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'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 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, Gigi. Good afternoon, everyone, and welcome to Falabella third quarter 2022 earnings call. Joining me on today's call are Gaston Bottazzini, our Chief Executive Officer; Alejandro Gonzalez, our Chief Financial Officer; and Francisco Irarrazaval, our Department Stores' CEO. I would like to remind you that the 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. Let us begin with Slide 3 onwards to go over the financial results for the period. During the third quarter of 2022, the company consolidated revenue reached $3,094 million, a 2% increase year-over-year. This is mainly explained by a 5% increase in non-banking revenue mostly due to home improvement Chile business growing -- decreasing 20% and Department Stores in Chile decreasing 24%. This was partially offset by our retail businesses in Peru, which increases the revenue by 18% in Chilean pesos, and partially compensated by shopping center revenue at Mallplaza, which also grew 24% year-over-year. Banking business grew 72%, mainly driven by a 35% year-over-year increase in the regional loan book. During the third quarter, e-commerce GMV decreased 4%, while our 3P online sales grew 7% and our physical stores decreased 13%. Our e-commerce platform achieved $3 billion in GMV, when considering the last 12 months as of September 2022. Onto the next slide, we can see that gross profit reached $969 million in the third quarter of 2022, representing a 10% decrease year-over-year, mainly explained by a reduction in the contribution from non-banking businesses, particularly home improvement and Department Stores in Chile, who contributed to a lesser extent and mainly explained by lower margins and higher markdowns and a challenging set of comp figures, as they experienced strong demand for the products back in 2021 despite zero markdowns. This was partially offset by the Shopping Centers and Department Stores businesses in Peru. The banking businesses experienced a reduction in contribution due to the operations in Chile, which faced a challenging comp figures as the portfolio in the third quarter of '21 have lower levels of risk, so provisions were released and increased margins, while revenue grew by 64% during the quarter and loan portfolio grew by 25% with a higher level of risk. This was partially offset by a good performance from the Colombian and Peruvian operations. Onto the next slide, and we can see that consolidated EBITDA reached $186 million for the quarter, down 54% compared to the $406 million for the same period last year, this decrease was mainly explained by the 16% increase in SG&A, mainly impacted by increases in personnel, leases, marketing and logistics, which includes $73 million of expenses associated with developing our growth platforms, which are marketplace, digital banking, payments and the loyalty program. If we adjust out the growth related expenses, SG&A would have grown by 7% year-over-year, while total revenue would have grown by 2%. A net loss for the third quarter of 2022 was reported of $26 million, which was impacted by the translation of U.S. denominated financial debt to Chilean pesos of our real estate operations, which do not affect our cash position in the period, but do have an impact in earnings of $36 million. From a contribution standpoint, businesses in Chile registered a higher degree, namely Department Stores, Home Improvement and the Banking businesses. I will now turn the call over to Gaston for further remarks.

Thank you, Juan-Luis. Thank you everybody for joining us this morning. As you saw from our press release, we experienced quite challenging third quarter, which turns into a disappointing results that we are actively working through. These results were driven by a combination of factors in each one of our businesses. In our retail business, we faced a faster than anticipated slowdown in consumption, particularly in Chile, which turned into lower margins and lower sales, and in particular, what we saw is a shift in demand by category that left us with very uneven levels of inventory by category and as a result of that increased markdowns. The second effect in retail was expenses, which as Juan-Luis explained were many different factors. We have inflation-linked adjustment of our salaries, a bit of the increase also has to do with leases, which we were not paying a year ago completely. Another effect that we had was logistics both the last mile logistics and the inbound logistics generated the increase in expenses. In the fourth place, marketing and loyalty also grew in part as a result of the continued expansion of our loyalty program, and about a fifth of the effect had to do with the actual platform development in terms of technology in particular. In financial services, what we saw is banking margins continue to be compressed although at much lower rates than in previous quarters, and this is a result of lending rates continuing to lag cost of funding. The biggest effect in this business were provisions. Provisions have been at an all-time low during 2021 and this has rebounded to historical levels that are actually in line with our risk appetite. In complete terms, will return to NPLs in the range of [ 3% to 5% ] from all time lows about a year ago of 1.2%. Additionally, we have reached record levels of origination of credit cards and credit, as we have upscaled our digital platforms and this has also translated into additional provisions. In shopping malls, we had actually positive effects with revenue growing 24%, mostly driven by entertainment. And finally, we had non-operational effects, both because of our inflation-linked rates in the real estate business, the higher debt rate in general and the financing of working capital resulting for -- from these decreased inventories. As disappointing as these results are, we see them really as an opportunity both to focus our development efforts in our platforms and also to take action in some very relevant levers, which we outlined in our recent Investor Day. Namely, to shorten our buying cycles, achieving more flexibility and lower inventories, to make an effort to optimize our product mix as well as our brand mix to more precisely align to our customer needs, to improve the efficiency of our store operations while at the same time preserving service levels, therefore, doing this through increased focus on self-service and automation. To improve our shipping recovery and our shipping efficiency particularly in the e-commerce business. The last mile shipping has been pressured by competition and that pressure we expect, and actually is gradually easing off, as we move forward, and we have increased prices of shipping somewhat. To continue enhancing our digital banking proposal and as a result of this, we rely less and less on our physical channels for total customer service and product origination, something that is happening also at a relatively fast pace. Also to focus our technology investments on those areas that we consider high value and high impact to our customers and our ecosystems. And finally, to continue our divestment of non-core assets as well as selective store closures. At the same time, these results, which are mostly driven by operational challenges in a rapidly changing environment in no way make us question the strategy of building our digital and physical ecosystem. We have and we will continue to push the development of our platforms with a strong focus on attracting customers and strengthening our relationship with them. This has actually allowed us to reach 37 million customers served, representing a 9% growth year-over-year. In concrete terms, our Marketplace has gained traction, growing 7% year-over-year regionally in the quarter, but in particular our last Cyber event in Chile showed our 3P sales growing at 54% year-over-year. So this growth is actually accelerating as we put in operation many of the functionalities of our global seller centers and improve the value proposition to centers. As a matter of fact, the value proposition to sellers is improving drastically as we introduce APIs to allow connectivity with falabella.com and different seller aggregation platforms, which allows centers to speed up their listings and make it easier for them to migrate their catalog to our platform. Our sellers are also increasingly adopting the fulfilled by Falabella functionality, which has grown 7 percentage points and has reached 17% of our 3P sales. Seller onboarding has also accelerated with an increase of 40% in SKUs and 50% in sellers on a quarter-to-quarter basis. As a result of all of this, e-commerce in Chile is gaining share, outperforming the market. Our loyalty program, another one of our rapidly expanding platforms is continuing to gain traction driving increased interaction with customers throughout the region and reaching 18 million participants. This represents 24% growth year-over-year and roughly speaking 50% of all customers served participating in the program. Finally, our digital banking platform grew by 35% in gross loans, totalizing [ $7 billion ] strongly supported by our digital loan origination and product opening capabilities, which are fueling growth with lower customer acquisition costs. These capabilities attracted new card customers and we opened over 205 digital cards in Chile, Peru and Colombia during the quarter, which represent 50% -- a little over 50% of the total cards opening and the 19% growth in digital cards opened year-over-year. Digital wallets continues to broaden adoption with active users surpassing 640k. But more importantly, our digital wallet is -- and our PSP is allowing for much better conversion rates in our e-commerce and much better than market average fraud rates in the e-commerce. So in conclusion, we are putting important efforts in regarding the short-term results and the execution of our efficiency plan is our top priority with our team fully aligned on its execution. Our growth platforms continue to develop. They are delivering customer growth and engagement, and they are allowing us to gain share in most businesses and markets in which we operate. So thank you all for joining us, and with that, we open the room for Q&A.

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

I was hoping to dig gross margin trends, you mentioned markdowns were a negative and levels seem to look a bit high. So curious, when do you think there could be normalization on this trend. And then thinking about the supply chain more broadly, what you're seeing in terms of any delays or any current disruption in the supply chain? And then lastly, the move to shift share to local suppliers, any update or along the timeline for this change?

This is Francisco speaking. As you said, markdowns were indeed negative, especially, if you compare them with the 2021, which was actually a year where we didn't have any markdowns because of the lack of merchandise and the withdrawals of the pension funds. But when you compare the June level markdowns to the pre-pandemic one, let's say, 2019, we are about the same levels. So we do anticipate markdowns to continue at our historical level, as we navigate the scenario with the loan down in consumption. We aim to normalize our inventory levels to our historical levels, not 2021, but let's say 2019 in terms of coverage in all our formats by the end of this year, with some minor spillovers maybe to the first quarter of next year in [ February. ] So to keep that, we have been using merchandise being bought. We are focusing on -- mainly on the replenishment of our stores with our own found inventory. And regarding your question about the sourcing, we are -- as of today -- as you know, we mainly rely on China as a source in order to reduce the product lifespan cycle, we're aiming to increase the regional, let's say Peru and Colombia sourcing to increase the fashion companies of our apparel proposal. We are currently executing that, we plan to finish that by the winter season of -- the South America winter season of 2024. That's going to be gradual, as we said, we aim to increase that [ 50% ] share of item being bought locally, but the main thing here is to achieve a higher component of fashion in our apparel proposal. We also looking to expand outside of China, maybe Bangladesh, Vietnam in order to achieve a better quality price relationship, so those 2 things are currently under our consideration.

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

I was wondering on the SG&A, it will be helpful to have the breakdown on the different points of pressure. I was curious on the platform development, where do you see yourself in the investment cycle for this? Should we continue to see a similar amount of pressure in coming quarters from the specific source? And the second question is regarding the outlook for risk appetite in loan growth in your -- in Banco Falabella, specifically in Chile, whether there is a sense that credit quality has already sort of hit an inflection point, or if you think there's still sort of a trough ahead and you're still going to remain a little bit more cautious near-term, because the portfolio didn't grow that much from the second to the third quarter?

So regarding the investment trajectory on the platforms themselves, I'd say the level of maturity is quite different from one to another. Probably, the one that is with the lower level of maturity today is Marketplace, in which we need to continue to invest in functionality and we need to continue to invest in the robustness, both of the global seller center and the sell out. And I'd say, the good news there is, this is the first quarter that we are actually seeing traction in seller onboarding, in SKU onboarding, and in 3P sales, which is something we have been invested quite a bit in. So -- but in spite of that the level of investment still required is relatively large and probably in line with what we have been doing over the last 12 months going forward for the next 12 or so. The other platform that also requires substantial investment is home delivery, not in terms of infrastructure. We have most of the distribution centers and probably there is one area in infrastructure where we need to invest more, but it's not a substantial investment, it is transfer centers. And the other area is the integration of systems, the trackability and visibility both for customers and for delivery professionals. So those are the 2 I think that have the most investment relative to output, but in both of them we are seeing improvements. In home delivery, the focus is going to be more on efficiency going forward, since most of the focus until now has been based on speed up delivery. But now that we have -- we are comfortable with the speed of delivery. What we are going to prioritize is efficiency. I'd say in loyalty, in banking and payments, both of those are quite mature. Loyalty, I'd say, we are actually in a gradual lowering of levels of investments. Banking is probably stable, but with very good monetization, that is paying off very well. And payments, it's not being monetized vis-a-vis the customer, but it's being both monetized very strongly in terms of the impact it is having on our conversion, which is increasing substantially when people use Fpay as a checkout, as well as our fraud levels. So I'd say, the good news is that these different platforms are getting closer to maturity and even though some of them still require substantial investment. On average, it's not going to be growing going forward, it's probably going to stay more or less the same. So your second question on the banks, I think your assessment is right. Our loan growth has decreased in the last quarter and it will continue to decrease probably. If you look at our risk appetite and what that implies for loan growth. We see loans continue to grow, but probably at a third the pace they have been growing in previous quarters, maybe Q1 or Q4 of last year. In terms of credit quality, I don't think we are at a trough yet, but we see deterioration really softening in terms of pace. But I think that we still see space for additional deterioration, and one caveat I would put regarding loan growth is, we are going to try to lower loan growth without lowering customer growth. So we should be seeing continued customer growth by the way of lower exposure on average for a customer.

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

I have 2 actually. The first one is a bit on the short-term, interesting to hear from you, how are you seeing the fourth quarter as of now? How was top line promotions? How has the dynamics behaved in Chile specifically? And also still on inventories, I couldn't quite catch if like how the inventory normalization is going, and if Francisco's response was just for the Department Store or this was actually for the full, let's say something like Department Store plus [indiscernible]?