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 second quarter of 2022. Following this, Mr. Gaston Bottazzini, Chief Executive Officer of Falabella S.A., will share some highlights on the performance of the company. Afterwards, we will open the line for questions. [Operator Instructions] Now we'll start with the conference with Mr. Juan-Luis Carrasco.

Thank you, Victor. Good afternoon, everyone, and welcome to Falabella's Second Quarter 2022 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 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 3 onwards to go over the financial results of the period. During the second quarter of 2022, the company's consolidated revenue reached $3,299 million, an increase of 16% year-over-year. This is mainly explained by a 10% increase in nonbanking revenue, mainly driven by department stores across the region, and in particular by Peru and Colombia, which grew 21% and 46%, respectively, in local currency. Also, shopping center revenue at Mallplaza grew about 97% year-over-year, which is explained by the continued normalization in the operation and in indexations to Chile and UF. Banking business revenue grew 76%, mainly driven by a 47% year-over-year increase in the regional loan book. During the second quarter, e-commerce GMV decreased 15% and physical stores increased 7%. Our e-commerce platform achieved sales for $3.1 billion in terms of GMV when considering the last 12 months as of June 2022. Moving on to next slide, we go over gross profit, which reached $1,065 million in the second quarter of 2022, an increase of 7% year-over-year, which is mainly explained by higher contributions from shopping centers and the nonbanking business in Peru and Colombia; home improvement and department stores, both in Chile, contributed to a lesser extent, mainly explained by lower margins due to challenging comparatives, which during 2021 experienced a 0 markdown environment despite strong demand for its products. The higher contribution from banking business was explained by good performance from the Colombian and Peruvian businesses, where revenue grew by 52% and 67% in local currency. This was partially offset by the business in Chile, which based on a high comparable base of the portfolio, decreased in second quarter of '21 with healthy risk exposures, so provisions were released abnormally, driving high margins. On the next slide, consolidated EBITDA reached $263 million for the quarter, down 32% compared to the $385 million for the same period last year. This decrease was mainly explained by the 28% increase in SG&A, mainly impacted by increases in personnel, marketing and logistics. Aside -- these expenses include approximately $63 million of OpEx associated with the development of our growth platforms, which are the marketplace, digital banking, online payments and the loyalty program. When we exclude growth related -- sorry for that -- when we exclude growth-related OpEx, our expenses only grew 20% year-over-year, while total revenue rose 16%. Turning over to the next slide, we go over the net profit for the period, which reached $70 million, a 52% decrease year-over-year, which was impacted by accounting for the translation of Chilean and UF-denominated financial debt at our [indiscernible] cash position in the period, but did have a $42 million impact on earnings. From a contribution standpoint, home improvement Chile registered the highest decrease in contribution, partially offset by real estate and department store businesses in Colombia and Peru. I will now turn the call over to Gaston.

Thank you, Juan-Luis. Thank you, everyone, for joining us this morning. During this year, we are continuing to place the focus on strengthening our physical and digital ecosystem. And as a result of that, we are now serving more than 37 million customers, which represents a 17% growth year-over-year with a strong focus on attracting new customers and strengthening the relationship with existing customers and leveraging our loyalty program. The performance of our physical stores has continued to recover with regional sales growing 7%, which reaffirms their role in the consumer shopping experience. Year-on-year, our e-commerce is slowing down as we leave the lockdowns of the pandemic. However, online sales are consolidating in terms of scale and penetration as current sales of e-commerce are 2.7x our pre-pandemic levels. Digital banking and payments are reaping the benefits of our accelerated investments in technology over the last few years. Our digital banking platform has grown 47% year-over-year in gross loans, totaling $7.3 billion in assets. This is strongly supported by our digital loan origination and product opening capabilities, which are fueling growth with lower customer acquisition costs. These capabilities have allowed us to attract new credit card customers in the order of 2,000 -- I'm sorry, 230,000 digital cards in Chile, Peru and Colombia. This represents a 16% growth year-over-year. Today, 59% of our total card openings are made digitally and 61% of our financial product origination is made digitally. Finally, our digital wallet continues to broaden adoption with active users surpassing 600,000, which represents a 4x growth year-over-year. In physical retail, we are continuing to develop our selective physical expansion. We have opened our IKEA store in Santiago, the first one of its type in South America on August 10. The integration of IKEA into our retail proposition underscores our commitment to a unique and differentiated value proposition to our customers with a unique brand and a very good value proposition in terms of cost. Mallplaza Oeste will follow this year by year-end in Chile and Colombia will have its first store in Bogota during the first half of 2023. In Mexico, we opened our 10th Sodimac store. This market holds tremendous potential for us as it has fragmented and underpenetrated home improvement consumption that offers a very attractive growth opportunity. We expect to close this year with 12 stores in that market. Our marketplace continues to develop. In the second quarter of 2022, we began rolling out the new capabilities and functionalities of our global seller center with focus on the onboarding experience of sellers. This has allowed us to both increase the number of sellers, increase the number of SKUs published and the categories that we cover with our marketplace to complement our 1P value proposition. Also, on August 16, we launched falabella.com as an integrated platform in Peru, the same way we had done in Chile a few months before. This was a significant event and is positioning us as the largest e-commerce company in that country. The marketplace platform overall has sold $680 million overall over the last 12 months. To complement all of this, our loyalty program also continues to grow and is driving increased interaction with our customers. Today, we have 17.5 million participants in our loyalty program, which represents a 34% year-over-year growth in that aspect. Also, redemptions have grown by 61% year-over-year during the quarter, which is a very important accomplishment for us given the visibility it gives us to customer behavior as well as the increased frequency of interactions that it produces with our customers. In terms of our financial results, the second has been a very challenging quarter as we began with a very high comparative base and also experienced global and local difficulties in shipping and other aspects of the operation. Driving this lower results is mostly an increase in expenses. This increase in expenses is mostly explained by: number one, investments in our digital marketplace and payment platforms, which represent 1/3 of the increase in expenses; increased personnel expenses driven by higher costs in our stores as well as more personnel in the stores as people are returning in more volumes to our stores; increased marketing and particularly loyalty expenses related to the expansion, I already explained, of our loyalty program; and higher logistics costs, both related to product deliveries as well as inbound logistics costs. As a result of that, we're putting together a comprehensive efficiency program, which is focusing on increasing the level of integration between operations, particularly between our retailers, further centralizing our back offices and improving the efficiency of our shared functions at the corporate level and continuing to divest some of our noncore assets. In summary, we are sustaining the development of our growth platforms in a difficult context, but this is allowing us to gain share in most businesses and marketing -- and markets in a challenging context. Going forward, we aim to maintain this momentum while achieving greater operational efficiencies. Thank you. With that, we will open up the room for questions.

[Operator Instructions] Our first question comes from the line of Antonio Hernandez from Barclays.

My question is regarding -- well, you mentioned the different headwinds that you had in Chile and in other regions. But overall -- we know the impact that these headwinds had in the second quarter across our formats. But can you also elaborate a little bit more on which of these headwinds are you expecting to continue? And maybe which formats could recover profitability like the past in Chile?

Yes, Antonio. I would divide the headwinds in these 3 categories. And I talked about expenses. But in addition to that, at least in comparable terms, we also have pressures on margins. We have higher inventory than the previous year by an important percentage. And therefore, markdowns are -- even though they're not returning to 2019 levels, they are, of course, higher than last year. So that's one area of pressure. We expect that, that will continue throughout the second semester. And as we will unload inventory and -- we'll have a better -- much better position towards the end of the year. The second has to do, as I described, with investments in our platforms. We also think that these are actually providing us with a lot of strength in the markets, and we are gaining share as a result of that. So we are not inclined to [ rollback ] some of these investments that allow our growth of our marketplace, the development of our loyalty or the digital aspect of our loyalty program, the development of our payments platform and also, very importantly, the development of our digital bank. The third aspect I mentioned has to do with logistics. I'd say there, we will see improvements in the second half of the year. Inbound logistics are normalizing. Our level of imports is decreasing substantially for the second semester. So therefore, on the inbound side, we will have substantial improvements. And on the deliveries, even though we don't expect substantial improvement in efficiency yet, I think those will be coming probably mid next year. But we will have improvements in shipping recovery as a result of promotions. And one of the ways in which we do markdowns today in our e-commerce platforms has to do with shipping. We do expect that will decrease substantially. Actually, we have already taken measures for that to decrease substantially during the second semester. And finally, in terms of just general expenses. As I described, we are putting together a set of programs, which we think will help us contain particularly some of the expenses at the administrative level. And I will let Alejandro expand on that.

Yes. As Gaston was mentioning, we already launched a plan that aims to basically look for new ways of working, aiming at a significant level of efficiency, something that we have not done before. And the most relevant part of what we are considering here is, a, giving a centralized group view to, for example, the different categories that we have in the different retail businesses. I'm talking about categories, different brands that we have, SKUs. We're also doing a thorough analysis of profitability of the square meters that we have in each different store that we have and also on the different real estate assets that we have. And as he also mentioned some -- also centralization of, I would say, back office functions. We already did finance a couple of years ago. Now we're aiming into other functions, not only staff, as you can see, as we can talk about legal, HR, but also aiming at some functions that may have some [indiscernible] in them from a central view like logistics, eventually marketing. We already do IT. So that would be also a complement. But as I said before, this is a thorough plan that we are -- actually, we started about a month ago. And we expect this to be able to bring more color of that to the market in the coming, I would say, months or at least weeks.

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

I had 2. The first one is on the OpEx investments you mentioned. I was wondering what capabilities you think are missing in the platforms you discussed so that maybe in upcoming quarters, we can see a slowdown maybe in OpEx? What capabilities you think are critical that you guys are developing right now? Also, on the inventory level, you mentioned that inventories are higher. I wanted to understand from you how are you seeing the rest of the industry? Are theirs at similar levels to yours? And how does this compare to maybe 2019 levels? And maybe the last one. Gaston, when you mentioned the efficiency plan, you made reference to maybe some divestments of noncore assets. I was just wondering what you guys had in mind on that aspect.

Great. So in terms of OpEx and the investment in capabilities, I would say that the one we are investing the most right now in is our marketplace. And that has, I'd say, 2 major fronts of development. One of them is the integration of our marketing platform, which we just launched in Peru. But there is a lot of post-launch adjustment to make and to make that platform actually work as an integrated marketplace that complements 1P with 3P, integrates all of the Linio operation with our Sodimac and Falabella and Tottus operation. It's something that even though you launch it one day and there is a lot of preparation for that and there is a lot of work after the launch. A similar process is taking place in Colombia, which we expect to launch early next year. So that's the first 2 fronts of development. And the second one is more of the seller portal or what we call the global seller center, which basically are all of the functionalities that we provide for the sellers to operate with us. And what we are doing right now is placing a lot of focus on the onboarding process and making the onboarding shorter in time, easier to accomplish, taking steps out of that process, et cetera. But then there is further work around functionalities that actually are more high value added in terms of the relationship with the seller, like the ability to manage their inventory better, their ability to place their inventory with us in our fulfillment centers. We are already doing that, but that has to improve in terms of functionality. And then the ability to provide sellers with value-added services such as data services, marketing services as well as financing services, which is an area where we are starting to operate, but we see great upside as we improve both the models behind those capabilities as well as the interface with the sellers. The second area in terms of OpEx is the banking platform. The functionality of the apps is permanently improving in each one of the countries. Chile is the most mature, but we have a lot of work to do in terms of improving app functionality to improve customer acquisition, conversion rates and service levels, and as a result of that, NPS and the value and the quality of the relationship with customers, particularly in Colombia and Peru. So those journeys have a lot of focus in Colombia and Peru. And the third one is digital payment. We launched Fpay in Chile and in Peru. We still have a pending launch in Colombia, which we expect doing that in the next few months. But Fpay today, as you see in our numbers, operates mostly in our platforms. So the focus, once the launches take place for Fpay, is to make it a much more valuable wallet and payments tool for sellers outside of the ecosystem, both for third-party sellers for stores, developing store value accounts, which we have developed in Chile, but we still have to develop that for Peru, as well as making the wallets the tool for our loyalty program. So the loyalty program no longer operating independently of the wallet, but basically being part of the currency that our customers use in our wallets to redeem their points for products or benefits, et cetera. So those are the areas of focus right now. We do expect that over the next 12 months, at least the level of operating expense related to these areas is going to be high. The good news is, today, as we are putting those functionalities in front of customers, they are being adopted at great speed, as some of our numbers show. And that is enhancing the overall relationship we are developing with customers. In terms of expanding on the efficiency and inventory levels, I will pass on to Alejandro to complement on that.

First, to start with, I would say that the view that we have on the industry is that everyone is more or less higher than expected in their inventory levels. And the main reason for this is the, I would say, logistic restrictions that we faced during the end of last year and especially first quarter this year. And moving forward -- and also, there's certainly -- just for you to be aware, there's an impact of the cost of purchase, not only the logistic cost, but also the FX that we're facing in the region consistent with the devaluation that we've seen especially in the CLP. Now moving forward, what we are seeing is that certainly we did slow down consumption, not because of which we faced during the second half of second quarter, but because when we planned this 2022 -- and I think we shared this view on the first quarter -- we thought we were going to have relatively dynamic first half of the year on, I would say, a slower second half of the year. So second half, the inventory that we're going to be adding, the imports -- especially, the imports that we're going to be adding, shows a slowdown in that. And that was planned. And just again for you to be aware, we are expecting -- this is certainly by different categories, but we are expecting to get back to normal levels of inventory year-end/first quarter of next year. And the other thing that I would like everyone to be aware of is the fact that a very small percentage, less than 5 percentage of the inventory that we -- of the excess of inventory that we have is seasonal. So now we are basically in the process in which we are managing how we handle the margin that we can get versus eventually getting into a harsh market. But as we said before, we think the excess of inventory situation that we see in the market is more or less spread out, especially in Chile.

If I may add a little bit of color on the inventory also. The percentage of our inventory that was in transit during the first semester was very high, and that is decreasing substantially today, which reveals how we are managing purchases and also the risk that the inventory entails. Now if you combine that with the fact that Alejandro mentioned about the percentage of inventory that is seasonal, that combination actually puts us in a relatively healthy position.

And on that small question on the noncore assets?

Well, when we refer to noncore assets, it mostly has to do with real estate and the land bank as well as a utilization of the air of our be it malls or stores, et cetera. So monetizing some of our real estate either by selling it or by allowing others to build on it.