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. In the first part, Mr. Raimundo Monge, Head of Investor Relations, will present a summary of the consolidated results for the third quarter of 2023. [Operator Instructions] Now we'll start with the conference with Mr. Raimundo Monge.

Thank you, Gigi. Good afternoon, everyone, and welcome to Falabella Third Quarter 2023 Earnings Call. Joining me today are Gaston Bottazzini, our CEO; Andrea Gonzalez, our Chief Strategy and Sustainability Officer; and Alejandro Gonzalez, our CFO. I would like to remind you that during this presentation, management may make forward-looking statements relating to our company, its results, operational expenses, strategies, potential restructuring and other matters alike. This will be characterized by the use of terms such as plan, pretend, expect, anticipate, estimate, hope and seek. Such statements are based on assumption and expectation of future events that are uncertain and contains risk. Therefore, and for further information on this matter, I kindly refer you to the disclaimer and forward-looking statement that is displayed on the screen. And also, that the number presented during the call will be according to the IFRS rule expressed in U.S. dollars around $2 million. Therefore, certain small differences may arise with the published financial statement. I will start the call by going on some key operational highlights of our physical digital ecosystem. Let us begin reviewing from Slide 3 onwards. During the quarter, we opened a total of 6 stores in the region, including the first IKEA stores in Colombia. The slowdown in consumption trends and high inflation levels continue to impact our operations. In the case of our retailers, the businesses that suffered the most were home improvement and department stores in Chile and the retail business in Peru. The consolidated revenue of department stores reached $753 million in the quarter. The electro category experienced the largest drop in sales versus the previous year, both in the physical and on the online channel. In Home Improvement, consolidated revenue reached $1.3 billion, a decrease of 15%, mainly explained by a contraction in categories associated with construction in the region. Supermarket revenues decreased 8%, reaching $587 million. Nonfood categories continue to do downward trends, reducing their participation at sale level. Mallplaza revenues reached $123 million, reflecting high occupancy levels due to a strong proposal and more than 70 million of visits. On the banking side, solid progress has been made in the digitalization, strengthening our value proposition. Today, Banco Falabella Chile is the leading credit card issuer and that during this quarter, it was ranked first by number of personal checking accounts, highlighting that it was in fifth in 2021. Today, around 50% of total card opening were made 100% digitally. Our loan book portfolio decreased 9% year-over-year, reaching $7 billion. In line with our restriction in origination and despite -- and also despite a challenging consumption environment, the purchase using our credit and debit card increased by 3%. In terms of the loyalty program, we have reached almost 19 million of participants, generating and maintaining closeness with our clients in the long term and allowing us to increase the level of transaction, spending and retention of our customers. On the e-commerce, we now have more than 19,000 sellers with sales in the region, and 38% of the online sales are delivered to customers through the click & collect option. During the third quarter, the online GMV decreased 14% while our 3P online sales grew 1% year-over-year representing today 26% of the total online GMV. Overall, our e-commerce platform achieved $2.7 billion in GMV during the last 12 months. Consolidated revenues decreased 10% year-over-year, mainly due to the decline in the Chilean business of home improvement and department stores and the retail business in Peru. This was partially offset by Mallplaza and Banco Falabella Peru. Gross profit decreased 6% year-over-year due to home improvement segment, which declined 25% year-over-year due to lower sales volume in Chile and Peru, mainly explained by the decline in categories related to the construction sector. Department stores decreased 17% year-over-year, mainly due to a lower revenue in the region coupled with a decrease in gross margin in Peru and Colombia, partially offset by an improvement in Chile. This was, to some extent, offset by the banking business in Chile, mainly due to improvement on the cost of risk and by Mallplaza. We experienced a change in the trends seen in the last 12 months with EBITDA growing 1% year-over-year, reaching $202 million. Our SG&A expenses decreased 6% year-over-year, despite an environment of high inflation in the region, thanks to reduction in the personal expenses, excluding severance payments and optimization of our marketing and local strategy and improvement in logistics. Given all the above, we closed the quarter with a loss of $5 million, a decrease of 73% from the net loss registered in 3Q of 2022. As far as our financial position, we have decreased 5% in our net financial debt, and we would like to highlight that we have no relevant maturities until January of 2025. Now I would like to leave the floor you with Alejandro Gonzalez, our CFO.

Hello, everyone, and thanks again for joining our call. I would like to start with a reminder of the commitment we've made in our Investors Day of last year where we launched our efficiency plan or our operational leverage plan, which aim to increase our EBITDA margin in 200 basis points, which was around $250 million in gross savings on a yearly basis. The implementation of that plan was completed in the second quarter of this year. However, in a more challenging than anticipated environment, we intensified the efforts adding new initiatives to the plan of around $100 million, which were also implemented during second and third quarter of this year, giving us a total of $350 million in savings on a yearly basis and also excluding implementation costs. We also announced on our last call some stop doing, such as closing our digital wallet Fpay and Fazil where we relaunched our Tottus app with a focus in on-demand delivery for our supermarkets. During this quarter, we continued advancing in our strategy to increase profitability. This focus has allowed us to improve our inventory position, reducing inventories by $570 million or 23% during the last year through a more conservative inventory purchasing policy as well as shortening the purchasing cycle of our goods. Additionally, we reduced our SG&A expenses in $60 million during this quarter, which represents a 6% reduction in nominal terms. This reduction would be $75 million or 7% reduction without the implementation cost of the plan, which was $11 million. And it's mainly due to corporate efficiencies, improvement in our logistics processes, focused marketing expenditure and the rationalization of our physical footprint. It is important to highlight that cumulative inflation in the region for the period was around 6% and this affects most of our SG&A. So in real terms the reduction that we presented in this quarter was around 12%. There had been prior occasions where we at Falabella have had levels of that greater than what we feel aligns with the duration of our assets. In the past, the recovery has been faster, and now the macro condition has been more challenging than we would have originally expected. This is why, as a company, we have made certain commitments to support our financial position, and let me remind everyone that having an investment grade rating is an integral part of this. We have established a plan that has 3 levers. The first one is to focus our 224 -- 2024 CapEx against 2023 in both physical channels and digital developments. We will announce our CapEx plan during the first quarter of 2024. The second one seeks to maintain and increase the savings achieved to-date that we discussed and continue improving our operational margins. And finally, as part of our additional effort, we incorporated a third component that expects with a period of 12 to 15 months to raise between $800 to $1 billion from noncore assets, mainly real estate. With that, we will now open the line for questions.

[Operator Instructions] Our first question comes from the line of Nicolas Riva from Bank of America.

Alejandro, for the chance to ask questions. So I want to ask about the announcement regarding asset sales. I would assume that the new number you are planning for the $800 million to $1 billion in asset sales. I assume that includes the previously mentioned $300 million to $400 million that you had discussed in the last earnings call. And I want to ask what's the progress in the completion of the previously announced $300 million to $400 million in asset sales? Because the rating agencies had mentioned that the announcement regarding asset sales had to carry low execution risk for the company to keep its IG ratings. So I want to ask, for example, if you have received any offers for the assets you plan to sell or any update on that? And also you mentioned these would be noncore real estate assets. Are you planning to sell any of your stake in Mallplaza or Open Plaza? And what's the annual EBITDA from the assets that you plan to divest? And then my second question, unrelated to asset sales, would be, you have discussed all the progress regarding your cost efficiency program. We have seen SG&A down well in the mid to high single-digits in both the nonbanking and the consolidated business. We continue to see a lot of weakness in your top line. So revenues being down double-digits year-on-year, and that drove a year-on-year decline in EBITDA as well, even though the comps year-on-year this quarter were a bit easier, because your results have already been weaker in the second half of last year. So my question would be, why do you think we continue to see such weakness in your top line, and what will be the outlook for the fourth quarter in 2024? And then finally, kind of combining my first question on asset sales, the reduction and my second question about the weakness in top line and more on the operating results would be, where do you expect to be in terms of net leverage by the end of 2024? How much higher than the 4x net leverage requirement to keep, IG would you expect to be by the end of 2024?

Thank you, Nicolas, for your several questions. I will try to address them jointly, but please feel free if I leave anything out of what you are expecting, please feel free to jump in and we can move on with that. To start with, the first is yes, this is part of what we announced in the previous quarter, the $300 million to $400 million, this is the same I would say part of the plan this is an increase of that. The difference with what we said in second quarters is that now there are several processes that are undergoing in this and we've received some. I cannot give you further detail in several of these transactions because there are some NDAs that have been signed. But I would say part of the majority of the $800 million to $1 billion that we are basically holding on informing the market today are things that are undergoing. It is -- as you said, it is subject to, I would say, standard market implementation risk. But so far we're not seeing something like that, at least in this process. You also asked, if this considered something related to the 9% or any stake -- selling a stake in Plaza, it's not included in here. The majority of what we're talking about in this particular plan that we announced, the most relevant assets are the assets of Open Plaza Chile, assets of Open Plaza Peru, some distribution centers in Chile and Peru also and some standalone stores in Chile. That's I would say the majority of what we're considering here. And as I said before, even though it is subject to, I would say, standard market execution risk, we see this as something that we are counting on the completion of this plan that we announced.

Alejandro, if I may just follow-up on that. You said you ruled out selling a stake then in Mallplaza, but you are saying this would include selling a stake in Open Plaza?

No, I didn't say that. I'm telling you that what I already announced in the press release does not consider selling a 9% of Plaza. As Falabella from a portfolio perspective, I have several other options. What I'm saying is that the $800 million to $1 billion is what I already mentioned, which are the Open Plaza Chile, Open Plaza Peru distribution centers in Chile and Peru and standalone stores in Chile. And it goes in line to something that you mentioned, and I would like to please, for everyone's sake, let me be very clear that we're doing this to strengthen the financial position of Falabella because we think it's the right thing to do. And that's why you mentioned something related to execution risk. Yes, we think this has a standard market execution. This is not something that should have a high execution rate. But that said, I need to be rational in what I tell you. And what I'm saying just for the avoidance of any doubt to everyone, In this amount, selling a stake in Plaza is not on the table. You also -- yes, we don't. Okay. Regarding the -- I would say something about outlook for next year. What I can tell you, so even though the macro trends have been in the most of the countries in which we operate, we still see a challenging consumption environment. Inflation and interest rates although they seem to be easing, they're still -- they remain at high level especially in Chile with most relevant country for a portfolio. The trend that we're seeing is even though the top line is still decreasing, such decrease is much softer. And what we're putting on our numbers is not a super strong recovery, at least for the next quarters, but we are expecting some degree of recovery in that. And I think what's relevant is we are controlling the things that are, I would say, on behalf of Falabella. So we are in a better position for Christmas season this year, as we were before, not only on the inventories, which we already mentioned, also the operational leverage that we're going to be presenting. So we are getting ready for a tough period for next year. But as I said before, we are expecting an improvement next year and we are adding on top of that this I would say this program is $800 million to $1 billion program. It's a mix of both.

And with all of that do you have an estimate for where your net leverage would be at by the end of 2024?

We don't give that kind of numbers, but the plan that I'm making is a plan that's consistent with the strength and the numbers of Falabella has had historically. This is very relevant for us. But as I said before, this is beyond just I would say an investment-grade thing. This is because we need a strong financial situation for the future of Falabella.

Our next question comes from the line of Melissa Byun from Bank of America.

I had 2 questions. First, I just wanted to clarify, you mentioned the increasing savings next year. And I just wanted to understand if this is an annualization of the $100 million in incremental savings that you found this year or are there new areas of opportunity that you're discovering and if so where? And then my second question is just on the e-commerce environment. If you can discuss the competitive environment and specifically cross-border in Chile, and whether you're seeing any impact from Temu and it's still early for them, but you've had a couple of months with them. And then how are you protecting your business from cross border or is there an opportunity that you can explore there? More than 2.

Okay. Yes. Sure. Thank you for your question. I'm going to take the first one and let Andrea to go on the e-commerce one. In very simple terms, we are expecting to keep the savings we have thus far. The structural part of, I would say, savings that we've achieved thus far had already been executed. However, we're certainly on budget process as we speak and we expect that more efficiency related, more than just savings to the focalization of the strategy and particularly on our omnichannel study, there will be more reduction in SG&A moving forward. As I think we've been very open in saying that there's a lot of stuff doing. There's a lot of focalization of things that we're going to be doing and that should bring also a reduction in investment in CapEx and also should bring a reduction on SG&A driven by the reductions from teams that were doing things that we're basically stopped doing in 2024. So to your question, we are planning and to keep and all the things that we've achieved this far to move them into 2024. And I know that there's a chance there because most of our SG&A are in some way indexed to inflation. And as we have been able to beat inflation thus far, the plan is also move to 2024, beating also inflation moving forward.

Sorry, Melissa, go ahead. Do you have any follow-up questions or should I pick up on the e-commerce one?

No. That was very helpful. If you can address e-commerce.

Thanks. So in terms of what we are seeing on cross-border impact, we haven't seen much yet. AliExpress share has been stable through the years. And Temu is very recently entering our country with much penetration. I would say the only exception in terms of growth has been in Shein. And we don't see much overlap of categories in AliExpress and Temu yet, so we don't see it as a great threat. We do have an international marketplace proposition, which has been growing. And in terms of Shein, I think this is more of a concern in general for the fashion industry, but we are very confident that our own brands are well positioned on the same segments in which Shein has penetrated. So of course, we are continually, I would say reviewing what the competitors are doing, but we don't see a major threat yet.

Melissa, this is Gaston. If I may complement that, I would say that in terms of the -- because your overall question was about competitive environment. And I think if you look at the competitive environment in Chile, we're still seeing the most of the competition coming from the local players, which is different from what you're seeing in other countries. And in that sense, I'd say that during the last quarter or so, what we have seen is a strengthening of our position in competitive terms and in market share terms, but in a backdrop of a market that is contracting very much. But if you think about and we think about it in terms of categories, I think there are the main retailers, we compete very strongly on the big ticket items and then we compete with the pure e-commerce players more on the general merchandise and small ticket items. So that continues to be the context. And I'd say where we have strengthened our position in the last few months has been more around our 1P offer more than anything, even though our 3P offering has also continued to have a gap, a substantial gap of about 15 or 20 percentage points in terms of growth when compared to our 1P. But 1P is generally where we have defended our share better.

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

I had a couple here. So first, I wanted to touch a bit still on the online, piggybacking a bit on what Gaston said. Could you tell us how the overall online marketing in Chile has been performing to see how that compares versus your growth? Also, I want to touch or to dive a bit deeper in Sodimac in Chile. Could you break down maybe what's the performance of the retail categories and the construction categories? How has growth been in those 2 during the quarter? And also on the level of inventories. I wanted to understand if we saw a relevant inventory adjustment in department stores and gross margin has actually reflected this quite significantly. But there's still pressure in home improvement. So I wanted to understand how are your inventory levels? Do you think they're okay into the upcoming holiday season or maybe could be a bit lower, a bit higher?

Thank you for your question, Nicolas. So first of all, starting with your question around, I think around e-commerce, it's very hard and the competitive environment and how we are compared to the market. The figures are not so clear on this. So the more significant signals that we have of how we're doing vis-a-vis the market is basically when there are these big promotion events, the last one of which was the Cyber day. So in that event in particular, we actually gained share particularly in electronics and some of the big ticket items. Regarding your question about home improvement, I'd say that -- and department stores. I think, first of all, in department stores, we are -- we continue to be in a very good inventory position comparative to last year, even though there is still room for improving that position, and we're working very hard on having a very clean inventory going into the Christmas season. For home improvement, our inventory position is not so event for this time of the year is more of a permanent management challenge. It is true that we were in a better position in department stores than we have been lately in home improvement. And I think that continues to be the case, but it's not a major issue facing the end of the year season. In terms of how home improvement is doing, I'd say we are seeing a very consistent level of contraction in demand, both in the harder lines, the construction lines and in the softer final consumer or homeowner type of lines. So the weakness is relatively even across categories. We had a very strong contraction during the middle of the year in the bigger ticket items that is coming back. So audio, video, computer, all of that is starting to improve, and that's the only change we are seeing, I'd say, in demand in relative terms. But in general, I'd say that we are seeing an overall contraction of demand, which is not as strong as it had been in previous quarters, but it's still a relative contraction.

And if I -- just let me clarify maybe one thing that Alejandro mentioned and maybe I didn't catch that clearly. When we're thinking about the very short-term trends, maybe October, are trends similar to what the third quarter was or still declining, but declining less than what the third quarter printed?