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

Good day, ladies and gentlemen, and welcome to Falabella earnings call. My name is Victor, and I'll 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 third 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 the conference with Mr. Juan-Luis Carrasco.

Thank you, Victor. Good morning, everyone, and welcome to Falabella's Third Quarter 2021 Earnings Call. Joining me on today's call are Gaston Bottazzini, our Chief Executive Officer; Alejandro Gonzalez, our Chief Financial Officer; and Alejandro Arze, CEO of Home Improvement. 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. During the third quarter of 2021, the company's consolidated revenue reached $3,572 million, an increase of 16.7% year-over-year. This was mainly explained by the increase in revenue from Home Improvement and department stores across the region. Retail formats in Chile performed strongly with Department Stores revenue growing by 39% and home improvement by 33% on a year-over-year basis. Banking business revenue grew 4%, mainly explained by the increase in loan book of 6.8% on a year-over-year basis. Shopping Centers revenue grew by 163% year-over-year associated with lease income from returning to normal conditions in the operations of the malls when comparing to the third quarter of 2020. During the third quarter, our omnichannel platform reported total sales growing 23% in the region. This is considering both e-commerce channel and physical stores. Our e-commerce platform achieved an online GMV of $3.5 billion over the last 12 months on an FX-neutral basis. Gross profit reached $1,266 million in the third quarter of 2021, an increase of 38% on a year-over-year basis, mainly explained by a higher contribution from Department Stores in Chile, whose margins expanded to 33.8%, explained by a reduction in promotional activity, along with a strong contribution from Home Improvement in Chile, whose gross margin reached 30.7%. Also, a higher margin from the Chilean banking business, explained by lower cost of risk. And lastly, a higher contribution from the real estate business, whose gross margins recovered up to 69.4%. Moving on to the next slide. We can see that consolidated EBITDA reached $480 million for the quarter, up 117% when comparing to the $221 million for the same period last year. This increase was reflected into a 13.4% margin, mainly due to contribution from Home Improvement and Department Stores in Chile. Also, the real estate business and the banking operations in Chile and Peru contributed. Net income reached $226 million for the third quarter of 2021, mainly explained by higher contributions from Home Improvement in Chile, Department Stores in Chile and the real estate business as well, and to a lesser extent, banking operations in Chile and retail formats in Peru. Additionally, non-operating results were positively impacted by a financial income of $87 million, mainly explained by gains recognized in derivative contracts used for hedging purposes. I will now turn the call over to Gaston.

Thank you very much, Juan-Luis. Thank you, everyone, for joining us this morning. So to start, we would like to express our gratitude to all of the teams across the region that are continuing to face a very challenging situation in the face of the pandemic. We have gained a lot of freedom and mobility as a result of a better and more stable situation in terms of contagions in -- across the different countries and this has been a driver of our performance this quarter. But in spite of that, we continue to navigate a very challenging quarters in terms of continuing waves as well as supply chain challenges. In terms of the quarter performance itself, it was mainly driven by the return of customers to shop in our physical stores, which underscores the importance of the stores to enhance our overall value proposition as a physical and digital ecosystem. Our physical stores this quarter grew by 40% year-over-year. This was also -- the quarter was also driven by continued strong performance in Home Improvement across all of our markets, with sustained good performance in the physical stores, driven by continuous appetite by consumers, to continue to renovate and expand their homes. Our international operations have been also an important driver of performance, particularly Peru and Colombia, where overall retail revenue grew by 16% and 22%, respectively. Our shopping malls, lastly, also were an important driver of performance, in particular, this quarter in comparative terms because with increased mobility, we actually reached almost 100% of leased GLA operational and very good or very low vacancy levels in comparative terms. This also, in terms of the expanded hours of operations of our malls, permitted our food and beverage value proposition to actually restart very strongly. And overall mall performance, therefore, was an important factor in the performance of the quarter. And finally, our Banking Operations, which have been losing ground in terms of loan book as a result both of restrictions and mobility and more conservative approach in terms of risk policies are finally starting to resume expansion with a 7.9% growth of the loan book in Chile and 6.8% growth of the loan book across the region. In terms of the execution of our ecosystem strategy, this quarter has also been a very relevant one and almost a point of inflection in this execution. Since at the end of August, we launched our new falabella.com portal, which integrates all of our e-commerce sites with all of our retailers in a single platform as well as all of our -- the sellers, third-party sellers that we had in Linio, making this a single destination for our customers and a single point of contact for our sellers. This is, as I said, a very important point of inflection in our digital transformation. And behind this, there was a very relevant effort of integration of many different systems. And the fact that we were able to do this without losing ground in the growth of our GMV and in terms of the satisfaction of our customers, we consider it to be quite an accomplishment. We continue and will continue to work to position falabella.com as the single destination for all products, both of our retailers and for our sellers. And we think this is going to be a particularly important driver of growth going forward, particularly as we revamp the marketplace operations. In digital banking, we also made significant progress in terms of improving our product opening processes. We issued more than 170,000 fully digital credit cards. These cards are open without any human participation. Current accounts were also introduced with a fully digital opening, and we opened 130,000 current accounts in the quarter -- in the third quarter. We are also benefiting from our improved loan origination models, coupled with enhanced customer journeys, which means that in spite of the reopening of most of our bank branches, over 50% of loan origination continues to be digital. TPV on our payments platform reached a total volume of $2.9 billion. With our digital wallet, in particular, gaining traction and total volume actually being a little bit contracted as a result of lower GMV, e-commerce GMV as the stores reopened almost completely. In Loyalty, finally, we have reached 14.6 million participants in our program. This is a 60% increase in the program as we have opened it to all means of payments, which is helping us significantly in terms of visibility of our customers and our ability to permanently improve that value proposition. In summary, as we continue to see greater mobility and our customers return to the stores across the region, we see that the combination of fully reopened stores with an e-commerce platform that continues to improve and maintain a strong performance allows us to drive overall top-line growth. So the combination of channels is actually becoming one of -- addition rather than cannibalization. Also, the traction we are gaining in product origination in the banking operation is the foundation for taking our digital banking proposal to the next level and is going to continue to help our customer acquisition levels. We are committed to strengthening the physical and digital ecosystem, focusing on enhancing our scaling all of our core platforms. And in the short term, we are focusing on some very specific initiatives, such as the full deployment of our global seller center, which is a very important part of the falabella.com value proposition to the marketplace sellers. Continue to scale fulfillment capacity ramping up operations of our newly inaugurating fulfillment centers for third parties in Chile, Peru and Colombia, which are exclusively destined to marketplace sellers. Continue to roll out falabella.com platform in Peru and Colombia, which is coming in the next 2 quarters. And we have recently launched Fpay in Peru, and we'll launch Fpay in Colombia at the beginning of next year. In the longer term, we are very encouraged by the positive performance of our business in Brazil and the improvement in this Sodimac-Dicico model value proposition, which has led us to also consider the expansion in Brazil as one of our priorities in the near future. At the same time, we are also trying to push forward in our expansion in Mexico with -- and try to open a few stores to complement the 8 stores we have opened in that country so far. To finish, we are really very encouraged by the results of this quarter, but more importantly, committed to advancing our journey of digital transformation, which is helping us shape also our cultural transformation as an organization. Thank you very much.

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

[Operator Instructions] Our first question will come from the line of Marko Kraljevic from LarrainVial.

My first question is, what benefits are you seeing for a line Home Improvement after the integration under falabella.com? And my second question is, how do you feel about the current inventory levels facing the fourth quarter and the first half of 2022?

Marko, thank you for your question. I'll take the first one. The online sales for Home Improvement have gained relevant scale with $809 million as of third quarter '21 last 12 months, more than 4x what we had in 2019. Benefits of the integration in falabella.com are becoming tangible rapidly as our products gain immediate access to a larger traffic base, resulting in increased exposure and sales. Home Improvement categories within the platform are showing rapid strong growth, particularly across general furniture, home appliances and gardening equipment. We continue focus on getting our customer increasingly familiar with this revamped experience with the marketing and communication plan to position falabella.com as our one-stop-shop.

So I will take the question on inventories. Basically, the challenges we face are across the whole value chain, right? There is an imbalance in production. Obviously, there are, as you know, problems in the inbound logistics, and in general terms, in the different categories, we are facing challenges. There are certain categories in which we are facing more challenges, particularly those more linked to Home Improvement, decoration, gardening, construction materials. Having said that, and looking forward to the holiday season, we actually are in a very comfortable or we feel in a comfortable position in those categories that are facing highest demand during that season, like electronics, particularly small electronics, fashion. So those are categories in which we are actually -- and we have been building up inventory, and we are actually in a better position than we have been in the last few months. So we are continuing to work on this. We actually feel we are in good shape for those categories that are in highest demand in the coming months and actually have been balancing between those -- between different categories to make sure that those that are more relevant to our customers in the next few months are the ones that we have highest availability.

Our next question will come from the line of María Ignacia Flores from CrediCorp Capital.

Gaston, Alejandro, congratulations on the results. I have a question for Alejandro in Home Improvement. You mentioned you're looking with revised prospects, your Home Improvement expansion plans for Brazil and Mexico, given the better-than-expected performance. So I was wondering if you could provide further color on that.

Thank you, María Ignacia. Well, Mexico, it remains as a very attractive opportunity for growth as it's a market and underserved by Home Improvement chains and with very attractive growth prospects. In that sense, we are executing an organic growth plan to enter this market. We have been focused on Mexico City, large Monterrey area and also Mexico City, Veracruz area. And despite a slower-than-anticipated piece in-store openings, mainly explained in the delay in obtaining construction permits. Today, we have 8 operational stores, and the performance on these stores is very good. All of them are profitable on a stand-alone basis. And in Brazil, we are encouraged by the performance of the home improvement in Brazil, and we are evaluating to accelerate our expansion plan in this market. Our Sodimac-Dicico proposal could continue to strength and positioning in front of our customers. This came as a result of a multi-year effort to turn a construction specialist into a broader Home Improvement value proposal as it has turned out very successful for us. And this has turned into a very healthy sales growth for each one of the stores that we remodel. And therefore, we have no doubt that has been both on market share gain and also performance improvement in Brazil with very healthy growth rates. So we are evaluating to accelerate the plan.

Our next question comes from the line of Andrew Ruben from Morgan Stanley.

Just a follow-up on e-commerce. Could you talk a bit more about the 3P marketplace? I know it declined on a tough comparison this quarter, but any color you can provide on the integration of marketplace within the new platform, any supply chain issues with sellers, and more broadly, any color on expectations for the marketplace as we move to the end of the year?

Andrew, thank you for the question. So in general terms, as you said, marketplace performance has been a little bit softer than it had been previously. We do think that the supply chain issues that are affecting us as a relatively large retailer have actually a greater effect on smaller retailers. So that is part of the explanation for that. Also, marketplace, in general, has higher exposure to -- it's very broad in terms of its exposure to categories compared to our retail. And in particular, we have seen that the growth in categories or the categories that have grown the most are actually ones that -- in which our retail is very focused, particularly those around Home Improvement, decoration, home furnishings. So part of our strategy also is to continue to build a more diverse seller base since our seller base is today very focused on certain categories that are not the ones that are -- that have seen the highest growth in the last quarter. So I'd say those are the explanations for what you see in our volumes. But our -- and therefore, as we continue to improve our value proposition in the marketplace. And in particular, as we implement the new version of our global seller center, which will have a much easier onboarding process and much better visibility of inventories, et cetera, that should allow us to increase the rate at which we bring in sellers as well. And as a result of that, increase the performance of our 3P.

Our next question comes from the line of Nicolas Larrain from JPMorgan.

Gaston, Alejandro, I have 3 actually. The first one is, I wanted to ask, what are you seeing in terms of trends in the fourth quarter? And if you can share any outlook into 2022, considering that you face maybe high comparison basis into next year. Also on the e-commerce front, I wanted to understand from you Gaston, maybe in which areas you think that further investment is needed in order to continue accelerating e-commerce? And lastly, thinking on the department stores, how should we think about potential repurposing of some department store area, considering the growing e-commerce penetration in that format?

Thank you, Nicolas, for your questions. So in terms of how we're seeing the fourth quarter, we are actually seeing a lot of stability in most of the dimensions. So both at the sales level, margins level, and we are seeing more or less the same story that you've seen so far this year. Of course, it's very -- still relatively early to call it, the margin to because -- call it a trend in the quarter because actually, the last month of this quarter represents a very, very large proportion of the overall quarter. So a lot is going to be defined by how the holiday season goes in the quarter. In terms of -- I think your second question was around e-commerce and what are the -- where we see the drivers of growth there and what types of investments we are making. I'd say today, there are 2 or 3 axes. One is the implementation of falabella.com in Peru and Colombia that is going to be coming in the next few months. Having a successful implementation, such as the one we had in Chile is a very important aspect of keeping the growth. We think the impact in those 2 countries is actually going to be higher than it was in Chile, given the breadth of product that we have in Colombia, for example, compared to Chile. A second area of investment, as I said before, is our global seller center. Even though we implemented the integrated e-commerce platform, the value proposition to sellers still has a way to go in terms of both functionality, ease of use, visibility of inventory, et cetera. When we have that, we will have a much better value proposition, but also a much rapid way to onboard sellers, which will translate into a capacity to onboard a lot more sellers than we have had in the past. And I'd say in terms of e-commerce, the third area of investment is around logistics. We have greatly improved service levels. We have been able to sustain these major events, cyber days in Chile, Peru and Colombia, and maintaining service levels through those events, which was very important for us. But we still are not at our target of delivering more than 70% of our orders below 48 hours. That continues to be our target. We are at a number slightly above 50% in that. So we are continuing to make several investments in technology, in transfer centers, which we are expanding, in routing capabilities and tracking capabilities so that those numbers are actually reached in the next few months. I'm sorry, if I didn't cover all of your questions, but let me know if there's one that I left. I may have left one out. So remind me and I'll go through it.

Yes. It was just, Gaston, if you could comment a bit on the department store area, how should we think about repurposing maybe some of these areas considering the growing e-commerce penetration in that format?

All right. So if you think about at a very high level of our department store, this has mostly been a sales surface, right? 100% of the area of the department store or almost 100% was destined to just selling product, showing product that we have in stock and sell. Today, there are several changes that are taking place. They may not be completely obvious, but if you go to one of our stores today, you will see 2 or 3 major changes. One of them is that a part of the store is actually today functioning as a showroom. And particularly in some categories that we had partially or completely taken out of the store, such as furniture, sports equipment, strollers for kids, these are categories that are going back to the store with a showroom type of value proposition, where we show a partial view of the assortment. And then digitally, you can access 100% of the view of the assortment and part of the role of the store there is more the advisers that we have that are specialized in those categories. And therefore, not only improve the sale at the store but also the sales in our digital channels. Another change that is taking place is around logistics in general, right? So the store -- the area that was destined to product pickup in the store has almost quadrupled over the last couple of years. It is very relevant in terms of giving the customer a lot of space to try the products, to try clothing, if they need to try clothing, to make exchanges, to -- we are also incorporating technologies. So we have an automated product pickup in the larger stores where the volume justifies that. So that's another area, another major change in the department store. In terms of the network itself, we are continuously reviewing the store network. We are closing a few stores but as I've said many times before, we don't foresee that we will have any major or massive store closures since both in terms of size and distribution across the 3 different countries, we are comfortable with the coverage we have. So there will be some store closures, but we think they're going to be sporadic and spread over time.

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

Gaston, I wanted to dig a little bit on the consumer credit or the Banco Falabella results. And actually, perhaps maybe if you can comment about the outlook that you see. You mentioned in your opening remarks that you're starting to sort of open the channels a little bit more again on the lending, and we already saw the growth in the loan book again. Now when we combine that with the fact that maybe the liquidity isn't going to be perhaps quite as large into 2022 as it has been in 2021 and with provisions normalizing, but also a number of new efficiency and digitalization tools that you've been putting in place, it feels like you're actually having probably pretty solid and positive outlook for this part of the business into 2022. So I just wanted to check in on what your vision was for this business? And if there's anything else that is on your radar that we should just keep an eye on in or bear in mind?

Thank you very much, Irma, for the question. So in general terms, we are actually quite excited about the financial services business and the digital bank, which is, as we today have more than 95% of our transactions being performed digitally, we think we can already call it a digital bank. Even though in terms of product origination, it's still 50-50, 50% of product origination and digitally 50% in our branches. In terms of our outlook for the business, the contraction of the loan book over the past 1.5 years or so has been mainly driven by 2 factors, one has been the liquidity, particularly in Chile, but also in the rest of the countries, there has been enough liquidity that demand for credit has decreased. And also, the uncertainty about the course of the pandemic had us go -- had us really be a lot more conservative in our credit policies. The result of that is that the customer base is really unlevered compared to where it was 1.5 years ago. So that's one factor that there is space for people. And as you said, Irma, as liquidity decreases over time, there's going to be this additional source of liquidity which is people have a personal relatively unlevered balance sheet. The second aspect is that we have really improved our origination processes and made them a lot faster and in a lot less steps. And at the same time, we have improved the origination quality through our credit models. So the impact of that is that we expect that we will really ramp up account openings. So the combination of ramped-up account openings and our customer base with a more unlevered balance sheet, we think is a very promising scenario for the coming months, maybe more than months, maybe a couple of years in terms of expanding this business. Of course, there are many factors that can affect this going forward but if you were to ask me today, this is probably one of the engines of growth for our overall business that I see going forward.

Our next question will come from line of Rodrigo Echagaray from Scotiabank.

Just a quick question on the loyalty program. You're obviously making important progress. And I was just curious to hear your thoughts on the vision for that, how it ties in the wallet in cross-selling? And how important is that going forward for your strategy?