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

Ladies and gentlemen, welcome to the Falabella earnings call. I'm Gigi, your coordinator for today's session. [Operator Instructions] Present with us are Alejandro Gonzalez, Interim CEO and CFO of Falabella; Juan Manuel Matheu, CEO of Financial Services; Francisco Irarrazaval, CEO of Falabella Retail; and Benoit de Grave, CTO of Falabella. First, Mr. Raimundo Monge, Head of Investor Relations, will provide a summary of the consolidated results for the fourth quarter of 2023. Following his presentation, we'll open the floor for questions. [Operator Instructions] Now we'll start with the conference with Mr. Raimundo Monge.

Good afternoon, everyone, and welcome to Falabella's Fourth Quarter 2023 Earnings Call. I would like to remind you that during this presentation, management may make forward-looking statements related to our company, its results, operational expenses strategy, potential restructuring and other matters alike. This will be characterized by the use of terms such as plans, pretend, expect, anticipate, estimate, hope and seek. Such statements are based on assumptions and expectations of future events that are uncertain and contains risk. Therefore, and for further information on this matter, I kindly refer to the disclaimer on forward-looking statements that we display on the screen. Also, the numbers presented during the call will be according to IFRS rule expressed in U.S. dollar around $2 million. Therefore, certain small differences may arise with the published financial statement. I will start this call by going over some key operational highlights of our physical digital ecosystem and its capabilities. Let us begin reviewing from Slide 3 onwards. The slowdown in consumption trends continued impacting operations. In the case of our retailers, the business that suffered the most were Home Improvement and Falabella Retail in Chile and the retail business in Peru. The consolidated revenue of Falabella Retail reached $1.1 billion in the quarter under an environment of markdowns and lower decrease in sales of the electro category versus 3 quarter 2023. During the fourth quarter, we opened 1 department store in Iquitos, Peru. In Home Improvement, consolidated revenue reached $1.4 billion, a decrease of 9%, mainly influenced by the construction in the construction sector. Supermarket revenue decreased 4%, reaching $695 million. Non-food categories continue to enter downward trend in sales participation in line with the value proposition adjustment. Mallplaza revenues reached $122 million due to higher operation level that reached the highest level of the last 4 years. On the e-commerce, online GMV remained stable year-over-year, while our 3P online sales grew 7%, representing 28% of total online GMV. Overall, our e-commerce platform achieved $2.8 billion in GMV during the last 12 months. We now have over 20,000 sellers with sale in the region and more than 45% of the online sales were delivered to customers through Click & Collect option. We have successfully reached nearly 19 million participants in our loyalty program. Fostering [indiscernible] relation with our clients and driving up transaction levels, expanding on customer retention. In the third -- in the last quarter conference call, we announced a plan to strengthen our financial position, and we have continued working hard on this. In the first place, our cash position has increased 73% year-over-year in line with the better management of our balance in the business and better performance of our EBITDA. Secondly, our inventories level are returning to normal levels, registering a decrease of 21% year-over-year, containing the margin in our retailers. And third, we continue to observe year-over-year decline in SG&A as a consequence of the efforts that our teams made in the execution of our operational leverage plan. Cost related to revenue decreased 6% year-over-year, mainly due to the decline in the Chilean business of Home Improvement and Falabella Retail and the retail business in Peru. Gross profit decreased 1% due to Home Improvement segments, which declined 22% year-over-year, the Falabella Retail decreased 12% year-over-year originally, mainly due to the reduction in contribution of Chile and Peru, partially offset by an improvement in Colombia. This was, to some extent, offset by the banking business in Chile, mainly due to improvement in cost of risk and by Mallplaza with a 5% increase year-over-year. The consolidated numbers in EBITDA, we experienced an increase of 30% year-over-year, reaching $333 million. Finally, we closed the quarter with a net profit of $80 million, 9.2x than the numbers of 4Q of 2022. As far as our financial position, we have decreased 12% our net financial debt and reached a 6.5% net debt-to-EBITDA ratio. We would like to highlight that we don't have any relevant maturities until January of 2025. At the beginning of the year, we unveiled our 2024 investment plan, reflecting a 24% decrease reduction versus 2023 plan. We are allocating more than $200 million in technology and logistics, essential for integrating our capabilities across the ecosystem. Additionally, another $270 million for store renovation and opening with plans, in average, 10 new stores by year-end, deepening our experience and the omnichannel value and improve our value proposition in most urban centers. Now I would like to leave you with Juan Manuel Matheu, Financial Service CEO.

Thank you, Raimundo, and good morning to everyone. We continue advancing in our goal of becoming the main digital banks in the Andean region. Our value proposition is based on app-first customer journeys strengthened by a comprehensive set of benefits. These benefits include discounts, both inside and outside of our ecosystem, and the favorite loyalty program of the Andean region, CMR Puntos. Digital transformation has revolutionized how we interact with our clients, leading to substantial enhancement in our service standards. Currently, over 95% of transactions are executed digitally. It has also helped us to adapt faster to our clients' needs and to boost our growth. To mention a few examples, recently in Peru and Colombia, we launched immediate transfers using a phone number. In Chile, we integrated into the bank's app the functionality to automatically pay for parking in Mallplaza. Our operation in Mexico continues growing fast. Mexico represents 25% of total credit card openings in 2023. Our credit card also Mexico is becoming the main card of our clients. Our customers started to use the card, not only in Soriana stores, but for all their needs. Purchases outside our ecosystem have tripled in volume, surpassing purchases inside our ecosystem. Finally, our digital transformation has led to evolve from being a credit card bank to a multiple product bank. In Chile, we are the #1 player in checking accounts. And client deposits have -- has increased 37%. This shift has allowed us to reduce our funding costs. Currently, more than 70% of our funding comes from personal deposits. Our goal to become the main digital bank in the Andean region is progressively -- progressing rapidly over the past 4 years. We have threefold the opening of credit cards and checking accounts. Double purchases using our credit and debit card reached to 7.4 million clients, growing our loan book by more than 35%. We are facing a challenging macroeconomic environment. High inflation levels increase our risk cost because our clients have less disposable income. To reduce our risk cost, we have restricted credit origination, which has impacted our revenues. In addition, inflation increased our cost of funding. For 2024, we are expecting an increase in the bottom line driven by lower risk costs, a decrease in the cost of funding and operational efficiencies. However, we expect lower interest income due to the restricted credit origination measures. Our loan portfolio is expected to remain unchanged. Now I will let Francisco Irarrazaval to talk the -- our retail operations.

Well, thank you, Juan Manuel, and hello to everyone. Consumption has been challenging, challenging recent quarters in the region, but I believe that we have taken measurements that have allowed us to increase our consolidated EBITDA margins by 130 basis points. It was mainly about efficiency programs and about inventory reduction. We have successfully reduced our inventory levels by 19% year-over-year, which we believe is going to allow us to have a better margin in the future as well. Nevertheless, during the year 2023, we continue strengthening our omnichannel value proposition, being the leader in the free market where we operate with more than $3.4 billion in revenues on year 2023. Over the last years, we have developed a clear road map with 3 pillars, and I would like to refer today about the first 2 ones. We're including -- first, we have to continue to win over our customers with the best value proposition, combining the strength of our private label brands with exclusive brands and with local and global brands at the best possible price. So we believe that this strategy, our clients will be always at the center of the decisions that we take. Second, we are enhancing our omnichannel proposition. We are leveraging the strength of our stores with our e-commerce platform to deliver the best value proposition to our customers. I would like to give a couple of examples here. First, we're improving our services and experiences in the store to delight our customers. Today, we have personal shoppers. We have [indiscernible], which is a small shop where a client can fix a product or maybe bring back to fashion the same garment. We are gaming zones on several stores, and we have always been working to provide the best buying experience in our store floors. We are also adjusting our physical footprint. In the last year, we have closed 3 stores in Chile, and we have opened 1 in Peru. But we have been constantly changing the proportion of the square meters allocated to category with greater inventories. Our main goal here is to become a fashion specialist and to devote most number of meters to those categories. On the e-commerce side, we're enhancing the digital experience, adopting the user experience to different types of product and customers. In Chile, for instance, more than 70% of our sales from the online channel went through our stores either through Click & Collect or the stores as allocation of the segment. Now we're going to continue with Alejandro, who's going to talk to us.

Thank you, Francisco. Good morning, everyone. Before we get into the questions-and-answers section, I'd like to give a brief summary of our view on '23 and then an outlook of [indiscernible] what '24 looks for us. 2023 was a challenging year for Falabella, without a doubt. We began the year with a very negative macro environment with high inflation and interest rates, leading to a slowdown in consumption. In addition to that, we started 2023 with high levels of inventories and higher-than-expected risk [indiscernible] in our loan portfolio. Our company's [ turn ] is focused to recover profitability and improving our customers' experience. We finished 2023 with relevant milestones in the construction of our physical digital ecosystem. We launched falabella.com in Colombia, completing the deployment of our e-commerce capabilities in the Andean region. We opened the first IKEA store in Colombia, and we also became, as Juan Manuel mentioned, the #1 bank in checking accounts in Chile. And the summary of this is that more than 35 million customers in the region chose Falabella. We also completed the operational leverage plan we announced at the end of 2022 and focused our strategy and rationalized our operations to recover profitability. The key proof of this was the closing of our digital wallet and the launching of a plan to monetize noncore assets were up to $1 billion. But today -- and today, as Raimundo mentioned, we are starting to see the results of the efforts of our team. We were downgraded below investment grade during the last quarter of 2023. And we will continue working on the different fronts of our customer-centric study plan that will lead us to strengthening our financial position. The investment grade is an integral part of Falabella's future growth plan. We have recently announced the evolution of our e-commerce strategy, enhancing and focusing our customer omnichannel proposition. Our proposal [ while it didn't meet any ] on offering the best brands with the highest quality and competitive prices to our customers. In simple terms, if I were one of our brands, we will look at the offer of centers of excellence, allowing us to differentiate ourselves with higher standards in both products and services. All this with a more efficient operation. Finally, we anticipate that 2024 will continue to be challenging, but we are convinced that our customer-focused strategic plan leverage on our powerful retailers and brands. Our network of stores and malls and the ecosystems capability we already built will allow us to significantly recover the profitability of Falabella. With that, now I will open the line to any questions that you may have.

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

My first question is if you can give us an update on your asset sales. If you can -- if you have completed any, so far, in the first quarter. And I remember that you had previously mentioned a target, I think in the last earnings call, the $800 million to $1 billion in asset sales. And you have highlighted as kind of first large transaction, this one related to the shopping malls in Peru. Out of that target of the $800 million to $1 billion, how much had you factored in for this specific transaction for the holding company selling the shopping malls in Peru to Plaza S.A.? And also I want to confirm if my understanding is correct that this transaction would bring in cash to the holding company but will be neutral for leverage on a consolidated basis, assuming that Plaza S.A. issues new debt to finance this acquisition of the shopping malls? And second, I think clearly, one of the main positive highlights in the quarter was the increase in the cash position to $1.2 billion in the quarter. And with that, I know that you have the maturity of the 2025 bond in January, next January, I believe, the $200 million. If you can talk as of now, what would be the idea of the plan in terms of financing the $200 million maturity in January next year?

Thank you, Nicolas, for your, I would say, questions. Let me start by tackling the 2025 bond and give you some flavor on the -- what we can do on the Plaza transaction, and then I'll let Benoit give you more details on the asset monetization plan that we have. The bonds mature on January next year. You mentioned correctly that we are, today, holding a relevant level of cash that's more than enough to cover that. We're basically in the plan to analyze whatever we do with that. And given that this is a publicly traded instrument, it's hard to come out with some anticipation of what are we going to do. But you can rest assured that we will hold the liquidity to face that without any problem. And this -- just to emphasize. This level of cash that we have is before any success on the monetization plan that we have. Now related to the Plaza operation that we announced and the potential impact that it can have on Falabella. It's -- this is 2 things. This is a transaction that involves 2 publicly traded companies, to start with. This is also a transaction that involves 2 related party companies. So I mentioned this because there's a limited level of information that we can do, that we will share with you today that's not considering the material fact that we will have to. There's a very thorough legal process that we need to follow to comprise this. What I can share with you is that the process is advancing as we are expecting it. But there are several legal requirements that we need to comply. Now to your question, which I think it is what will be the impact on the leverage of Falabella is going to be super related to the market conditions at the time of the execution of this. We're not doing this solely for a leverage -- or helping the leverage of Falabella. The main driver to do this transaction is because we do think there's a lot of value of putting these assets in one hand. If you see the level of operational success that Plaza has been showing lately, makes us think that in one single hand and specifically in the management of Plaza, the assets that we have approved will generate more value. That said, I will let Benoit to share with you some, I would say, update on the monetizing plan of the different loans for assets that we have.

Benoit here. So just to complement Alejandro, just a reminder that our plan to improve our financial position has 3 pillars. The first one is the improvement of the EBITDA. The second one is the focalization of the CapEx. And the third part is the monetization of noncore assets, mainly real estate. So we remain committed to the goal of raising between $800 million and $1 billion, $800 million or -- and $1 billion through asset monetization. Our efficiency efforts, as we mentioned at the beginning of this call, contributed to improve our profitability, reducing SG&A by 8% in the last quarter. And we have also announced an investment plan for 2024, which is 24% lower than when we announced in 2023. So regarding the status of the asset sale plan, we are in several processes, working with investment banks and progressing in this plan. I think on the Mallplaza transaction, Alejandro said everything. And in terms of land banks, in 2023, we managed to close transactions and signed purchase agreements, some of them not yet materialized, but very soon. And this is in the order of $25 million. So we are progressing with the plan, and we are committed to that plan.

Maybe if I can just do a quick follow-up. So you have just said we remain committed to the plan of raising between $800 million and $1 billion through asset sales. Is there a time frame to achieve that? And then second, if you have that specific target, I would assume you're factoring in a specific number for the -- how much you are raising with this transaction of selling the shopping malls in Peru? Can you share that or not at this point?

Related to the mall operation in Peru, it's hard to come up with -- there's so many things going on. And at the end of the day, we think this transaction, as I said before, is going to be creating a lot of value for us. Your question is whether how Plaza will fund this. And therefore, what Falabella will do with that funding. The good thing is that we have so many options. It's highly likely if the markets are, I would say, as positive as they are improving and that's what we're seeing also from a, I would say, fixed income, from a share perspective, it could be a mix of both things. But if the market switches and it goes, I don't know, into the negative side, I don't know. It has to be full debt. It will be a full debt. The main source -- the main reason why we're doing this transaction, as I said before, is because of the value creation that we believe there is. And in terms of the question about the time frame for this, we always mentioned it was going to be between 12 to 15 months. We expect to get a lot of, I would say, closure stores during this year. It's hard for me to come up with date. And actually, what we've seen lately, I don't know if you're that familiar with the interest rates market here in Chile, but rates are trending down. And actually, the interest that we're getting for these assets is higher today than what we saw towards the end of last year. So I am positive that we will be able to, as Benoit said, to fill in the gap for these transactions and probably second half of this year, year-end, something like that.

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

I had a couple here on -- particularly first on the retail side. I wanted to understand very briefly if you have seen any change in trends for topline, particularly in Chile during these first few months of 2024, maybe an inflection after the Christmas season of '23? And my second question has to do with inventories like we've seen strong normalization of inventories across most of the discretionary business lines in Chile. I wanted to understand if you see that there is a further need in some particular banner or business for inventory still to be adjusted?

Thanks, Nicolas, for your question. What we're seeing today is similar trends compared to what we saw in '23 fourth quarter in the sense that things are improving. We're seeing margin improvements in sales. We're seeing margin improvements in margin, which is on the positive side. Even though sales are still a bit lower than what we had last year, this revenue change, as we speak, and the reaction is going down. So we are positive on that side. And the other positive thing, and I think goes in line to your second question, is that given that we got, I would say, a big reduction -- and then if you allow me, instead of calling it a reduction, I would say, normalization of the inventory levels. We think we are where we would like to be, especially thinking of 2024 as a challenging year. So we think this is a position that has allowed us also to keep our margins, to handle them and to manage them in a positive side. A similar thing is happening in the cost of risk. If you allow me, I will allow Juan Manuel to give some flavor on the perspectives on risk that we have for 2024, at least first half.

Yes. Nicolas, in terms of the cost of risk, we are expecting to reduce it in the Banca in Chile during the first half of 2024 and continue the downward trend during the year because we are observing improvements in the early delinquency of our loan portfolio. And regarding -- I will say that we expect the trend to continue during the year.

Nicolas, this is Francisco Irarrazaval to complement. You asked if we see further need in the future to reduce the inventory level. And as Alejandro said, I do believe that we have achieved like -- well, we should call it a normal level. Nevertheless, in Falabella Retail, we have been very focused on reducing the buying cycle for the seasonal merchandise at least. So for example, our fashion brands such as Basement, [indiscernible], in the last quarter, we are priced at about 40% of our purchases. We were able to distribute the merchandise to the stores in less than half the time that we usually have. So we are very focused on reducing the buying cycle. This, in the long run, should lead to less inventory levels, but mainly it's going to lead to a better value proposition in the sense that the merchandise that we will be selling to our customers will be more aligned to the fashion will be more up to date. So basically, we do want to become or behave more like a specialist in fashion. And that should further reduce our inventories. But what we are pursuing here is to become a fashion specialist more than anything else.

Our next question comes from the line of Felipe Ballevona from Santander.

I have 2 questions regarding operations and another 2 regarding the MOU. Starting with the operations. January retail sales came out this morning with hard goods increasing year-over-year for the third consecutive month, and fashion growing year-over-year for the first time in well over a year. So are you seeing a recovery in line with these trends and in what segments? And then my second question is related to gross margin. Are you seeing pressures due to current FX levels? And -- well, I mean, this is like a second question related to that one. Do you think it would be more convenient for you guys that rates are cut more rapidly despite FX depreciation? Or do you think demand is [ you're selling enough ] that rates could be cut more [ slowly ] and thus with a lower FX impact? I can ask the more nuanced after so we can [indiscernible] first.

Okay. Thank you, Felipe. This is Francisco. We do see the same trends that you mentioned. So garment sales have been regaining its usual strength for us, and electronics and consumer durables, in general, are still depressed. Regarding the exchange rate FX, we, as a company, carry a coverage policy. So we're usually covering 3, 4 months short-term changes. But I think that the best quote that we have today is the fact that we are carrying less inventory, less buying cycles. So we're not that exposed to long-term dollar value. And of course, we can always translate the price into the commercial price for the client. So we're not that concerned about the exchange rate FX on the EBITDA in the short term.

Great. That's very helpful. [ And just to tie back on that. ] Is there like an FX level that you feel comfortable with, like a cap sort of thing? Or it just depends on how like the volatility behaves?

Thank you, Felipe. But if you allow me, more than having a level in which I feel comfortable, the lower the level of the FX, the more competitive we can all be with the customer. And it's good for consumption. So basically, the hedging policy that we have, what it aims is basically to protect the capacity of us being able to offer competitive pricing, as Francisco said, 4 to 6 months. I don't have a view on this. But certainly, if FX goes up, which is -- there's some pressure of FX on the CLP to depreciate. But we don't see it going to levels in which it would be super dramatic for this. What we see on the other hand is, as Francisco mentioned, we're facing this in 2 ways. The first one is certainly shortening the cycle of buying and therefore, holding more competitive levels of inventory. And the other thing, as you also mentioned, is the fact that we are also -- when FX goes up, we have the possibility of looking for some local suppliers, especially we have some apparel in Peru and Colombia, that allows us to be competitive in case the CLP U.S. dollar keeps going up. So there's some hedging -- operational hedging that we can do with shorten the cycle, as Francisco said, and looking for other sources of products.