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

Good day, ladies and gentlemen, and welcome to the 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 fourth quarter of 2021. Following this, Mr. Gaston Bottazzini, Chief Executive Officer, will share some highlights, on the performance of the company. Afterwards, we will then open the line for questions. [Operator Instructions] Now we'll start the conference with Mr. Juan-Luis Carrasco.

Thank you, Victor. Good afternoon, everyone, and welcome to Falabella's Fourth Quarter 2021 Earnings Call. Joining me on today's call are Gaston Bottazzini, our Chief Executive Officer; and Alejandro Gonzalez, our Chief Financial Officer. I would like to remind you that numbers presented during the call will be rounded to million and in U.S. dollars. 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 3 onwards to go over the financial results for the period. During the fourth quarter of 2021, the company's consolidated revenue reached $4,077 million, an increase of 15.3% year-over-year. This is mainly due to 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 21% and home improvement by 22% on a year-over-year basis. Banking business revenue grew 26%, mainly driven by a 21% year-over-year increase in the loan book. Shopping Central revenue [Mallplaza] grew by 51% year-over-year as rent collections normalized and GLA was fully operational. During the fourth quarter, our omnichannel platform reported total sales growth of 17% in the region with e-commerce growing 19% and physical stores 16%. Our e-commerce platform achieved $3.5 billion in GMV during 2021. Gross profit grew $1,484 million, an increase of 14% year-over-year, mainly explained by higher contribution from departments or in Chile, Peru, and Colombia, driven by higher sales and lower markdowns and strong contributions from home improvement in Chile the gross margin grew to 12.5%. Higher margins from the Colombian part [which increased] as well was explained by lower cost of risk. And lastly, higher contribution from the real estate business at Mallplaza, with gross margin recovered 74.6%. Moving to Slide 4, consolidated EBITDA reached $572 million for the quarter, up 4.3% compared to the $548 million in the same period. This increase was reflected in a 14% margin, mainly explained by higher contribution from the real estate business, department stores in Chile and Colombia, and the [rising] business in Colombia as well. This was partially offset by lower contributions from home improvement in Chile and the banking operations in the same country. Net income for the period reached $232 million for the fourth quarter, mainly explained by higher contributions from department stores in Chile, Peru and Colombia, -- Mallplaza and to a lesser extent, the banking business in Colombia. I will now turn over the call to Gaston.

Thank you very much. Thank you, everyone, for joining us this morning. I will give a few highlights of the year 2021. 2021 represented another challenging year for us, particularly in terms of changing conditions in each one of the countries in which we operate. In that context, I am proud of our team continued rising to the challenge, adapting our operations continuously and at the same time, executing our transformation strategy. During this year, we served 35 million customers across the region. This represents a 25% increase year-over-year over 2020. As a result of that, we also achieved record numbers in name of our financial indicators, but most importantly, we achieved several milestones in the development of our physical and digital [ecosystem], which provides a platform for further growth in 2022 and beyond. I will do a brief recap of the key milestones we have in each one of our businesses. In physical retail, we continue developing stores in line with our belief of the important role stores play in our relationship with customers. An important milestone was the opening of our flagship store in Falabella in Chile, which is not only our largest store in the region, but most importantly, is a store where we are introducing many of the omnichannel capabilities around the shopping experience, the payment experience, the post-sale experience, showrooming capabilities, et cetera. All of these have turned this store into a very high-performance store and many of these initial experiments will be replicated in all of our stores, both in the partner stores and in other formats. We also completed the 3 new home improvement stores in Mexico, totaling 9 stores in that country, 4 supermarket stores in Peru, totaling to 85, and we completed or almost completed the renovation of all of our Dicico stores in Brazil, turning them into the new Sodimac Dicico format, with very good results in terms of sales growth and profitability, which has put our Brazilian operation in [indiscernible] this year. In e-commerce, the major milestone for the year was the launch of Falabella.com in Chile, which integrates our e-commerce sites from all of our formats into a single platform. This represented a significant enhancement of our value proposition, and it translated into a very good opportunity for better promotion and cross-selling for all of our formats, improving our 1P sales at this stage. Today, our platform has completed $3.5 billion of GMV, which is 3x our sales in 2019 and with great potential for incremental sales as we complement our 1P with marketplace sales as we complete the rollout of our global tower center. Our mobile channels continue to increase their relevance in our online sales and today represent about 45% of the sales through our apps. In Logistics, we delivered $38 million orders in 2021. We continue to expand our infrastructure by adding 32,000 square meters in fulfillment centers for our marketplaces in Chile, Peru, and Colombia, allowing us to enhance the value proposition to sellers and offering them the fulfilled by Falabella service. Today, about 14% of our 3G sales are being performed from those [indiscernible]. We also improved our infrastructure by building transfer centers, which are smaller cross-docking and distribution centers closer to the homes and the major urban cities. We started with that development in Chile and are rolling that out in Peru and Colombia during the next year. Today, close to 60% of our products are being delivered in 48 hours, and we -- that represents a major improvement from 2020, and we will continue to improve that performance indicator throughout 2022. In Digital Banking and Financial Services, Banco Falabella continued to enhance its digital platform with more functionality and most importantly, with a streamlined product origination process, both for credit card and current accounts. As a result of that, we issued more than 745,000 fully digital credit cards, which represent about 50% of the total credit cards opened in the year. And we also reached more than 360,000 fully digital current accounts. These are numbers that will continue to grow in 2022. Also, approximately 60% of our loan origination was digital during this year. In our payments platform, TPV reached 2.6 billion, mostly driven by the penetration of our e-commerce, but we also increased the penetration of the wallet for stand-alone use. And today, we account with likely over 500,000 active customers. As a result of that, our banking operations grew its loan book by about 21% year-over-year, recovering to pre-pandemic levels, and it happened mostly during the last quarter of 2021. In loyalty, we reached 15.7 million participants in the program, starting with likely above 5 million participants about 2 years ago. In the last year, that represents a 49% increase in the number of customers that participate in our program, and this gives us a great level of granularity and visibility of our customers to improve the value proposition and the offerings that we make to them on a much more personalized way. Overall, the quarter performance was also rather quite strong. It was mainly driven by customers returning to shop to our physical stores, which grew their sales year-over-year by about 16%. Also a very strong performance of our -- and continued very strong performance of our home improvement operation in all of the markets -- and finally, a very good recovery of our shopping malls, which grew its traffic by about 51% recovering to approximately pre-pandemic levels. We are very encouraged by the results of this fourth quarter, but more importantly, committed to continue to enhance the journey of digital transformation of our company, which is helping us to shape as well our cultural transformation. Looking forward into 2022, we see several drivers of our performance in that year. In the first place, the traction that we gained during the last quarter of 2021 in Digital Banking, we expect to continue forward into 2022, particularly given the low levels of leverage of the population in Chile and also the rest of the region. And also given the improvement in all of our product origination processes, which are allowing us to grow the number of customers much faster than we have done in the past. We also expect all improvement to continue to drive performance. We are seeing a recovery in construction in most of the region. Most of the 2021 performance was driven by end consumers. So that shift, even though puts pressure on margins because of the change of mix continues to drive the growth performance of that business. Within that business as well, we are opening the first IKEA store in Chile during this year, around the middle of the year. And finally, in the marketplace is basically in the current where we have more work to do. The initial launch of Falabella.com had a very strong impact on [1P], but didn't yet have a very strong impact on our third-party centers. And that has to do mostly with the development of our global seller center, which will be rolled out in different phases throughout the year in Chile, Peru, and Colombia. That Global Seller Center will enhance the seller value proposition in terms of the [key] of the onboarding process, the integration to seller inventories and other and other sources of information, the offering of financing to sellers and continue enhancing the functionality to sellers, which as we roll out during the year would allow us to grow our -- sales. So basically, we see those 3 as the major drivers of growth and performance during 2022, along with a continued effort to improve and change both our operating model and our culture. We are committed to the process of transformation that we have taken on, and that goes along with our requirement to execute at a much faster pace, and this is what we are going to be putting forward to our cultural transformation process during 2020. Thank you.

[Operator Instructions] Our first question will come from the line of Andrew Ruben from Morgan Stanley.

You just touched on it a bit, but hoping you could go into more detail on the marketplace strategy for 2022. We see fulfillment is in place. But what do you see as the main bottlenecks for further growth? And as you think about rolling out these seller center operations, how do you think about the cadence here and when we might see a more meaningful pickup on the 3P side?

Thank you, Andrew, for your questions. Yes. Basically, in the first place, the marketplace growth hasn't been great during 2022, particularly after the launch of Falabella platform. The fact is many of the centers or a good proportion of the centers we have, operate within our categories or in the perimeter of our category. And at Falabella.com increased the opportunity for cross-sell and the assortment of our own categories as we put all of our formats together in one place, that also somewhat crowded out the opportunity for [indiscernible]. So the challenge going forward is to really expand assortment through sellers that are within, but most importantly, also outside our categories. And in order to do that, the process we have today and our ability to significantly grow the number of sellers is somewhat inhibited by the technology or the capabilities of our seller center. So rolling out the new seller center, which is under development that is basically the main driver of growth as we see it. What are the functionalities? The first ones are very basic and are around really having an easy onboarding process and one that operates remotely. Secondly, having a much better integration to the seller. And thirdly, the ability to offer value-added services around marketing, around financing, all of which we are preparing in parallel, but we will go out into the market in Chile, in 3 or 4 different versions during the year and then starting middle of the year also in Peru and then following in Colombia.

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

So my first question is on the Chile banking operation. It's obviously an important part of the business. I was wondering if you could give a little bit more of an outlook for 2022. How should we think about loan -- the growth in the loan book from here sort of against the consumer backdrop that you're seeing? Also in terms of rate increases affecting revenues as well as funding costs, maybe cost of risk and operating expenses. I know there's a lot in there, but just sort of conceptually trying to understand sort of how we should think about Banco Falabella Chile. I was also curious to understand whether you saw additional room to drive a bit more operating leverage there? I think we've seen growth picking up nicely, but maybe the operating leverage sort of didn't fully come through yet, if I may say so. But at the same time, I see you've made great advances on digitalization. The number of branches has also gone down, which I imagine is ongoing efficiency efforts. So just wondering if we could hope for sort of additional operating leverage still coming through in 2022? Or is that was further out or not necessarily on the cards right now?

Irma, for your question. If I understand it well, you're basically asking about loan growth perspective going forward, margins perspective, and operating leverage. We will try to cover them [indiscernible]. In terms of the loan book, we saw a much higher demand for credit in general, not only in Chile, but also in Peru and Colombia in the third quarter -- I'm sorry, in the fourth quarter, which is carrying into this year. The loan book, if you look at 2020 and the first half of 2021 was actually contracting. And this was also -- if you just look at consumer credit, something that was happening in a generalized way in the market. It was a combination of liquidity on the hands of consumers, but at the same time, more conservative posture on the part of issuers or credit originators. So what we are seeing that is that dynamic switching or changing. And our perspective for the loan growth is a continued growth throughout this year. And at the same time, of course, provisions should rebound to more normal levels, but what we foresee is that we'll stay below pre-pandemic levels, given all of the improvements and investments we have done in origination models and behavior models during the last years. Regarding the margins, in particular, in Chile, where you see a contraction given a much higher growth in our funding costs than in our interest revenue. There are a couple of drivers of this One of them is the fact that we funded most of the growth -- the initial growth with the market rather than with deposits initially. That should normalize going forward. But still, the growth will be more expensive than the steady position that we had during the last 1.5 years. So we do see somewhat of a contraction in margins there, but not as severe as what we saw in the last quarter. The second driver of that contraction of margins, which is going to revert, is the fact that there is a lag between market rates for funding and maximum rates in the markets. So the maximum rate is based on averages in the market, while the funding rates are based on the offering of -- the instantaneous offering of the market. And therefore, there is a 3 to 6-month lag generally between those 2. So we expect in the following months to have a normalization of the relationship between funding rates and lending rates in that part. Regarding operational leverage, I would say that we have -- in particular, in Chile, there are 3 drivers of growth in expenses. One of them, which is a one-off; and 2, which will probably continue going forward, but hopefully, we will be able to leverage with the increased volume. So in the first place, we did have a significant number of store closures during the last quarter of 2021, which resulted in one-off expenses related to that severance, termination fees, et cetera. Secondly, we have incremental expenses regarding or related to our loyalty program in particular, which relates to the mention I made to the substantial increase in participants in our loyalty program that obviously has a consequence in terms of costs. And this is an asset or an expense line that we think is a very good investment for us and that we actually think we're going to be able to counterbalance with the volume we will get from a better knowledge of our customers. And the third one is the basically doubling up of our investment in digital capabilities in the financial services operation. So the bank has been spending more in improving the app in all of these new origination processes. And again, that is one that we are already seeing paying off very nicely in terms of the increased number of customers and the increased volume. And by the way, that's also a driver of growth next year because the -- I'm sorry, this year because what we've seen in the last few months is a substantial increase in number of customers, but that will translate into an increase in the loan book for quite a while until we get a better knowledge of those customers over time. So that's going to be another driver of growth for the loan book during this year.

That's very clear. If I may, you've answered everything. Yes. Could I just follow up on the loyalty program? I thought it was very interesting that you -- what you mentioned upfront about the growth in customers and how much -- how many strides the loyalty program has made over the last 2 years. I was wondering in terms of just the payoff because normal loyalty programs have sort of an initial investment curve. And I guess we see that partly playing out through that expense line, as you mentioned. Where are you sort of in terms of, I don't know if you think about breakeven on those investments? Or where are you sort of in terms of maturity of that, do you think like well-going forward, there's more investments coming from that? Or we're already starting to see sort of the leverage find on that? I know we probably won't have a clean sort of P&L idea of loyalty program, but just to conceptually understand how you're thinking about sort of the investment curve on loyalty.

Yes. So let's -- I'll try to answer the question starting from our overall customer base. So I mentioned that an overall customer base of about 35 million customers, of which about 15 are participating in the loyalty program. Of course, many of those customers are not recurrent customers necessarily, but our aspiration is to turn them into recurring customers. So our operation is it's quite hard to have 100% of the customers participating, but we think 2/3 would be a reasonable aspiration. That means we will continue to invest in growing the participation in the loyalty program, which will turn into additional expenses on that side. In terms of the payoff itself, what we see is that more or less the maturity of a customer within the loyalty program is between 9 and 18 months, and that's where we see the increased activity, and it's very related to the redemption point rather than to starting getting the point, at least the first redemption point. So it's a 9 to 18-month period until we start seeing that call. In our analysis, that [payoff] is very positive, but [indiscernible] 9 to 19 months payoff investment.

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

I wanted to see if you could provide some color a bit on home improvement business in Chile. How are you seeing demand over there? How are inventory levels in the industry trying to understand here -- how should we continue to see gross margin evolving going forward in that business? And I'm also staying a bit on the banking side. Could you elaborate maybe a bit on what's the plan for the Peruvian operation -- it's been underperforming for some quarters now. I wanted to understand like what problems have you identified? And what's the idea to bring that around?

Thank you, Nicolas, for your question. So regarding home improvement in the first place, we are actually seeing a very continued good performance in terms of customer activity in that format and actually a very improved performance outside of Chile for that format, which is making the overall performance of the format very, very solid. And given that it's our largest retail operation that is also a driver of overall performance for us. We are seeing pressure on gross margins in that business. And I'd say it comes from 2 origins. The first one is the fact that the mix is evolving towards a more balanced mix between final consumer and specialists, construction companies, et cetera. And that even though helps the sales it is at a relatively lower margin. And the second one is the fact that as we normalize inventories and all higher levels of inventory, et cetera, which we were at so with low levels of inventory last year, and we actually had lost sales because of that. So now we are at more normal levels of inventory and therefore, you go into a more normal operation in terms of cost of that inventory in terms of also we -- as you know, there are shipping costs increasing, et cetera. So that's the second source of pressure on margins. So we're seeing a very solid commercial side, but, of course, a more normal without going all the way down to 2019 levels, but more normal levels of margins. Regarding our banking operation in Peru, I would say that there are 2 -- to oversimplify the question and the problem, there are 2 sources of pressure to profitability of that operation. The first one is during 2020 and '21, in particular, relatively high levels of risk higher than in the other countries in the region. Mobility restrictions were higher in Peru. Our customer base is more diverse in Peru than in other parts of the region. So as a result of that, the impact on risk was higher. We are seeing that returning to normal levels and improving. The second area of concern is the contraction of the loan book. It was the country where we saw the highest contraction, and that put us in a situation where the overall loan book is small compared to the operation we have to support. And therefore, we have to really focus on how to grow that loan book. With the reopening of the Peruvian economy, recovery of credit card purchases, which we are already seeing going back to pre-pandemic metals, and the slow recovery of the sale of financial products we are starting to see actually -- in the last 2 months have been to where we started to see real loan book growth. So that would put us in a good position to resolve the second challenge. But probably, it's the most challenging banking operation we have in the region and all of our efforts are in making that operation commercially more successful and more profitable.

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

So I just wanted to touch a couple -- on a couple of questions that were already raised just to understand further. Why did you guys use more market funding to grow versus deposits? The second one would be if these increases in fees and expenses in the banking division, is it to develop app, what is recurring versus what is just CapEx that needs to be done one time and then it won't be recurring. So we could see again the margins there.

Gabriela...

Yes.

I'm sorry, but I had a very hard time understanding your question. I apologize. If you could repeat it, and a little bit more slowly, I may be able to get it better.