Fnac Darty SA (FNAC) Earnings Call Transcript & Summary

Welcome to this presentation of Third Quarter 2022 revenues for Fnac Darty. My name is Diana and I will be the coordinator for today's event. [Operator Instructions] And now I will hand over to Mr. Jean-Brieuc Le Tinier, who is the group's Chief Financial Officer. This conference may begin.

Good evening, everyone. I'd like to thank you for taking part in this Fnac Darty third quarter revenue call 2022. As is customary, the press release and the presentation are available on our website. I'm assisted by Stephanie Laval from the Investor Relations team. We're beginning our call by commenting on Q3 revenue and then talking about outlook. Afterwards we'll field your questions. Let's begin with Slide 2. We're very pleased again to report our sales during this quarter, which are stable in our reported data, EUR 1.849 billion. This year sales began 1 week earlier than last year, making for a negative 60 basis points. Offsetting the calendar effect, Q3 sales grew by 0.03%. If we compare this to the pre-crisis level, quarterly sales continue to be well above those of Q3 2019 by up 7.2% like-for-like, boosted by the overall rise in the purchase basket. Good performance in the stores is the reason for this good resilience and e-commerce is starting to normalize. E-commerce still continues to be very high, representing 21% of total quarterly sales, up 3 points versus the pre-crisis level. It's a good fit, our stores and digital platforms. The complementarity demonstrated yet again in this quarter, Click & Collect portion in online sales is 47%, very near the normative rate of 50%, which we've always observed. Lastly, let me briefly comment on gross margin trends, stable this quarter compared to Q3 2021. If we exclude the dilutive technical impact of developing franchises, which has an impact of around minus 20 basis points. The product mix in the quarter impacted by strong performance in telephones, with the launch of iPhone 14 in September and normalization of large appliance sales offset though by good momentum in services and books. All in all, in the first 9 months of the year, the group is still displaying a growth in gross margin of 70 basis points, which is up 90 basis points, excluding the franchise effect. Slide 3 now. Let's look at sales performance by region and product category during the quarter. The first zone, France, Switzerland shows good resistance of sales, minus 1.8% like-for-like data driven by good performance in stores. In Q3, the group opened 8 stores in France, 3 Fnac's and 5 Darty's, all in the franchise format. Furthermore performance of the zone is bolstered by good momentum in small appliances and books, thanks to the literary season and the positive impact of the Pass Culture Services continued to grow well, thanks to new subscribers to Darty Max [indiscernible]. Now Belgium and Luxembourg, stability of sales with comparable data in the quarter in spite of strong inflation and very strong competition. Lastly, the Iberian Peninsula sees growing sales in the quarter, up 2.5% like-for-like, driven mainly by Portugal, Spain, seeing a great deal of competition. In spite of this, nevertheless, thanks to excellent business execution and gradual uptick in store footfall, we're seeing good growth, which more than offsets the normalization of digital sales, which we're going to see in both countries. Now let's look more specifically at performance by product category. Appliances. Volumes sold are down since the beginning of the year, particularly when it comes to entry-level products, whereas average prices of the category grow. Strong competition. After 2 years of growth, large appliance sales continue to stabilize, normalize, whereas small appliances remain stable. However, sales in this category remain above those of the pre-crisis level in 2019. Consumer electronics showed good resistance in this quarter driven by strong growth booked in telephones with the launch of iPhone 14, which led to a very high level of preordering. Furthermore photography and audio have grown nicely to some degree offsetting the slowdown in IT and TV with an eye to the World Soccer Cup taking place 20 November to 18 December. Editorial products continued to show good momentum, driven by various things such as vinyl records, which are very enthusiastic about as well as the books and the extension of the Pass Culture to middle-class students. Since its launched, the Pass Culture has now got 2 million young members versus gaming, where we're seeing the market is somewhat down due to the lack in availability of the PS5 since its launch in 2020. Lastly, in the quarter, services saw growth in number of subscribers to Darty Max, resumption in ticketing as well as good consumer lending business, good momentum there. Let's look at Slide 4. As a leader in specialized retailing in its various markets, Fnac Darty is endeavoring to meet the expectations of consumers and also continue rolling out its everyday strategy plan. Thanks to our strong business execution, the group is providing good availability for a wide range of products at prices that are adapted to everyone's needs. Therefore to meet the consumers' request for the greatest news items, Fnac Darty has a relationship based on trust with its suppliers to be able to provide innovative products, high-end products exclusively, such as our top position in France has meant that we got early availability of iPhone 14. We have significant numbers of preorders booked as from the launch in September. The group has been able to really meet demand that consumers have for the new generation of foldable phone such as the latest Samsung Galaxy Z. For that, Fnac Darty has a good overall set of stores organizing lots of sales events. The group has been focusing, for instance, on bundles of IT products for students and remote workers. The group is also organizing strong sales events for the launch of novelties, new releases. Think of the Fnac literary award, the back to season awards and new literary season awards, the gaming tour for the new release of FIFA 23 game. Fnac Darty adjusted sales policy, realizing that consumers are feeling a dip in purchasing power due to inflation, and we've got budget-friendly products labeled as such. The group is also continuing initiatives to find alternatives to buying new products. There are actions as second life products, for instance, particularly for consumer electronics and appliances. The group is continuing to provide customers with well-informed choices, giving them information on product reliability and repairability. On that point, the fifth edition of the after sales service parameter was published last September. This information tool is a real benchmark for the public at large. Henceforth it includes, in addition to various criteria such as reliability and repairability, also includes price of spare parts. This provides information to the consumers that can compare all the product categories with the various brands and move towards the more sustainable products. We're continuing the rollout of Darty Max being available now in Fnac stores, so that it's possible to promote repair versus systematic replacement. Now we've got more than 1.9 million products, which have been repaired since the beginning of the year. And on that point, to support the ramp-up of Darty Max and the recruiting of 500 additional technicians by 2025. To that end, we opened our own apprentice training center to train repair technicians. After their training, these repair technicians get a service technician's diploma for connected appliances, and we give them a job contract after that. Next, we're very proud of our commitments in CSR. And we, once again, were rated by Moody's ESG Solutions. The group is part of the top category for the first time called Advanced A1+ with a score of 61 out of 100, up 7 points over the 1-year period, up 17 points over a 3-year period. All the components, E, S and G grew this year, very significantly so for the social component, up 9 points in a 1-year period. Fnac Darty is in the top 5 in the area of specialized retail companies and top 5% worldwide. This recognition demonstrates the environmental, social and ethics as well as governance considerations are considered part and parcel of Fnac Darty business model and in line with our everyday plan. Lastly, a few brief words to talk to you about the current situation year-to-date and the outlook for this group. Slide 5. We are very satisfied to outperform the market once again as of end of August in a context where we're seeing high inflation and pressure on purchasing power. This performance should be confirmed again tomorrow when there's publication of the September data by the Bank of France. This strong momentum is a reflection of the success during the back-to-school period and also thanks to good management of the supply chain. We've got stable inventory rotation over a 1-year period. Therefore we continue to be confident in the success of our end-of-year events, which are particularly important for us, assuming the overall social environment in France doesn't disturb our activities. In this context, the group continues to be focused, first of all, on solid business execution to ensure success of the major sales events such as Black Friday and Christmas. For the first time there'll also be, in Q4, the world soccer cup. We've got a good level of products availability in all of the categories that are especially popular during these main events at the end of the year, such as TVs, where we're leaders in sales for TVs in France. Secondly, we are keeping an eye on our gross margin level, even though the mix for the end of year tends to be less favorable in this area. We've demonstrated over 9 months. We continue passing on price hikes, all the while providing a very broad range of products and services. We're also further bolstering our cost discipline, continuing with our performance plan to offset the impact of inflation even better in the second half. On this point, wage increases should be somewhat more significant in the second half with the full effect of the annual pay increases versus the 4 months affecting the first half, plus a sectorial agreement entering into force 1 October in France, which increases wages for around 2/3 of group employees, the impact is a few million euros. Furthermore, as announced last July, we're still targeting an overall amount of operating investments for 2022 in the neighborhood of something just under EUR 140 million. Lastly, the group is continuing the execution of its everyday strategy plan with an eye to having cumulative free cash flow of EUR 500 million over the period 2021 and 2023 and at least EUR 240 million at an annual pace starting in 2025. Thank you for your attention. All 3 of us would be happy to answer any questions you might have now.

[Operator Instructions] Question #1 from Marie-Line Fort, Societe Generale.

First, I had a question for revenue, Q3 question on variations of revenue. Could you go back on Q3 2021 revenue? Have there been any corrections made. Then my second question has to do with services. What was the trend over Q3? Also a word about Nature & Decouvertes. Has the return of customers in-store actually translated to more sales in Nature & Decouvertes.

Good evening, Marie-Line, Stephanie here. Concerning Q3 revenue for 2021, EUR 1.854 billion -- EUR 1,854 million, EUR 1.854 billion. So no change. And the variations indicated by Jean-Brieuc, there's a like-for-like effect also seasonal sales effect. This year, summer sales started 1 week earlier than the previous year. And so we told you about the effect, minus 70 bps that was definitely an impact, but no change in Q3 2021 revenue. And services, yes, good performance over Q3, thanks to the increase in the number of Darty Max subscribers. We can't give you the number now, but we will with the annual results, but definitely more than on January 1. Ticketing also was on the uptick first quarter with the impact of the public not fully returning to theaters, et cetera, but things have been on the up and up since then. As for Nature & Decouvertes, customers are returning to stores. Revenues are doing better than last year. But remember that last year, most stores were closed. The rate of closure was higher than group average. Nature & Decouvertes were located in the biggest shopping malls and were not deemed as essential shops. So we are very slowly getting back to pre-crisis levels, it's taking some time.

We have no more questions in the pipeline. [Operator Instructions] No more questions at this stage on the waiting list. [Operator Instructions] We have another question from Marie-Line Fort, Societe Generale.

I'll ask some more questions. The gross margin rate, lower growth over 9 months in comparison with H1. What was the impact in terms of basis points over Q3, 100 -- minus 100 basis points?

No, that's not it. We have flat margins with our franchise and with franchise minus 20 basis points. So the margin is -- has been stable over Q3. Over the first quarter, we had a margin mix, which was more positive because people were coming back in 2 stores that had been shut in 2021. And so we had a channel mix that had a more positive effect more favorable than in Q3 and more favorable than Q4. Q4, we're absolutely comparable with last year because no closures Q4 last year. Also, ticketing had an impact. We were comparing ourselves last year to S1, where ticketing was closed or big restrictions. And for S2, we're comparing our figures with second half last year with numbers that are practically back to normal.

Another question. How do you envision the end of the year in terms of the big sales and commercial events you were talking about? You mentioned the World Football Cup. Will there be any innovations that might sustain operations and revenue?

So in terms of our events lined up, we don't have anything special coming in. iPhone 14 was launched in September. So we're expecting lots of sales over Q4, that's something significant. Then we have the Christmas, Black Friday cycle and then something new this year, unprecedented World Soccer Cup over Q4. And so that's going to keep us busy and keep numbers sustained over the entire quarter.

And do you think the impact will be the same. There are lots of people who decided they would not watch the games. So what do you expect in terms of impact?

Well, time will tell. It's a little bit early to predict consumer behavior. What we've always seen is that world football cups always translate into more TV sales in the 2 or 3 weeks leading up to the event. So early November, let's say, I'd be quite surprised if football fans decided really not to watch a single game.

[Operator Instructions] There's a question from Emmanuelle Vigneron, HSBC.

A short question. Could you please recall the differences in gross margins between consumer electronics, editorial and appliances?

Well, we don't have specific gross margins, but we can definitely give you a ranging. So services, big gross margins by definition. They come first. And then we have editorial products that books, largish margins and then large appliances, those generate a lot of gross margin. And then we have the consumer electronics with smaller gross margins as a category. However, there's a lot of services sold with those products. So that's more or less the ranking in terms of gross margin rates. In some case, it's 40% and higher and down to 10%. But per category. So there's quite a big range for a difference. But once again, consumer electronics, low gross margins, but they are often sold with a big service component generating high margins.

[Operator Instructions] We do have a new question from Fabienne Caron from Kepler Cheuvreux.

I had a question about your product, your second -- previously owned products and your budget-friendly products. Could you talk to us about number of SKUs or volumes? And what's the growth for these product categories?

This is Stephanie answering. Well, we can say that now consumers have varying expectations. So we've got an offer both highly innovative products to meet things of consumers who are very enthusiastic about innovation, regardless of price almost. We've also targeted various daily products, products that some people need on a daily basis. I think of the IT bundles for students and for people here in back-to-school season. These are bundled, computers and printers, for instance. We won't give you specific numbers sold, but no doubt about it. This does help address that type of demand in a situation when there are some people who need this type of product. And maybe adding a little bit hard time here. These are often entry-level products for the budget friendly wins. We've got a share of premium sales, which is still preponderant. But nevertheless, we want to cover the whole of market needs and consumers' expectations.

I understand full well continues the question, but could you tell us how many SKUs we're talking about? How many different products are under the budget-friendly category and the previously owned ones? What are the quantities, the numbers here? You talk about sales, what about supply or products on offer.

Answer from Jean-Brieuc Le Tinier, we can just talk about the category, not specific SKUs. We can just talk about product categories.

What about the pre-owned products as a follow-up to the question, are you seeing other tailwinds for the preowned products?