Fnac Darty SA (FNAC) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to the Fnac Darty Q1 Revenue Call 2022. I'm Benoit, I'll be your coordinator for today's event. [Operator Instructions] I'd like to give the floor to Mr. Jean-Brieuc Le Tinier, CFO of the group, to begin today's call. Thank you.

Hello. Good afternoon, everyone. Thank you for taking part in our Q1 revenue call. As usual, our press release as well as our presentation, which we're going to comment on during this call, are already available on our website. The Investor Relations team is at my side with Stephanie and Marina. First of all, I'd like to give you an overview of the group's performance in the first 3 months of the year. After that, we'll be happy to field any questions you may have. We'll begin the presentation by talking to you about the main achievements in Q1. Firstly, Fnac Darty held up very well in Q1 in terms of sales, only slightly down by minus 2.5% like-for-like in spite of a very high comparison basis because we booked growth in sales of plus 21.7% in Q1 2021 compared to 2019 pro forma, the group is still seeing strong growth in sales, up 7.8%. According to the most recent figures by the Bank of France 2 days ago, the group has continued to outperform the French market in the first quarter of 2022. Secondly, this performance is a result of strong growth in in-store sales in the context when all stores were opened during the quarter and online sales continue to be buoyant, making 23% of group sales. I remind you, in Q1, level of online sales is still lower than annual percentage due to the seasonal nature of our business. Furthermore, Click & Collect, which is key to our omnichannel business model, still makes up over 1 online sale out of 2, which is 47% of online sales in Q1 2022, up 6 points over a 1-year period. Thirdly, the group managed to achieve its quarterly growth margin growing more than 40 basis points compared to Q1 2021, driven inter alia by the positive contribution from services and continuation of the rollout of Darty Max as well as the resumption in ticketing business. There's no significant impact from the franchise on the gross margin this quarter because business level has come back to a more usual level. Lastly, we signed 2 major strategic partnerships this quarter in the area of digital and data, firstly with Google and secondly regarding repairs with Apple. These are 2 major pillars in our Everyday strategy plan, which I'll come back to in a few moments. Before delving into detail regarding our performance, I'd like to recall to you that we paid a onetime cost of living bonus to our employees who are the hardest hit by the current inflationary context. This means over 19,000 employees, which is approximately 80% of group employees [indiscernible] in France. This bonus was EUR 400 for an employee who receives gross annual salary below EUR 35,000. All in all, impact on our current operating income this year will be above EUR 6 million. Furthermore, the ratings agencies, Standard & Poor's and Scope recently upgraded by 1 notch our rating, it's BB+ and BBB, respectively, outlook stable. We're highly satisfied with these upgrades, which underscore the sound financial management of Fnac Darty in the context of this crisis. Now to go into detail, talking to you about our sales performance in this group region to region. This is Slide 3. The France/Switzerland region is showing good resistance, like-for-like minus 2.8%. This is thanks to good in-sale stores. Online sales are normalizing. Most stores opened in the first quarter. In this geography, the group continued opening new stores in Q1, 9 new points of sale, including 7 franchises. Furthermore, in Switzerland, we're rolling out our partnership with Manor, continuing this in accordance with our plan. Additional opening of 7 shops-in-shops Fnac within Manor's established in German-speaking Switzerland. As of end of March, we have 20 shop-in-shop Fnac in Manor, still targeting 27 shop-in-shops by the summertime. In other geographies, sales are up in the Iberian Peninsula, up 7.4%, demonstrating continued gradual recovery in the geography, which have been harder hit by the health crisis. Lastly, the area Belgium/Luxembourg, down minus 8.6% like-for-like, impacted by a high basis for comparison as well as flat consumption levels and particularly high inflation. Let's talk about performance by category. Household appliances down this quarter, mainly due to a drop in volumes in the market, as foreseen by most recent Bank of France figures, and also a strong comparison base. Large appliances are up. Technical products, good momentum in telephones, audio, photo, more than offsetting the drop in some categories that had been required previously for remote working and learning from home in conjunction with the health crisis. Publishing products growing strongly due to renewed in-store traffic and very good online book sales, driven by the culture pass in France, which is extended to middle schoolers as well as people's interest in comic books and mangas. Audio and video and also vinyl records performing well. Gaming slightly down due to stock shortages of the most recent console generations. Lastly, services continue to grow in all regions inter alia with the continued rollout of Darty Max. Good momentum in credit and also an encouraging recovery in ticketing, thanks to good programming and an easing of health constraints during the quarter. Now on to Slide 4 to talk about our 2 key partnerships which we signed during the quarter. Firstly, the group signed a partnership with Google. It's a partnership on cloud and data to improve relevance of our search tools and always provide extra services to our clients. Fnac Darty is the first retailer in France to roll out the Google Cloud Retail search on its fnac.com and darty.com sites to improve the performance of our search engines. We're going to be establishing new performance standards in terms of customer experience online and on mobile devices to reach our objective of 30% online sales by 2025. Thanks to the partnership, we'll also be able at Fnac Darty to improve the coordination of our activities as well as promotions and better prioritize our after-sales service interventions, thanks to inclusion of data processing and analytical tools, machine learning and artificial intelligence. At the same time, we signed a partnership which is highly innovative with Apple to strengthen our group's position, which has been held several years, in the area of repair and extension of product lifespan. Through this partnership, we're talking about having 42 WeFix points of service, which will be included in the Apple approved network. We're also going to have the training sessions for 500 employees to repair Apple equipment. Lastly, AppleCare services will be in addition to our current online mobile insurance products. This strengthens our long-term relationship between Fnac Darty and Apple, showing our commitment to product sustainability and repair. 2.1 million in-repairs in 2021 already. The group has an ambition of reaching 2.5 million in repaired products by 2025. To wrap up, moving on to Slide 5. Fnac Darty has continued to outperform markets and has managed to ensure that its quarterly gross margin rates have been kept at regular levels and has also been able to stave off rampant inflation and a reclining household confidence index. While we pay close attention what is happening between Russia and Ukraine in terms of the impact on visibility for markets over the coming months, I would like to remind everyone that the group has no sites directly in the conflict area and has no direct impact on its supply chains. For the rest of the year, Fnac Darty remains confident in its ability to continue to outperform the market as has already been shown in this first quarter. In particular, thanks to its large product line of products and services because it can give clients exactly what they need and also because of the high premium-type categories that will able to shore up its position. Moreover, the group is focusing its efforts to optimize the impact on its gross margin. That is the key priority. It will rely on being able to offset price increases, in particular, through focusing on benefits that it will gain from its premium lines and renewing product lines. We will continue cost-management measures, which will help us ensure strong performance to be able to stave off inflation. At the same time, we'll continue to implement our efforts so that we can achieve cumulative free cash flow from operations of approximately EUR 500 million over 2021 to 2023 and free cash flow from operations of at least EUR 240 million from EUR 200 million 2025. A few quick points on Slide 6. Just to remind you all that the General Assembly will be held on the 18th of May in Paris. And we will -- as you will see in the press release, said that there is an increase of 13% of share take from Vesa Equity Investment this month, which will make it our second largest shareholder. That said, Vesa is not going to call for a nomination of a number of members -- its members to the Board. And during the general assembly, we will make this adjustment to renew 3 independent Board members and the nomination of a new independent administrator, [ Stefanie Meyer ], former VP of Projects for the group at [indiscernible]. This will increase the expected range of our Board. I'd like to thank you all, and now I'll open up the floor to questions.

[Operator Instructions] The first question comes from Clement Genelot from Bryan Garnier & Co.

I have 3 questions. First, about inflation. Are you going to see a drop in ranges? Are you going to focus more on proprietary brands, for example with entry-level prices? My second question is on the margin outlook. Are we going to see gross margins improve again at the same pace as we've already been seeing over Q1, given ticketing and other services are going to pick up again and also given that there is an uptick from Nature & Découvertes? Now everything that you've been able to put in place for 2022, is it going to offset OpEx inflation? Or is it going to impact a bit for this year? Or are we going to see recovery that isn't going to be as good for the gross margin? The third question, the partnership for ticketing for the 2024 Olympic Games. Are we going to see double-digit million euro investment? And for France Billet, is their contribution also going to apply or -- would just like a bit more color on that.

For the first question on inflation and the feedback we're getting from customers. Well, we aren't really seeing an impact on our product ranges. Maybe it's a little too soon. But for the time being, we haven't seen a change. Really, the changes we're seeing are more on long-term investment products. So here, high products such as white goods with a high -- that come at a high price. So they're long-term investments for households. And for these sorts of products, people are looking for long-term investment. And -- I mean, the question you asked, we aren't really seeing an impact for the time being. That's for the first question. Second question on gross margin. We have no visibility for markets, as we mentioned in our -- in the previous presentation. But what we do know is that our gross margin is nevertheless one of the levers that we could use to have an impact. So we're going to focus on ticketing. We're going to Nature & Découvertes. And obviously, it implies that we need to have a capacity to offset the impact that our customers are going to feel. And this is going to be the main focus of our efforts throughout 2022. Moving on to the next question. As you know, historically speaking, we've always been able to remain a constant scope zero impact. So this year, we see inflation is on the rise. And according to our current figures, we should be able to maintain that cost management. But remember, costs account for about 23% of our top line. So we also need to bear that in mind when taking into account the margins and the 25% elsewhere that we're looking at it. Second, we aren't giving guidance -- yearly guidance from timing. We're just trying to give you a bit more understanding. So really, we don't give gross margin guidance in terms of -- in euros, nor for EBIT. But that said, we do have levers and actionable schemes that we can put in place to ensure that we maintain the right capacity that we can keep inflation in check so that doesn't negatively impact either us or our customers. Next question, just on the partnership. We're quite happy with the current partnership. We're quite happy that we won the tender for Paris 2024 ticketing services. As was said in the press release, that will generate midterm revenue, but it's really quite a good omen for the coming years.

And just quickly, the margins that you're expecting to see is it going to bring additional business. Is it going to be similar to current ticketing activities? Or is it a bit different because it's quite a major partnership? What margins are you looking for there?

Well, obviously, we're still negotiating commissions on that, and it's highly confidential for the time being. So we aren't going to be able to give away too much detail there.

Next question, Marie-Line Fort from Societe Generale.

I would just like to talk about the drop in sales of white goods for the first quarter. Is this a baseline effect? Or is this because the market is oversaturated? Given that past 18 months has been going through quite a level of upheaval. Because obviously, these items are the sort of items that are fantastic for gross margins. So that's the first question. Second question on ticketing. What impact are you seeing given the fact that there was the Omicron variant that had an impact on venues being shut down? So just like a bit of color on that. And then on -- a quick question about advertising because shops were open somewhat in the first quarter. So how are clients perceiving a lot of the advertising that you're doing on current services? And the other question I would like to ask about is about the strategic plan. Some people are saying that it's about high time to see one. Could you tell us a bit more about that?

Okay. For the first point. Yes, the white goods market over the quarter was somewhat down, but that really is a baseline effect. When we look at the past 2 years, it has been really doing quite well. I mean it's always challenging for us to look at performance over 1 year or 2 years. Really, when we look at the proper year, 2019, the year that we can probably compare ourselves against, we're doing quite well. Ticketing. Ticketing was mainly impacted just for January. February, March, however, we saw quite strong business in terms of ticketing. Darty Max. So Darty Max, that's obviously what we're talking about, asking about the different advertising about that. And really, it is -- we're perfectly in line with what we forecast as part of that. And just quickly about Nature & Découvertes. So 2019 is when it all started. However, those shops were hard hit because of the COVID crisis. Both 2020 and last year, a lot of our shops were closed down. Now 2022 is more or less a normal year in terms of shop openings, but still a little early to say what it's like so far, but we will have more insight when we get to sit down with the General Manager of Nature & Découvertes. But we certainly hope to be able to open up new shops in new zones such as Portugal, the overseas territories. And we are continuing to roll out that new shop plan that we have.

Next question is from Geoffroy Michalet from ODDO BHF.

I just have 2 questions. Could you just quickly tell us a bit about stock shortages for the main categories? And second question about stock and inflation. How do you see the impact over the coming year from inflation on stock levels? And maybe some of this is all going to have a negative impact on your WCR.

Okay. Just quickly on stock shortages. Well, we aren't out of stock for a lot of items. Well, yes, there are challenges in supply lines, a lot of these date back to pre-COVID, so in 2019. The group's relationship with our suppliers is to be agile and to be able to absorb certain risks. That's why we may have difficulty with supply lines, but we do our best to avoid having -- or running out of stock in our shops. We're currently increasing stock levels. Now the reason we're doing that isn't because of inflation. We're not trying to make a bet on the future prices because that doesn't always pay off, but simply because of COVID, the number of factories have had to [ close down, Shanghai ] and other areas, factories are closing down. So in order to plan ahead for future factory closures, we are making -- we're increasing stock levels because of that. Because we may see greater shortages in the supply lines as to what we've seen over the past few years. That's why we're just increasing our reserves. I hope that answers your question.

No Further questions in our queue. [Operator Instructions] We have a question now from Ms. Fabienne Caron from Kepler Cheuvreux.

Yes, from Kepler Cheuvreux. Two brief questions. Could you talk to us about average inflation you're seeing for white goods? Next, why is it in Belgium the consumption pattern in the context is so difficult? From memory, yes, we noted inflation, but there's still automatic wage inflation in Belgium as well. It's hard to understand why consumption is such an issue in Belgium. Could you help us out?

Yes, of course. On inflation, white goods particularly, we signed contracts end of February as per the law. And this part due to inflation part through negotiation, but I'm not going to delve into detail on industrial secrets. We have our sales agreements. We may talk about this later on in the year.

Yes, just a follow-up. Were we talking about mid-single digit or mid-double digit? Could you give that type of comment?

No, I cannot. Now I can't even give that to you, Fabienne. It was a good try, but I can't give you that. I can't disclose that.

What about Belgium?

Yes, Belgium. It compares -- the baseline effect is quite high. Remember, in Belgium/Luxembourg, they had other impacts that were stronger than in other geographies. So that was one of the other impact. But no worry because they're seeing growth versus previous period. The comparison baseline is particularly high in that geography.

Next question is Marie-Line Fort again from Societe Generale.

The question asked about Belgium. I've got one on mobility products. We've seen some of them sold very well. Are you still in this product diversification? Do you have anything in the pipeline in this area?

Mobility, this is something we branched out into several years ago, doing well. We could be different, we realized. We started with scooters, went on to bikes, also electric scooters, continuing to develop -- selling the products and also product accessories, which are necessary for sales and margin. Well, for showcasing these products, we've got XXL corners for mobility, very large-sized mobility sections, to boost this product category.

Is gross margin improved?

Gross margin is entirely satisfactory for these products. plus you've got the accessories and the services. We've got the whole [ services ecosystem, thanks to our partnership. So we've got the whole urban mobility ecosystem covered ] that we're developing.

Next question Mr. Clement Genelot from Bryan Garnier & Co.

Two points. Firstly, on your partnership, deliveries platform. Deliveries come to the Fnac stores apparently to pick up the products and deliver them to the customers. Is this a partnership or a commercial relationship that's already beneficial? Do you think it should be extended to other platforms and conceivably other countries as well? Next point. Is this just a financial investor for the time being? Or are they an investor that's got a closer relationship with you and with whom you have regular discussions?

On your first question, Clement, about the Uber Eats partnership, we work with these platforms in big cities. It's just for a short list of products inter alia so we can have an additional offering so customers can get products they're interested in outside store hours. For the time being, it's a test. Like any test, it will take some time to see if it pays off for both partners. And then, of course, we'll go further if it's a positive. On Vesa, we've met with them and their team, of course, like we meet with all of our investors, that's as it should be -- I think what they like about Fnac Darty is our business model and our corporate project, our strategy plan, and our teams. Plus, it won't have escaped them that -- there was share price -- the share was being traded at a discount.

We have no further questions. I'd like to give the floor back to your host.

Yes. Well, thank you very much then for listening. Have a great evening. Meet with you again soon. Bye-bye.

Thank you for taking part in today's call. You can hang up now. The organizers will stay on line for further instructions. [Statements in English on this transcript were spoken by an interpreter present on the live call.]