Fnac Darty SA (FNAC) Earnings Call Transcript & Summary

Ladies and gentlemen, hello, and welcome to the presentation of the results for Q3 for Fnac Darty. My name is Val, and I will be your coordinator for today's event. Please note that this conference is being recorded. [Operator Instructions] I would like to give the floor to Mr. Enrique Martinez, CEO, for the rest of the conference.

Thank you very much, and good evening, everyone. Thank you for being with us live. We're going to be sharing with you our Q3 revenue. I'm with my colleague, Stéphanie Laval, who just joined us as the Head of Investor Relations for the group. I'd like to wish her a warm welcome. Before I give the floor to Jean-Brieuc to get into the regional performance and to answer your questions, I would like to give you some of the key highlights so that you can understand our performance over Q3. First of all, this quarter, we operated at sufficient levels given the current public health crisis. Despite the ongoing public health crisis, we have been able to maintain retail and services to help our clients in this period of upheaval. We remain fully on board to manage this crisis as we have shown ourselves capable of since March. Our teams and our clients are our priority during this period. We have reorganized to this end to better support our staff, and we have implemented a number of measures to face the challenges brought about by the current context. We are satisfied with our current operation, especially in its digital components, services and retail with the commitment from our teams. More concretely, I would like to underline that today, we are presenting a solid growth of our revenue with plus 7.3% like-for-like for the quarter. This is driven by retail performance and also our online performance, which is up 30%. We're continuing to gain online market share. And Click & Collect was very popular this quarter, with the Click & Collect share up this quarter group-wide. This shows the relevance of our omnichannel approach and the e-commerce platforms. Unfortunately, we are still seeing a delta between the Northern Europe sectors and the Southern European sectors. We've seen strong growth in France and Belgium. However, Iberian Peninsula is still sluggish with less growth and is being driven down by restriction measures that keep people out of retail space. And unfortunately, this has been damaging for Fnac. We were not able to offset the loss of foot traffic. The performance for this quarter has enabled us to limit the drop in revenue to less than EUR 5 million dated end of September, a drop of 4% for our turnover like-for-like over the 9 first months of the year. Despite these issues, we have continued our strategic rollout and our innovations, striving towards our goals with the launch of our new flat Fnac plus card. This card will enable us to increase the number of loyalty subscribers and to cross-fertilize between Fnac and Darty. We have more than 9 million subscribers, 7 million of whom are in France. We have also strengthened our partnership network with our Swiss partners. We will be deploying 4 test shops in our premium spaces in Switzerland. These partnerships could be rolled out further in the spring 2021, which would enable the group to significantly strengthen our position on the Swiss market and continue to develop our Click & Collect offering. This quarter, we have also announced that we have entered exclusive negotiations with Mirage Retail Group for management of our -- of 5% of our Netherland's business. In January 2020, we announced that we were looking for a partner to this end. And this once again shows the speed of execution that we can have. They have excellent experience in business management in the Netherlands and should help us fully seize opportunities in that market. And finally, we have continued supporting our clients and informing their purchase decisions. We launched our third version of the After-Sales Barometer to better inform our clients about the lifespan of their product. And furthermore, we have broadened our range of products available in our Darty stores and have strengthened our position on the leasing market, which is a strong growth market by opening the Darty leasing offering to all of our white goods at Darty. We also have new Darty Max clients this quarter, which is our repair service. We strongly believe in the subscription model, and it has become a go-to service for us. That said, I would like to give the floor to Jean-Brieuc to run down the performance. And then we'll be here together to answer your questions after that.

Thank you, Enrique. Good evening, everyone. First of all, group-level quarterly sales saw good momentum, up 8.5%, up 7.3% like-for-like. In an unusual environment due to unprecedented situation, revenue at EUR 1.859 billion, around EUR 12 million relating to Nature & Découvertes integration. I'd remind you that we have integrated them since 1 August '19. We're adding July to have like-for-like. During the quarter, July was somewhat hit by a shift in the sales season versus previous year. August-September saw renewed back-to-school purchases and good sales momentum. Category performance. White goods saw good momentum for large and small appliances. And the heat wave also had an impact. The group continued increasing market share in the area of large appliances. Now consumer electronics continues to see growth due to remote work. And also, telephones and television saw growth down somewhat. And photography, for structural reasons, saw a drop due to reduced travel during the health crisis. In addition, editorial books up, thanks to Click & Collect in all our stores. Audio and video continue seeing flat growth. Online games, somewhat problematic due to some releases [ we did ] last September. We saw strong growth elsewhere in games and toys, design, and we saw continued kitchen sales. We see some growth in the quarter. We saw gradual normalization of sales, services in stores and continued winning over new customers through Darty Max. Henceforth, it's possible to take out this product offering via the internet. Ticket sales though, still hard hit by the health crisis. Price activities continue to be down into the second half of '21. Now let's talk about omnichannel growth, which continues. We saw strong growth here, around 30%, representing over 21% of total group sales in Q3 versus 18% online sales during the same period last year. We see good momentum, new web clients during the quarter. Omnichannel reaching 40% of online sales during September. 50% online sales in Q3 alone, up around 1 point compared to Q3 of 2019. And again, the context has been a drop in store footfall. And we have full alignment on our omnichannel strategy. We see good quarterly growth in all geographies. In line with our omnichannel strategy, we've continued our expansion in the quarter. We saw store openings wholly owned as most franchises. Franchises saw good performance since the end of lockdown. The group will continue store openings selectively in Q4, mainly in that format. Integration of WeFix continued in the quarter, opening 6 new corners, total point-of-sale at 106 as of the end of September. Lastly, Kitchen offering, good momentum, strong development with new external franchise holders, 7 additional points of sales in the quarter, total points of sales of some 125 as of September. Now to talk about regional sales in Q3. As we already said, we saw strong growth, up 10.1% cumulative plus-9% like-for-like driven by online sales to around 30% and a resumption of in-store sales. Important to realize, in-store traffic is still down in large shopping malls, and this continued working from home. Conversion rates are generally up, consumers still determined to make purchases. Consumption pattern, Banque de France published figures recently. White goods saw strong growth in almost all segments, large and small appliances. Performance of Technical products continues to be good driven by televisions, telephones and remote working items, whereas photography and sound are down. Furthermore, the quarter saw good resumption in bookselling driven by the Internet. Diversification saw strong growth due to urban mobility, toys, design, kitchens and so forth. Nature & Découvertes saw good online sales and good performance in books and decoration. Lastly, services sales saw slight quarterly growth boosted by more store footfall. But there was quite a decline in ticket sales. Now to the Iberian Peninsula. Q3 sales down 3.7% published and 6.1% on a like-for-like. In spite of strong growth in online sales, and consumers are very much -- highly interested in Click & Collect, but they're highly exposed to intercity stores, many of which were closed for health reasons in Q3. For instance, in the last week of September, we saw a drop in tourism and in-store sales. We saw local lockdowns and restrictions, particularly in Madrid and Barcelona, that impacted Spain, which did see increased sales in TVs and IT. Portugal hard hit by restrictions enacted in the various cities such as Lisbon, having an impact on shopping centers' footfall. Belgium-Luxembourg see an increase in sales by 7.9% as reported and up 6.6% like-for-like driven mainly by continued growth in online sales. Good momentum in appliances, even though there's still substantial competition in the segment. Now let's talk about the change in gross margin. Q3 gross margin rate down minus 50 basis points versus last year. This drop is mainly due to the negative effect due to a drop in ticket sales, 2/3 of the impact. And dilution, due to the strong growth in franchise business, that's about 1/3 of the impact. Product services mix slightly negative, offset by positive impact by the Nature & Découvertes integration in July. Furthermore, I may have a question on renegotiating rent with landlords. These continue, and they're interesting and material. We will disclose actual figures when we give the annual results. I'll hand it back over to Enrique, who will talk briefly about the outlook.

Thank you very much. I hope that you've gathered from that, that we do have strong dynamics and put in a solid quarter. We're quite happy with that. And I'd like to commend all of our teams and everyone who trusted us over this time. Generally, Q4 is very important for business and it's upcoming, so we need to remain vigilant going forward. Of course, there will be digital and logistics issues, but I believe that we are set up to cautiously be able to be confident in the quarter to meet the needs of our customers. Cash flow, costs and investments will remain a priority for us. We remain concentrated on our operational and sales performance, and we'll continue to launch new exclusive products between now and the end of the year. As you know, we have important launches in phones and computers starting from Friday. That will be the launch of the new iPhone. And all of this should enable us to explore new heights of growth. And then we have the strong business periods of Black Friday. We have good relationships with our suppliers and the entire ecosystem, which should enable us to solidify our position as market leaders. Furthermore, to prepare for the upcoming months, we will be 100% digital for our annual retail conversion. I would like to congratulate the teams for the results they've shown, but we want to go above and beyond, and retail teams and our sales teams will be able to come together around these innovative products and services. A number of our suppliers have also signed up to our pact, and we are going to need all of our energy going into the end-of-year period. So there you go in a nutshell, what we had for you this evening. Mr. Brieuc and myself are available to answer any of your questions now.

[Operator Instructions] Our first question is from Kepler.

I have 2 questions. The first question, I know that we're always asking for more, but could we maybe get more information on the October trends? Are we looking at a continuation of September? Is the French curfew likely to affect business? Could maybe you reassure us about October and show us that it's in line with the trends? Secondly, my question on ticketing. I imagine that ticketing has been down since the beginning of the year. You've only just brought it up now and its impact on gross margins. Why did you decide to bring it up now? And is it simply to temper expectations for the entire year for 2020?

Thank you, Aurélie. I can answer your first question. October has just started, and October is significant for the quarter, so we will refrain from comment for the time being. As you know, the quarter really plays out from the 15th of November onwards. So for the time being, I would like to not feed speculation about the quarter. We have fully prepared for this quarter with all of the measures at our disposal. However, the public health situation remains uncertain in every country. So I would like to refrain from informing you on guidance for Q4 at this time. On ticketing, the ticketing situation has, of course, been difficult for a while. The drop in margins has been there since the beginning of the lockdown, a little bit less visible at the very beginning because it was drowned by other margin-drop effects. But ticketing was one of the effects that we felt at the beginning of the year. As you've seen, we have been able to rectify the trends for margins. We've just maintained our legacy business for ticketing. And for the time being, we can't really talk about this quarter. We would, however, like to signal that ticketing business is likely to be difficult all the way into the second quarter of 2021.

Next question from Clement Genelot.

Two questions. What are your figures on consumption from July to September? Do you believe that households have been reallocating funds away from travel towards their home? Or do you believe that people are already prepurchasing for the Christmas period? And my second question is on Q4. What is your opinion on Amazon's new tactic to implement sales outside of Black Friday throughout October? Do you feel that Amazon is disrupting the sales pattern of the fourth quarter.

Okay. Thank you for that question. On the first one, we have not done any in-depth study on purchasing behavior, but I do not believe people are already purchasing for Christmas before time. As you just heard, a lot of our sales are coming from categories where people typically purchase for themselves, television for themselves, or computer for themselves for remote working, white goods, et cetera. These are the things that people buy for their own use rather than seizing sales opportunities to buy for Christmas. I think people are catching up on purchases that they didn't make during the lockdown. And I think people are also looking to invest in their homes. They're spending more time at home. They're spending less money going out to restaurants, for example. So they're investing in the tools they have at their disposal at home as we've seen in our figures. So yes, I think that the purchases have been seen throughout that period, but it's mainly for self-use. On the topic of sales, as we have seen, it's been an atypical year especially for players such as us. We're not seeing any promotional pressure this year. The changes in date for the sales have changed our outlook maybe a little bit, but we're not feeling any particular heat from competition. And on the topic of Amazon that you mentioned, I think that customers are smart enough to see that maybe jumping on an early sale is not the best idea, and maybe it's a way to get some purchases out of the way before Black Friday. People have been trying to set up sales in July, and people have never really bought into it.

But Black Friday, its impact. Well, we can say that there isn't growing sales in Black Friday in the last 5 years. We've got to also consider this in terms of digital. Black Friday is a promotion that began online and then spread to brick-and-mortar stores, but it's still got a real digital presence. You've got more and more customers who are active on the digital platforms, darty.com, and that's broadened the base for Black Friday. But I'm cautious to the degree that the overall context is highly unusual in this epidemic, which is having an impact.

[Operator Instructions] A participant has recorded their question. Please wait a moment. Thank you for waiting. Next question in the line.

I had a question. Could you tell us about cash generation in Q3? And the second question, are you expecting -- do you have a plan if there's a second lockdown in upcoming weeks? Would you be more prepared than previous weeks? In terms of base effect in the various scenarios you have, are you expecting negative growth even if there's a renewed lockdown? Last year, there were labor movements that cost some EUR 70 million in revenue, so I was wondering what your thinking is in terms of these various scenarios.

Well, as in March, during lockdown, in a few hours' time we shut our stores, shifted 100% to digital. If we have to do it again, we would. We certainly hope we won't have to. But if we had to, regionally or for the whole country in any country, we're certainly prepared to shift as we did previously, just as we were prepared to do so and undo things and reopen stores. We were able to do this on the appropriate schedule as the lockdowns were eased. So certainly, operationally, we're ready for any and all scenario. In terms of projections, base effects and so forth, I won't comment on the Q4 projections. I can just say that last year, we did see some labor movements that impacted France, especially Paris. We have a stable situation. In a normal situation, I would say to you, you're right, the impact of the epidemic may be this, may be that, but I'd like to not give specifics on them. Now on to cash, Jean-Brieuc.

We never comment on cash flow during the year. What we can say, since April, we didn't use the guaranteed loan facility.

Next question [indiscernible].

I was wondering could you talk about new web customers? You gained over 1 million during lockdown. And if I recall right, this was the momentum in the previous quarter. Is this continuing at the same pace in Q3? Or was there a slowdown in new web customers? Thirdly, online sales, still driven by new customers or are online sales mainly to existing previous new customers?

Thank you for the question. Yes, we still got very good momentum in terms of gaining new web customers, going well beyond figures pre-lockdown. We'll wait until the end of the year to give specific figure on this. But we can say the overall momentum is very good in terms of new online customers. Growth, 30% digital business partially through -- thanks to the new customers, so just largely thanks to new customers. But we're also talking about loyal customers, also many in-store sales, there's a blend of in-store and web sales to existing customers. All this has boosted online sales further.

Our next question is from Geoffroy Michalet from ODDO BHF.

I've got 2. Firstly, on gross margin. I'm wondering, could you quantify the scale of the impact of Nature & Découvertes on your gross margin, on your products and services? Next question, OpEx. I know that you don't give specific figures. But qualitatively speaking, can we say that considering the strong resumption in Q3, have you adjusted your initial plan of adjusting this to use some leverage? Might there be a readjustment?

As you said yourself, we don't give guidance on OpEx. Let me just say that much of it -- much of the OpEx is variable OpEx. In other words, when you've got a growing business, lines of OpEx grow. Sometimes they're just upward. Some cost, operating cost, logistics, deliveries and so forth grow at the top line growth. We've got a quarterly OpEx plan, which we adjusted to business levels. I won't give specific figures. But I can say we're satisfied that we managed in the quarter and overall economic performance. Gross margin for Nature & Découvertes, we don't give specifics there, probably not really material. The impact much more similar to the franchise effect.

The next question, Marie-Line Fort from Societe Generale.

Could you please tell me, after negotiations with Mirage Group, can we expect new provisions on sale of the subsidiary, BCC? Another question, where do you stand in terms of your dispute with franchise holders?

On to your first question, if you look at the financials as of 30th of June, you can see we still had a net asset of EUR 38 million in our financials. Some of it was booked. There's probably an equivalent amount not as a provision but as an impairment under IFRS 5 in the financials. No cash effect. No impact on net income, nor earnings.

So regarding the franchisees, we are delighted to see the business for the franchise holders is very dynamic at the moment, especially in France. All of these stores are operational and they have been putting in growth above that of the integrated retail space. I hope that we can find an agreement quickly, so we can turn the page on all of this. To move on from the last month, the relationships are good, that's the important thing, and we're working on an agreement. We haven't found the agreement yet, but I hope we will soon.

We now have a question from the webcast. Three questions from Mr. [ Pierre Dene ]. The first question, is it possible to have a reminder of online sales for Q3 and last 9 months?

That is plus 30%. Overall, plus 7%. Because online sales were up 30%. Does that answer your question?

Second question, ticketing, the share of ticketing.

That was included in services. It was a small part of the services business for the group. Nowadays, it's an even smaller part of services because as we discussed, it's been heavily driven down. I think it was about 10% of the overall and an even smaller part of services. So it doesn't have a significant impact on our margin rate because we mainly look at margin rate rather than revenue. That's exactly it. As a follow-up, we look at the profit made on each ticket rather than the face value of each ticket, which is, therefore, much lower. Therefore, the margin rate for the ticketing business is quite high.

Third question. Amazon's Prime Day being shifted to October, did that drive down your online sales? And did it affect your website traffic over that period?

We're not commenting on the October Prime Day. I'm sorry, we'll get back to it at the beginning of next year is the answer. Sorry, that may have been a little bit on the nose, but we've said we're not commenting. We won't comment until we announce the annual results.

We now have questions from the English line, and we have a question from the English webcast. The question is, can you talk about market share and how your long-established Click & Collect infrastructure positions you versus both Adam Crocker, Amazon and also the smaller brick-and-mortar place? Does this online/offline flexibility amid the virus improve your relative long-term positioning? And that question comes from Adam Crocker.

Okay. We don't have anything for you on market share. I think if you look at the Banque de France data that was published and our own figures, I think you can see that the changes are pretty evident. That's all we're saying for the time being. As to Click & Collect, I'm not sure I fully understood the question because we're being compared to Amazon here that doesn't use Click & Collect. I assume the question is whether we have pushed Click & Collect to face Amazon's model with a different model. The answer would be, yes, with an increase in activity. And that's one of the strengths of our sales model, in fact, the combination of brick-and-mortar and online. We're seeing a strong uptick Click & Collect for our cultural offering with items such as books being opened up to Click & Collect, which has helped the stores get part of the revenue being siphoned through the online platform. If I haven't fully answered your question, feel free to ask a follow-up.

We have no further questions on the webcast or the audio line. Therefore, I would like to give the floor back to our hosts to wrap up.

Okay. I hope we answered your questions. In any case, we would like to thank you for your attention and your virtual attendance, and we will see you in February for the annual results. In the meantime, stay healthy, keep the virus away and have a good evening. Thank you.

Thank you for your participation in tonight's conference. You can now hang up. [Statements in English on this transcript were spoken by an interpreter present on the live call.]