Fnac Darty SA (FNAC) Earnings Call Transcript & Summary

Hello, welcome to conference call. Fnac Darty will be presenting its financial performance for Q3 2023. We have with us Enrique Martinez, CEO of Fnac Darty; and Jean-Brieuc Le Tinier, CFO. They will be hosting this conference. Mr. Martinez, you have the floor.

Thank you very much. Good evening one and all. Many thanks for attending. The conference call representing our Q3 2023 results. Our press release as well as the presentation that we will be commenting on during the call are already available on our website as usual. This quarter demonstrates the very strong resilience of the Fnac Darty model in an environment that remains challenging, where sales are virtually stable on a like-for-like basis, which is a clear improvement on the second quarter and our gross margin continues to grow. This quarter also demonstrates our strategic ability and ability to take the initiative. We have announced an agreement with CEVA Logistics. I'll get back to that in the course of my presentation. And on September 28, as expected, we finalized the acquisition of 100% of MediaMarkt in Portugal. I'm quite satisfied with the work accomplished by our teams during this quarter. Every day, our model based on services, digital and the in-store experience demonstrates its power and relevance in serving our customers. In a little while, Jean-Brieuc will give you a detailed account of our financial performance, but I would like you to take note of 4 highlights for the third quarter. EUR 130 million. That is the positive cash impact of the favorable outcome for litigation concerning the sale of Comet. The victory that should enable us to close this chapter and I would like to take this opportunity to pay tribute to our teams for their tenacity over this matter. So EUR 140 million that is the additional sales we will generate in Portugal with the acquisition of MediaMarkt. With this deal, we will consolidate our #2 position in the buoyant Portuguese market. Also, 1 million, that's how many Darty Max subscribers we have. We passed that threshold in Q3, we're well on the way to achieving our target of 2 million subscribers by 2025. This unique repair offer is a real success, and it reflects our determination to be a pioneering player in the circular economy and also strengthens our position as France's leading repair provider. And lastly, EUR 200 million, that's the sales that we're targeting over the next 5 years for Weavenn JV that we've just announced with CEVA Logistics. Talking about Logistics. As you well know, that is a subsidiary of the CMA-CGM Group. And together with CEVA Logistics, we're going to create Weavenn, a joint venture dedicated to e-commerce logistics and the Software-as-a-Service marketplace. So Weavenn aims to address the European market worth about EUR 80 billion, with growth estimated at over % a year. Weavenn will propose a unique fully integrated offering combining the best marketplace technology solutions and high-performance logistics for multichannel distribution. This market first offering will meet all the needs of e-commerce players, including complete management marketplaces, direct-to-consumer sales and omnichannel delivery. And Weavenn will draw on the leading expertise of Fnac Darty and CEVA Logistics. We bring together the reputation of our 2 brands, a network of nearly 1,000 stores, a proven omnichannel model with 24 million unique monthly visitors to our websites and our expertise in last-mile delivery. As far as logistics is concerned, well, it's a world leader in logistics. It covers over 170 countries with over 10 million square meters in warehousing space, more than 20 million tonnes of goods transported every year and the globally recognized integrated quality of service from order to final delivery. This company will be up and running by 2024. And together, we are aiming for sales of EUR 200 million over the next 5 years with a double-digit operating margin. Now I'd like to hand over to Jean-Brieuc, our CFO, who will detail our performance in. Thank you, Enrique.

Hello, everyone. Fnac Darty reported very resilient sales in Q3. They were virtually stable on a reported and like-for-like basis and better than the consensus forecast of a 1% decline. This performance is a result of solid in-store sales despite an inflationary environment. Our stores are attractive because of the layout and the product offering so the quality and guidance of our sales staff as well as the events that take place there. Online sales remained at a high level of 21%, which is still 3 points better than the level. Lastly, Click & Collect which is a key indicator of web performance continued to grow, accounting for 50% of online sales in the first 9 months of the year. And this figure confirms our choice of an omnichannel model to meet the expectations of our customers, not all of whom have the desire, the need or the possibility of home delivery. Let's now take a closer look at the group's third quarter performance by region. The France-Switzerland region reported resilient sales, up 0.4% like-for-like, and this performance was driven by buoyant in-store sales and the extra week of sales last July. On the Iberian Peninsula, sales were down by 5.7% like-for-like with a contrasting effect between stable Portugal and Spain. Spain was down given the strong pressure on consumer purchasing power due to inflation and also higher monthly mortgage payments in that country. Lastly, the Belgium-Luxembourg region is still on the -- on an upward trend with like-for-like sales up 1.4% for the quarter, although competitive pressure remains high. With our sales being stable, our gross margin for the quarter rose by 70 basis points adjusted for the dilutive effect of the franchise. It was mainly driven by the positive impact of services with a continued rollout of Darty Max and a more favorable product mix. In conclusion, the stability of our sales in Q3 that I've just described does not make up of the poor performance observed in Q2 and the comment on last July. Sales for the first 9 months of the year, therefore, amounted to EUR 5.184 billion, down 1.5% on a like-for-like basis. But with gross margin up 40 basis points to 30.4%, excluding the dilutive effect of the franchise. Slide 5 now. This slide illustrates the strength of the Fnac Darty model. Let's take the French market as an example, in our sales growth over 9 months. The group has continued to outperform the market according to the end of September figures published last year by the [ Bonduva ]. Both over the quarter and since the beginning of the year, so we have outperformed the market in all 3 of our main product categories. Editorial products is still growing driven mostly by books and gaming. This category is doing extremely well, thanks to the end of the shortage of Sony's latest generation console and also the launch of Zelda in May and EA Sports, probably called FIFA. And we clearly benefit from an attractive, well-positioned offering. Consumer electronics saw good momentum in telephony and leisure-related products such as audio and photography. However, the category as a whole is declining with hardware sales continuing to decline, particularly for computers, a segment that saw an increase in household ownership and during the health crisis in connection with remote working and online education. Lastly, sales volumes of household electrical appliances are down sharply, mainly in the large appliance segments. Against the backdrop of constrained purchasing power and after a period of significant renewal in recent years, consumers are more cautious, they postpone spending decisions for nonessential products, we're benefiting from our positioning in premium and long-lasting equipment and from the recognized quality of our guidance and service, while the decline in market volumes is mainly concentrated in the entry-level segments for large electrical appliances. Lastly, services. We are up 5%, there is no market data for the segment. We are clearly the leader and innovator, and this is an important focus of our development. Let's not forget that we have reached an important milestone with over 1 million subscribers to our Darty Max program. I'll now hand over to Enrique, who will conclude this presentation.

Thank you, Jean-Brieuc. To conclude on Slide 6, we are operating in a market that remains challenging with volatility in consumer purchasing decisions. At the start of the year, we anticipated a consumer rebound in the second half. Today, we are more cautious, even though we remain confident in our ability to achieve a good Q4, particularly at the time of Black Friday and Christmas shopping. Against this backdrop, we remain extremely focused on our operating efficiency and are counting on a current operating income in the second half of 2024 similar to that of the second half of last year. This would mechanically lead us to a current operating income for the 2023 financial year of around EUR 180 million, which is slightly below our initial target of EUR 200 million. And this would still be a very good performance in the current context, and this does not call into question or strategy or our ambition to serve our customers as well as their expectations for more responsible and sustainable consumption. Considering current market conditions, the Board has decided to implement the authorization given at our Annual General Meeting on May 24 to buy back our own shares and allocate them to future bonus share grants, long-term incentives. We have interested this mandate to limit excess for a maximum amount of EUR 20 million, and this decision reflects our confidence in the group's operating performance, free cash flow generation and outlook. Finally, thanks to our stringent management, particularly with regard to cash generation, we are reaffirming our medium-term objectives. We seek to achieve cumulative free cash flow from operations of around EUR 500 million over the 2021-2024, period. We seek to achieve a free cash flow from operations of at least EUR 240 million on an annual basis from 2025 onwards. Thank you for your attention. Jean-Brieuc and I are now ready to answer any questions you may have.

[Operator Instructions] The first question is from Clement Genelot from Bryan Garnier.

I have 3 questions. The first one is on Weavenn, who will consolidate the business you or AGM? And what of the losses for this joint venture in 2024-2025. The second point -- the second question is more current. What about October? And for the EBIT guidance for 2023, EUR 80 million, this EUR 180 million, will it be boosted by what's going on in Portugal? Because the asset was at a slight loss in 2022. So will there be a small negative impact in Q4 with the consolidation?

Thank you, Clement. I'll take the first one on Weavenn. The consolidation elements, are still being reviewed with antitrust players. It should be consolidated -- we should be doing the consolidation, but of course, we need the validation of the antitrust authority in 2025. There will be slight losses but very negligible at the scale of the group. In October, current trading -- we -- our answer is that we don't comment current trading. On the EBIT MediaMarkt Portugal is going to be insignificant in terms of integration we're still taking over them. So we consider the impact is almost neutral on this year in terms of current operating income. We're not starting from 0. The investment efforts were supported by assets that already exist. So to launch this activity, we -- I didn't have to do huge efforts, whether in terms of cost or CapEx. If there are any losses, they won't be very significant. And even in terms of capital expenditure, it will be very limited because we're developing assets that already exist within the group. On the logistics side, CEVA and IT Tech for own staff.

[Operator Instructions] The next question is by Florence Thy-Tine from TPICAP. You have the floor.

Yes. Florence from TPICAP. Just to continue to talk about Weavenn. Do you aim to outsource the logistics of Fnac Darty to a player like CEVA and to better understand will the customers be only the customers of the Fnac marketplace for the joint venture? Or will there be other clients? If that's the case, what does the joint venture offer versus a player like Amazon? Do you have any comment about what's going on with the capital of that?

On Weavenn, we're not looking to outsource our logistics capacity. It's quite the opposite. It's how the logistics of our group, especially towards our stores can be put in service of sales for marketplaces. So we're going to do this capacity investment and our teams in our stores and our sites will lend these services to the marketplace player. First, we'll give these services to our vendors. We have 3,000 vendors in the platform. And we'll propose our fulfillment and delivery services to them, first and foremost, but the mission of the partnership goes beyond that. We aim to propose in France in our countries and elsewhere in every ecosystem where we can propose both tech and logistics capacities and that will be in 2024 through our vendors, but it will quickly extend to others. What's going to be better or worse than our competition. First of all, you mustn't forget that it's a market that's still isn't mature. There's a lot of potential. Competition will always be good. And in France, especially what we can propose that others don't have, it's access to the delivery of large products through our stores. So for the French market, the offer is much more relevant and rich and for other markets, I'm sure, will also find venues for development, and we're just at the beginning of this venture. That said, this morning, we discovered we were informed the change in the structure of our shareholders. It's very recent. We don't have any comments to make on that. it's still very recent. We haven't taken contact with the shareholders, those who hold the titles of ex-Indexia. So I can't give you any more information today about that.

The next question comes from Stephen Benhamou from BNP Bank.

Can you hear me?

Yes, we hear you perfectly well.

I have a question concerning the catalyst for Q4. You identify Christmas and Black Friday as catalyst for Q4. These events were already present last year. So how could that trend be more favorable this year? And could we have an idea and approximate of -- an approximate idea of what is the volume that is generated during these events? And are these events that contribute to margin? Or are these events that contribute to sales and that allow you to absorb fixed costs?

Well, you know that Christmas has been happening every year for 2,000 years, but this year as well. Last year, Christmas was not very dynamic. So it's an opportunity to have a better Christmas celebration this year. It's -- we're also looking at a year where consumption is actually lagging behind. And so there could be a catch-up with these activities. But we've built this quarter with this in mind with powerful offers for quality products, I'm not going to reveal anything right now, but the group has prepared the necessary strategy for this rather dynamic period. And these are offers, we're not going to give the amounts yet but you can see how important this activity peak is in November, and this some of our December activity. It's quite important, especially in categories like electronics. So these are offers that contribute to our overall sales. In terms of margin, it's in -- within the average of our activities, and that's how these offers are built, designed to build up sales while maintaining a decent level of profitability. That's what we've been doing for years and years. And this year, we've built our offer this way once more.

And off the top of my head, you -- this year, you have an impact concerning the price of energy efforts are being made to reduce that impact? Because energy costs are going down, could there be a positive effect next year compared to 2023?

Of course, we've taken significant steps to reduce energy consumption in the stores with best practices, but also with large investments to redo lighting and the technical management of the building such as air conditioning and heating. So we spent more money. We've trained our staff and consumption has gone down significantly. That's very positive. The impact on next year, well, we're not done with yet, 2023, I mean. So we're going to look at that before we look at 2024, we'll see what it looks like. It will be a mix between price evolutions, and we'll see how prices will behave tomorrow. And combined to consumption changes, which will remain in the future, and we're very happy with those changes so far. So we'll talk a bit more about that one. We have the results of 2023 in February.