Fnac Darty SA (FNAC) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Fnac Darty Investors Conference Call. [Operator Instructions] We're going to hand over to Mr. Enrique Martinez, Chief Executive Officer of Fnac Darty, to begin this morning's session. You have the floor, sir.

Good morning. Good day to you all. I'd like to thank you for taking part in this conference call. I hope you and your families are doing well. Considering the current situation and changes in the situation in recent weeks, I wanted us to comment on April and May revenue figures and also talk to you about the trends and the impacts of the COVID-19 crisis. It's impact on activities. First and foremost, as already mentioned when we disclosed our figures for Q1, our priority has been to ensure the health and safety of employees and partners and all the while provide the best possible service to customers. In the presentation which you have, we can move on to Slide 3. Now the health crisis has seen very specific, different operational periods, lockdown, the lockdown phase. We were a digital pure player at that time. Then at the easing of lockdown, we began opening stores and moving more toward omnichannel. I'll go into this more specifically in a few moments. Now post lockdown, we started reopening most of our stores. Those took up to around 10 May. It was an exceptional situation. We previously become a pure player, during lockdown, online. We've seen the impact of this. And this has been a real plus, that we have been able to shift to omnichannel and really boost omnichannel and boost our digital activities. And also, our diversification into services has made it possible for us to perform excellently over the period, in a particularly difficult period with many headwinds. We saw strong growth throughout the group, up 160 -- up some 60% for online sales, 60% online sales growth, which to some degree offsets the drop in in-store sales. If you look at the referencing of our e-commerce site, it's possible for us to see an uptick in these sales. Our IT teams, our logistics people, our delivery teams were able to really support this online business, able to process very large volumes of orders up to best market standards. Second phase and after 11 May, we started reopening stores. And we continued to see the strong momentum in e-commerce and up 110% online sales during that period. As we reopened stores, we made sure we enacted any and all health measures to make sure to protect the health of our clients, partners and employees. Customer satisfaction, as measured by Net Promoter Score, the NPS, went up by 5 points after the stores reopened. This especially shows the very positive in-store experience for customers and their feeling of safety there. On our group revenue, EUR 2.211 billion end of May, which is down 14% on a reported basis and minus 16% like-for-like. Now a drop in revenue in the physical network was substantially offset by e-commerce sales. This revenue went up 160% as of May, a good resumption in activities as the stores reopened. All in all, the crisis had an impact of around EUR 4 million on our revenue -- impact of minus EUR 400 million on revenues. Now on to Slide #4. First of all, during lockdown period phase 1, when we closed almost all of our stores, this had impact on our group. We had to reinvent ourselves, turning to a pure player in online, e-commerce pure player in just a few days' time. We saw very strong performance during the period in that very tough times, headwinds. Fnac and Darty, our omnichannel approach is a unique one. That's been a real plus. We boosted our logistics and IT capacity during the period. And of course, it wouldn't have been possible without the tremendous commitment of all of our employees during a very complex period. We were able to provide continuity of service and make deliveries up to best market standards. Currently, we can see over 220,000 home interventions are taking place. We kept the home services available during the lockdown period. We quadrupled home deliveries during the period, thanks to strong partnerships with the delivery partners and also thanks to our internal delivery capacities. E-commerce went up very substantially during the period with some over -- some 100 million unique visitors, which is significant -- with a significant conversion rate. During the period, over 1 million additional new web customers registered. We saw solid performance in white goods during the period, thanks to our continued services capacities. Technical products did well, hardware, gaming products and so forth. Small domestic appliances showed very good momentum as well, such as the kitchen equipment category. This is starting from the second half of the lockdown period. However, segments such as telephony, television, imaging and books and services recorded sharp declines in sales. This is in line with the physical store closures. Moving on to Slide #5, Slide 5. Now we saw May 11. That was phase 2 to our group with the reopening of our stores in all of our geographies. Starting on May 11, we opened our stores in Switzerland and Belgium and many of our stores in France. Stores in Portugal started reopening on May 15. In Spain, though, store reopenings were more gradual, starting on May 18, completed beginning of June. Total revenues of stores up 10% during the period, driven by group's operational excellence. And we were strong in France-Switzerland and Belgium-Luxembourg, 20% growth there, in spite of the fact we were closed in very large shopping centers. Iberian Peninsula opened stores later, several stores opening from starting 11 May. Online sales dynamic continued, after reopening of stores seen strong growth, 110%. Strong momentum in IT and gaming segments continued in May, while large domestic appliances and urban mobility items posted a solid performance since the stores' reopening due to a catch-up effect in consumption. Telephony and television segments, which were going down during the lockdown period, actually had an increase in sales since the reopening of stores, while the book segment and services remained in decline. I'd like to hand over to Jean-Brieuc to talk about the outlook for the next few months.

Thank you, Enrique. As we indicated to you when we just reported our revenues April 20, COVID-19 crisis will materially impact the group's current operating income, expected to decline by EUR 100 million to EUR 120 million in the first half of 2020 compared to the first half of 2019. Last year's current operating income was EUR 46 million like-for-like, excluding Nature & Découvertes and excluding business in the Netherlands. This decline is due to several reasons. I'll remind you, first of all, integration of Nature & Découvertes should have a technical negative impact of around minus EUR 20 million in the half year's period. And this is in line with what we already disclosed during presentation of our last recent annual results. Also, we'll see another effect due to a loss in revenue, EUR 400 million loss in revenue, as mentioned earlier by Enrique. Our margins should also see an impact and a negative effect due to the negative product and service mix due to a drop in in-store traffic that had a negative impact on services. Also, we had less of an attachment rate on the Internet sales. Plus, there was a decline in editorial products, which tend to sell very well in the stores. This will have an impact on gross margin by around minus 100 basis points, not including Nature & Découvertes. Negative impact should be offset to some degree by positive effect of implementing cost-cutting plans should enable us to offset these, excluding some scope effects and integration and including integration of Nature & Découvertes. Cutting staff costs and furloughing as well as optimization of productivity are the pluses. We've seen extra logistics costs due to more deliveries over the period. Regarding rent, in compliance with accounting rules, we're booking in P&L the savings we've negotiated that are formally recognized by our partners. We've negotiated our rent payments and these negotiations are underway. We've entered into some initial agreements regarding rent, but we're still formalizing all of these. Expected earnings only include amounts that are not very significant, but these should trend in a positive direction later on during the year. At the same time, the first positive effect of implementation of cost readjustments, agile inventory management and controlled purchasing means that we can generate good cash as of end of May. More than EUR 100 million available cash -- more than EUR 900 million available, after drawdown of the RCF rolled over today. Now 2020, we're cautious as to performance in the second half. This will depend on consumption recovery once the health crisis is over and also depends on evolution of products and services. At this juncture, there are still many uncertainties to these factors. Fnac Darty is not in a position currently to release financial targets for 2020, but the group remains attentive to its cash situation and conducting the cost-reduction plans indicated. We revised downward our adjustment plan for CapEx 2020, which should be less than EUR 100 million. Thank you very much. Enrique and I will be happy now to field any questions you might have.

[Operator Instructions] We have already 2 -- we've a couple of requests to the floor [indiscernible] Nicolas Langlet, Exane's.

Can you hear me?

Yes.

Three questions, if you'd allow me. First, on June. Can you tell us what the trend has been since the beginning of June? And have you seen some kind of trend change or reversal since the beginning of lifting of lockdown? You say also that you expect to lose EUR 400 million in sales, which was already what you posted for at the end of May. So do you expect to have a stable like-for-like in June? Now second question. Your performance was quite good on headline during lockdown. And after that -- on online, sorry. How much of this can be sustained over the last -- next few quarters? For instance, how much online during H2 this year compared to last year? And then did you get a return to normal for click&collect since the lifting of lockdown? Or are we still getting more home deliveries than click&collect? Third question, relating to gross margin. You mentioned a 100 basis points drop. Do you expect a return to normal or usual situation over H2? Or will there be headwinds going against you?

Thank you for that. June, I think we can say, is fairly consistent with what we've seen since the lifting of lockdown. We also, if -- would say that we can't really say much about the next few weeks, but for the moment, the dynamics online and in-store is actually quite good. Now I think this period was unusual and exceptional. As you've heard, we got 1 million more customers on our digital platforms. This will necessarily lead to some kind of dynamic on online trading. Now with the reopening of stores, customers have started to come in droves. And we've seen an increase in volume with e-commerce. So we see that there is still lots of products collected in the stores in click&collect, but remember also that the customers have seen the limitations of the last-mile home delivery, what with delays and postponed delivery, et cetera. So the -- quite simply the ability to just come and collect your shop from the store was very popular as soon as lockdown was lifted. H2, I think we can expect larger numbers, but the stores have been posting good results and good performance. So it's probably still early to give you -- too early to give you any numbers. We'll have to see in a few weeks' time. No, we can't be too specific yet. As for the gross margin, 100 basis points, excluding Nature & Découvertes, that is directly linked to footfall in the stores. After all, that is what drives the margin because of services, services which we can sell much better in the stores than over the Internet. So if we come back to, say, last year's numbers for in-store shoppers, then we can come back to usual situation, but it is far too early to say anything, so we have to remain cautious.

And in-store footfall for the moment, what are we talking about as compared to last year? What's the drop?

The conversion rate is much higher. And in Fnac and Darty stores, you've seen people queuing outside the stores. So we've had to put a cap on the number of people allowed in. So there are fewer people in the stores, but there's been a greater conversion and increased checkout value. Also remember that things are changing almost day by day, what with the red, amber, green areas, the lifting of lockdown here, there and everywhere, that's had a clear influence on the number of stores opened. At some point, the Paris stores which -- with very big footfall were actually closed, but now everything is open. I mean I think that, what with people going back to work as of next week that will probably signal a new phase maybe heralding a fairly normal operational practice. Yes, we are coming close to normal conditions, and we expect things to become more stable over the next few weeks.

Just to double check. You say that the dynamics for June is much -- is very consistent with May. Are you talking with May overall or May post lockdown?

I'm talking about after lockdown.

So with a 10% like-for-like.

When I say consistent, I said good numbers, good practice. I mean I don't want to give any numbers, but it sort of all makes sense.

Next question. Nicolas Champ, Barclays.

Three questions from me. First of all, can you tell us anything about market shares and increased market shares? Because I expect you did increase your market share online. Do you have anything to say there? Second question, can you tell us more about your inventory levels, where you expect to land and get to at month end in June? And what about working capital requirements? Thirdly, you sort of mentioned potential good news in H2 for rent renegotiation. Can you maybe give us a heads-up and maybe give us an indication of how good the news might be? And maybe one last question, about business in June and more specifically in the Iberian Peninsula. After lockdown was lifted later in Spain. What do you expect over and what can you see for the first fortnight of June relating to physical sales in brick-and-mortar stores in Spain?

Thank you. On market shares, there again it's very diverse. Admittedly, our online business was very consistent, but most of our business is usually in-store. So our analysis is that we have made significant gains on online market share, but that does not offset completely the less of market share because of the closure of the stores. Stores in Iberian Peninsula, well, the stores are opening incrementally. And the performance there is consistent with what you see in Belgium, Switzerland and France. As soon as the stores are open, you can see that there is a positive impact with increase in traffic, but we're still cautious because I think we can expect the return to a normal situation to take a little longer. I think France was very lively in picking up, maybe more so than in other countries. On inventory levels, working capital requirements. And I suspect your next question, which is half year cash flow. Well, we're not going to give any guidance. It really will depend on what we see in the next few weeks. What we can say is that, from the beginning of the crisis, we were very careful on cash. And we did sort of restrain and limit our supplies. This has obviously meant fewer suppliers and had an impact on working capital requirement. Online sales were a bit higher than what we'd expected. Business is picking up faster than we'd expected in stores also, so we're actually are in a position where our inventory levels are at a historic low, which might not be in fact the case over the whole year. I mean, in some instances, in some product lines the inventory levels are too low, so we will build up inventory there. On rent. As we said, we will only book those rent reductions on the basis of signed contracts. So maybe a couple million at the end of June. Over the 2 months, we're talking about EUR 35 million for stores, headquarters, storage facilities and distribution platforms. Now I can't comment on this figure of EUR 35 million, which is an overall rent bill. We hope to get a full cancellation of it. So that's the maximum figure, in a way, but we'll see what we can get. So I can't tell you anything. And I certainly won't commit anything while I'm negotiating with the largest property owners.

Next question. Clement Genelot, Bryan Garnier.

Three questions too. Firstly, we -- remember that, last year, the weather was very good. There was a lot of -- it was hot, and there was an impact on sales of air conditioning. And what has been the situation in June this year? Second question, on rent, that you've mentioned that. I mean we understand that you're trying to renegotiate rent. Do you -- would you say that variability for rents across Europe is an option across the board? Would the virus -- could the virus be the lever to get there? And thirdly, focusing on 2021. The current environment is very tense. Are you on the lookout for M&A opportunities as of 2021, and in what kind of segment? Or do you think that with your 3 brands of Fnac, Darty and Nature & Découvertes you're already in an optimal situation for your brand portfolio?

Thank you very much for the question. Now air conditioning, first of all, it's true. Last year, it was very hot in June. This year, it was hot in May. I can't foretell the future, but it's possible to get really hot in July again. I believe that climate change continues. There are going to be heat waves during the summertimes. Anyway, in May, we did well with this. And we know that, next week, it's expected to be hotter in France. And now on to rent, yes, we're working hard on rent considerations and operations generally. It's a long-lasting drop in business, clearly that would lead to having to economize on stores and adjusting rent. There would be more and more vacancies in shopping malls and so forth. That would lead to natural market adjustment. All this is going to hinge very much on long-term sales performance. We're currently renegotiating some extraordinary terms and very specific terms, things being done in terms of rent and duration. We're discussing this with the property owners. They need us just as much as we need them. Now M&A, mergers and acquisitions. We're being very cautious. And there is difficulty in many sectors amongst some competitors. Some will have to restructure, but it's not our calling to try to gather up and collect lots of different brands. We have done what we intended to do, starting in 2019. We're now really consolidating our existing brands. We want to look out, but we're cautious, as we should be.

[Operator Instructions] We're now going to hear from Florent Tine from Midcap Partners.

Three questions from me. Firstly, performance of Nature & Découvertes, could you give us some information on that? Are they performing similarly, particularly regarding their online stores? Next, on to the state-guaranteed loan, where does that stand? Lastly, are you seeing any competitive pressure, any downward price pressure from the competition? Or any specific online marketing going on?

Nature & Découvertes, they're performing similarly to the rest of our brands, uptick in online, slightly lower due to product mix. Product families that did very well during lockdown had to deal with working-from-home, home products and so forth. Nature & Découvertes is a little bit less active in those product categories, but the trend was good, not quite as much skyrocketing in sales as for other brands. After store reopening, they are performing very well. Things are normalizing. In June, things are looking good. Regarding the competition, nothing in particular. Everybody's operational costs are probably slightly up due to systems and logistics and having to buy masks, face masks, and hand sanitizers and ensure social distancing and so forth, that's impacting everyone. It's leading to slightly increased operational costs for all the market players. This is why we'd say today there is not real significant competitive pressure, price pressure, on these product categories. Things could change, but for the time being now, it's pretty calm out there. Now the state-guaranteed loan, yes, to answer that one. This state loan was due to liquidity shock, you'll remember, in WCR. It was to cover for that eventuality. In fact, if you look at activity, which held up better than expected and our financial management has been very stringent, so we did not need the guaranteed loan at all during the crisis period. We didn't draw on one single bit of it so far. Do remember, though, the state-guaranteed loan is a several-year loan. Here it's 12 months. We've already paid interest, costing 50 basis points first year. We've already paid some of this. So at any rate, keeping on the balance sheet up until 2021. We will keep it on the balance sheet. We've already paid the financial expenses. There's no extra cost in keeping it on the balance sheet. The question is do we maintain it after 2021 or not? Time will tell. We'll see if we'll keep some or all of the state-guaranteed loan at that point. We're certainly pleased to have gotten to taking it out. We will talk next year, though, to see whether or not we keep this extra liquidity.

A follow-up question. Have you seen the effect of the closure of Amazon's warehouses? Some surveys, which show that you may have gained market share during that time. Is that what happened? And is that reflected in your overall business activity?

A couple things. First of all, Amazon stopped sending books for several weeks, and other majors continued delivering books. And really Fnac, only Fnac, kept delivering books in a very big way, so we certainly felt the impact of this. Now the time when Amazon shut down its warehouses, actually they were using -- they just used other European warehouses at the time, so I'm not sure there was a major impact when they closed their French warehouses. Anyways, it didn't impact our specific product categories. There was good availability of products at Amazon France during the period. I haven't seen any real impact on French revenues.

The next question is from Levy, Steve from MainFirst.

A lot of my questions have already been answered, but I have a question on your suppliers. Have you seen them wanting to sell more inventory? Has this improved price negotiations? Any pluses for you in this area? Are you considering organizing more promotions and sales in the next few months? Thanks to these specializations of suppliers?

During the entire crisis, we kept up very direct communications with our main suppliers to help them understand the [indiscernible] and understand our forecasts and what our forecasts were so that they could focus on product production. I'm very pleased at how good the cooperation was with suppliers during the period, with all the major French cooperations and international supplier cooperations. We've really worked as partners hand in hand. We're not seeing strong pressure to take onboard inventory today. We're focusing on customer needs, and we're making use of our resources and supplier resources. The suppliers also have to contend with a major shock and had to -- they had to restructure much of their production facilities. Now to sales and promotions, it's probably a good opportunity to focus on high-added-value products and sell products at the right price, the correct price and ensure good category profitability. As Jean-Brieuc said, during the -- we saw negative [ deformation ] of the mix during the lockdown. Categories, they tend to have lower margins for more dynamic on some other products. So we need to be very comprehensive in our approach and really focus on all categories, services and accessories and make sure that margin rates continue to be good. And of course, we will do a good French Days campaign. We'll support brands. We've done good sales and promotions for our customers and will continue to do so, but remember all of us are having to be careful to reestablish our profitability levels. We'll see the momentum in upcoming weeks and months, and we're going to make sure we maintain margins.

Have you delayed any product launches?

Especially books that have been slated for coming out in the summertime are being delayed slightly. Some of them are. Major brands like Apple have not stopped their lineup of launches, iPad Pro, even an iPhone coming out during the period, also a MacBook. These have already been slated, and they continue to and did roll these out. Really in the movie industry we've seen some delays. The blockbusters that have been scheduled to come out or -- sometime near the summertime will be coming out later, which means they'll be coming -- working from the pipeline further on in the year. Performances, live performances, live entertainment, there, various concerts and shows and tours have been canceled. Those are different business areas that were more impacted, but all in all, we say that there will be a lot of further product launches towards the end of the year. So there's new consoles are being launched that's confirmed. So things are looking good. Good outlook for the end of the year when it comes to product launches. Maybe we'll field one last question.

All right. One last question from Ms. Maricel (sic) [ Marie-Line Fort ], Societe Generale.

Two quick questions. Are you seeing a resumption in selling services since the reopening of stores? Second question, mobility products, are they having a positive impact on your gross margin and a positive mix effect as well?

Thank you. On services, well, yes, of course. As soon as the stores were open, we're back to normal in normal operations. So services back in the picture and resuming their position, so the answer is yes on the whole. Mobility products, this is a very important category of products for us. We're really at the very beginnings of a new mobility era. We were already leading the pack on electric scooters, and we've broadened our range with power-assisted bikes. And we'll soon be bringing out actual scooter bikes. On margin, well, it's much too early to say anything, but we are sort of setting up the whole ecosystem with products, accessories and services. And I hope this will have a impact on volume, margin and the like, but this is only -- it's still early days. But do go in our stores this week, you'll see what's happening. I think this is really a great opportunity for the group to branch out into these new product categories. Thank you very much. Thank you, everyone, for your questions. I don't know if there were further questions that some people would have wanted to ask. Anyway, we wanted to take the floor and address you. We felt that waiting until late July was a bit too long. We felt that it was important to take stock now. On the whole, we are very pleased with the way we've managed the various phases of this period, which was a real challenge for all of us. I'd like to pay tribute to our staff and all the teams, who've really taken up this challenge. We will go on managing and taking up the situation, whatever the situation is. Thank you.

Thank you very much for attending this conference. You may hang up now. The organizers will please remain connected. [Statements in English on this transcript were spoken by an interpreter present on the live call.]