and gentlemen, and welcome to Falabella Earnings Call. My name is Gigi, 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 results for the second quarter of 2021. Following this, Mr. Gaston Bottazzini, Chief Executive Officer, will share some highlights on the performance of the company. [Operator Instructions] Now we'll start with the conference with Mr. Juan-Luis Carrasco.

Thank you, Gigi. Good afternoon, everyone, and welcome to Falabella's Second Quarter 2021 Earnings Call. Joining me on today's call are Gaston Bottazzini, our Chief Executive Officer; Alejandro Gonzalez, our Chief Financial Officer; and Benoit de Grave, CEO of falabella.com. I would like to remind you that numbers presented during the call will be presented 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. Let us begin reviewing from Slide 4 onwards to go over the financial results for the period. During the second quarter of 2021, the company's consolidated revenue reached $3.6 billion, an increase of over 50% on a year-over-year basis. This increase was explained by higher revenues from our Retail businesses across the region, partially offset by lower revenue from the banking businesses. Retail formats in Chile performed strong with Department Store revenue growing by over 98%, Home Improvement by 96% and Supermarkets by 25%. Banking revenues fell by 13.9%, mainly due to an 8.6% contraction in the loan portfolio on a year-over-year basis, which generated lower interest income. Shopping Centers reported growth of over 110% on a year-over-year basis associated with increased lease income due to higher operational GLA when comparing to the second quarter of 2020. During the second quarter, our omnichannel platform reported total sales growth of 79% in the region. This is considering both e-commerce and physical stores. Our e-commerce platform achieved an online sales record with GMV totaling $1.2 billion, representing an increase of 38% on a year-over-year basis, on an FX-neutral basis as well. Online GMV for the last 12 months totaled $4.1 billion. Gross profit reached $1.2 billion in the second quarter 2021, representing an increase of almost 90% on a year-over-year basis, mainly because higher contributions from Home Improvement in Chile, which increased its margin by over 300 basis points; and Department stores in Chile, which increased its margin by over 400 basis points, explained mainly by lower markdowns. The Chilean banking business also produced a higher margin, explained by lower cost of risk. Turning into Slide 5. Consolidated EBITDA was $493 million for the quarter, up from the negative $35 million in the same period in last year. This increase reflected a 30.6% margin, mainly due to higher contributions from retail businesses in Chile and banking operations in the same country. Net income reached $185 million for the second quarter of 2021, mainly resulting from higher contributions from Home Improvement in Chile, Department Stores in Chile, Banco Falabella in Chile as well and, to a lesser extent, from Home Improvement in Peru and the real estate business. I will now turn the call over to Gaston.

Thank you, Juan-Luis. Thank you, everybody, who is joining us this morning. As you know, we are entering a period of greater mobility and greater activity throughout the region and particularly in Chile. And at this point, I would really like to recognize and express our gratefulness for the whole Falabella team that has really done an incredible job and raised to the challenge of keeping operations as normal as possible through a very difficult period. Having said that, we continue to be extremely cautious and recognize that we are still navigating a changing environment. The performance of this quarter is driven by 3 sets of factors. The first one has to do with the strong consumption dynamic we are operating in. In Chile and across the region, this has served as a major tailwind, as individuals continue to hold increased liquidity and have oriented their spending to consumption goods. At the same time, as mobility restrictions have begun to ease, our physical stores continue to recover performance. And they are driving, combined with the online sales, a very strong top line growth. Our omnichannel retail platform retail -- I'm sorry, reported sales growth of 79% in the region, combining physical stores and e-commerce, highlighting the value of our physical and digital ecosystem. Home Improvement continues to be a very relevant engine growth, capturing strong demand levels throughout the region. We continue to see very positive trends in e-commerce and particularly in our mix, our private label brands, and especially in apparel, continued to grow participation and share in overall sales, providing a differentiating factor to our value proposition. Overall, shares in soft categories continue to expand, with apparel reaching close to 35% of online sales in Department Stores. In the banking operation, we have reached a turning point in which during this quarter, we have started to see overall loan growth, particularly in Chile and Colombia. The second set of factors has to do with the way we have managed different aspects of costs. During the pandemic, we have made, as I have mentioned in prior calls, many efforts around reducing our cost structure in a sustainable way. This has translated into more positive results, as sales and demand expand and our cost structure doesn't move in the same direction and at the same rate. In the second place, we have kept inventory levels very controlled. And again, the rise in demand has also had a very positive effect on that. And finally, risk management has been very proactive, has been helped, of course, by liquidity in the market. But we are seeing unprecedented levels -- unprecedentally low levels of risk in each one of our operations. The third set of factors has to do with our company-wide initiatives to continue to strengthen our ecosystem, particularly in e-commerce, logistics, loyalty and our digital platforms. They have translated into increased customer stickiness and recurrence. To mention some of these, we have launched in the last few days falabella.com as the integrating platform where all of our 1P e-commerce and all of our 3P sellers publish their products, completing close to 8 million SKUs from retailers and from close to 14,000 sellers. The integrated e-commerce platform is a very powerful engine growth -- growth of engine, I'm sorry, as it allows us to enrich our value proposition to customers and sellers, fully leveraging all of the capabilities that we have in our ecosystem. This launch marks a turning point in our digital transformation and strengthens our value proposition, as I said. It's quite a relevant milestone, but at the same time, it's the beginning of a journey as we remain committed to constantly evolve and simplify the experience of our customers in our platforms. Secondly, in logistics, we have made great progress in making our logistics much more efficient and agile in order processing. We currently have over 1.5 million square meters of warehouses and, during the pandemic, have added 150,000 square meters. This has allowed us to improve service levels from a very low point at about a year ago, but not only that, but also gave us increased inventory visibility and optimized product sourcing, which is translating into operational efficiencies, and it's allowing us to improve and optimize markdowns. In our digital banking operations, we have continued to drive digital functionalities and products to our customers. In particular, our card opening process has achieved a milestone of opening 195,000 fully digital credit cards in this quarter, which is more than 5x what we did in 2020. Digital opening of current accounts, which is a new functionality that we are offering, is starting to gain traction as well. And this quarter, we opened more than 50,000 accounts fully digitally. Also, we continue to roll out our improved loan origination, supported by improved risk models. And this has been allowed -- has allowed us to boost cross-sell and also improve the participation of digital loan origination, which stands at above 50% throughout the region. Our recently launched wallet, Fpay, has reached a TPV of $2.9 billion over the quarter, which is mostly concentrated in our own platforms. And we are starting to do an outreach to third parties as well as to sellers so that this wallet becomes much more available in other merchants of high frequency. Thirdly, in loyalty, we have reached a level of 12.6 million participants in the program. This is a very sharp increase of 68% year-over-year, but the most interesting or important impact of this for us is the much higher visibility it has given -- is giving us of the transactions in our ecosystem, which has gone about 1.5 years ago from a level to -- of about 30%, which was the participation of our own credit cards to today, we can see about 80% of total transactions performed both in our digital platforms and our physical stores. As a result of that, we can make many improvements to our value proposition, both in terms of commercial offers, preapproved credit cards and accounts and several commercial initiatives that allow us to keep much closer to our customers. And finally, in technology, we are continuing to invest and evolve in the development of proprietary platforms that over time are replacing the existing platforms for our customers. These are our e-commerce platform, which is completely replaced as of today; our marketplace platform, which we are continuing to replace in a gradual stage; logistics platform, which is at a more early stage, but we are putting a lot of energy in it; our banking platform, which is quite mature today and is offering most of our banking products with a fully digital experience; and our loyalty platform that is more and more embedded with all of our other digital platforms that we operate. The development of these platforms is a very important engine of growth going forward. Also, to be able to accomplish all that, we continue to grow our in-house development centers in India, in Argentina, Chile and Mexico, reaching over 1,400 developers working in the Falabella ecosystem right now. As closing remarks, I would like to highlight the implementation and execution of falabella.com and particularly how this has served as a very strong example of collaboration and change in the culture of our business and how it is driving a much more customer-centric organization over time. We are encouraged by the results of the second quarter, but more importantly, committed to continue to advance in our journey of digital transformation and building digital platforms for a much more -- much better customer experience and, as a result of that, sustainable growth throughout the region. Thank you very much.

Thank you, Gaston. We will now open the line for questions.

[Operator Instructions] Your first question comes from the line of Marko Kraljevic from LarrainVial.

Could you please share us with -- share with us more color on falabella.com? What are the key differentiating factors of the value proposition of falabella.com?

Benoit de Grave here. I will answer your question. Thank you very much for being here with us and for your questions. The key main differentiating factors that we see, first of all, is the access of -- in a single place to a broader product offering, combining 1P and 3P products. The second one is the fact that our customers are able to have access to a single shopping cart and checkout for products from all our retailers and marketplace. Then we leverage Fpay as a key engine for growing our online platform. And this allows us to better and smoother payment experience for our customers by taking full control of the checkout and the payment process without relying on third parties, right? And through that, we've managed to increase conversion rates and also decrease credit card float rate, right? The fourth point is -- are the benefits for the sellers. Because we are focused on helping them growing their business and mainly through the access to a large traffic base. Combining all our offering through 1P and 3P, we have one -- we have the largest traffic base in the region. Then we give them access to marketing and analytic tools in order to boost their business through different tools of marketing and data and analytics. Then as Gaston mentioned, we have -- we give them access to our loyalty programs with more than 2.6 million customers. So this allows us to have a strong product recommendation for third-party products. And then the payment processing and financing, we are starting to give cash advances to our sellers and working capital financing as well. And lastly, logistics, we're putting all of our logistics network for the sellers, mainly for order fulfillment, fulfilled by with large warehouses where we are starting to give access to our sellers. And then the click-and-collect points in all of our stores and shopping malls.

Our next question comes from the line of Emilio Acevedo from Santander.

I have also a question on the e-commerce platform, falabella.com. I would like to know how do you lever on the key elements and assets of your ecosystem for this new platform.

Thank you very much, Emilio, for your question. First of all, I would say that we lever on the networks of more than 500 stores and 46 shopping malls. This allows us to enhance and complement the omnichannel experience for our customers, both on the shopping experience and on the returns and exchange processes. Second, we lever the established and well-recognized selection of private label brands that we have from all our formats. Third, we give access to our leading and highly valued loyalty program, as I just mentioned in the previous question, with more than 2 million participants. And then the financing alternatives that we are giving our customers and sellers through Banco Falabella and Fpay, financing alternative through Banco Falabella and payment processing services through Fpay. And then also the extended and expanded product delivery options where we are accelerating on express and on-demand delivery and 2 days delivery, click-and-collect both for click and returning products, right -- click-and-collect and returning products and exchanges.

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

I was curious, looking ahead into the fourth quarter holiday season, do you foresee any bottlenecks? Are you comfortable with current inventory levels? And the second question, in terms of the provision reversals that have helped, obviously, the result in the Banco Falabella in the financing operations in year-to-date. When you look into sort of the back half of this year and into next year, how should we think about sort of where profitability can go and where provisioning levels also should be going from here? Should they be going back to historical levels from here? And do you foresee any further releases of provisions?

Thank you, Irma, for your question. This is Gaston. So regarding your question around supply chain bottlenecks, this is a situation in which worldwide availability of vessels is definitely less than ideal. We do have secured levels that we are comfortable with in terms of supplying the holiday season in particular. We are going to be tight in inventories in general across all of our formats for the next few months, for sure. But also in relative terms, we think we're going to be in a relatively good position. On the other hand, talking about supply chain bottlenecks in terms of distribution, we are, as I mentioned previously, making additional investments in logistics, building transfer centers, which are going into operation in the next couple of months. And we think that will allow us to support the period of highest demand with very good delivery systems -- I'm sorry, with very good delivery services and times. At least that's our objective as we're doing all of this. And we think if we accomplish both of those things, which is securing a level of vessel availability that is even though being less than ideal, puts us in a good position to supply all of the markets in which we operate. And combine that with a robust distribution system, we should be in good shape. Regarding provision reversals, these are both a result of the liquidity that has been in the market and the fact that we have grown less. There has been much less demand of credit. So both factors are affecting the reversal of provisions. So as we increase the loan book over time, we expect that provisions will start to increase again. We don't think they will go back to pre-pandemic levels, because we are putting more and more energy into our models. And as I mentioned before, we are gaining increasing visibility of customer behavior, which should allow us to improve our origination, both of new credit card holders and of bank loans. In addition to that, you mentioned expenses in general. We are investing heavily, as I said before, in the digital banking solutions. This is translating into our reduction in the expenses of our physical branch network. And in a period of a year, we should probably be operating about 30% less branches than now. So all of that should translate into higher efficiency. Of course, there will be a rebound in provisions, but our objective is to make that rebound not back to pre-pandemic levels, but below that.

Our next question comes from the line of Gabriela Benjamin from BlackRock.