Fnac Darty SA (FNAC) Earnings Call Transcript & Summary

[Foreign Language] Good afternoon, and welcome to Fnac Darty conference call. Mr. Enrique Martinez, CEO of Fnac Darty; and Jean-Brieuc Le Tinier, CFO, will moderate this call. The floor is yours.

Good evening, everyone. We are pleased to be with you tonight to comment our 2026 half year results. Particularly in France over the past few years, we have experienced several early heat waves of unexpected intensity. These episodes had an impact on many of us and naturally on our customers. And I wanted to start by acknowledging the extraordinary dedication of our team during these exceptional weeks, especially our purchasing logistics stores teams and our home service technicians who intervene on products affected by the extreme heat. Everyone across the group worked tirelessly to step up and help our customers cope with these extreme temperatures. Right, the agenda. I'm going to present the highlights of the first half of 2026. Then Jean-Brieuc Le Tinier, our Chief Financial Officer, will detail our financial results. And finally, I will return for the conclusion, and both of us will be available to answer your questions. Slide #4, the highlights of H1. Our revenue grew by 0.6% on a like-for-like basis. This growth was driven by international operations, up 2.7%, while France declined by 0.7% due to a market that remains sluggish and a high comparison baseline. Activity was also driven by strong digital momentum, which I will elaborate on in a few moments. In a market that remains very fragile with solid recovery indicators in a few categories, yet still uncertain, particularly in France, we are pursuing the rollout of our Beyond Everyday plan. This has yielded significant effect on our gross margin rate, which expanded by 40 basis points to reach 29%. The growth of our service business remains the key engine for growth and services are contributing very positively to improving this metric. Finally, as you already know, our main shareholder, EP Group, announced a tender offer for our company at the beginning of the year. After obtaining the required regulatory approvals, notably clearance from the AMF, the offer has been open since May the 12. Subject to receiving merger control approval from the European Commission, completion is expected in the second half of this year. So, our first half of 2026 reflects positive transformation momentum and growth in services. In a moment, I will also return to the performance of online sales, which posted sustained growth and digital as a whole. Overall, commercial performance remains solid in an environment that remains challenging in France. Slide #5 now. Since launching our new strategic plan Beyond Everyday in June 2025, we have rolled out numerous initiatives. I wanted to highlight 2 of them, which fall under the integration of Unieuro through synergies and the development of high value-added services. They are illustrated on Slide 5. First, a dual launch resulting from an expertise sharing between the group and Unieuro. First, the launch in France of a professional TV calibration service. This is the first directly inspired by the success of a similar initiative deployed at Unieuro in Italy. Conversely, Unieuro launched Digital F-Secure, its very first subscription service offer inspired strongly by Fnac Vie Digitale, which has been successfully offered in France in 2021. Now second key initiative, we accelerated the integration of our own brands across the group. We previously announced our goal to pool expertise around private label products and licenses to optimize product offerings and better leverage existing group structures, particularly sourcing offices in Hong Kong and Shenzhen. Eighty group employees are dedicated to this business, which we have mastered over 20 years now. We work with approximately 190 suppliers worldwide and ship over 4,000 containers annually. Since 2025, we have finally expanded our product offering with more than 1,300 new SKUs, and we confirm our target to increase sales by EUR 300 million by 2030, doubling compared to 2024. These examples illustrate that Unieuro's integration is progressing successfully, and we confirm our target of delivering at least EUR 20 million in synergies by the end of this year. Moving on to Slide #6. Now we are going to talk about digital performance. So, regarding digital, as I mentioned earlier, we continue to accelerate, as shown on Slide 6. with a selection of significant key metrics. Our online sales grew by 4% in the first half of the year and now represent 21% of total group sales. Click & Collect sales are growing and now account for nearly 50% of total group online sales. This confirms once again the relevance of our omnichannel strategy, especially when foot traffic in city center stores was impacted by the heat wave. The use of AI in purchasing behavior, while still marginal today is accelerating rapidly. We pay close attention to ensuring strong visibility in LLM models, which already influence more than 3% of our gross merchandise value on our platforms. Our marketplace delivered strong performance in H1 with GMV increasing by 15% (sic) [ 18% ] over the period. The business or the activity within our Reverse Marketplace is also showing very strong growth. Finally, we are accelerating the deployment of Weavenn, the joint venture created with CEVA Logistics. Weavenn offers a unique fully integrated solution, combining best-in-class marketplace tech solutions with high-performing fulfillment for multichannel retail. Now since its launch, Weavenn has collected over 100 marketplaces across Europe and processed around 1 million orders. Overall, for technical products, 1/3 of units sold on Fnac Darty marketplaces are powered by or fulfilled by Weavenn. Moving on to the next slide, Slide 7, to conclude my section. I wanted to briefly review the ongoing tender offer by EP Group and provide a quick update on the timeline. I have already noted that EP Group's offer aligns with the solid partnership built together over several years. It represents a key new milestone supporting the acceleration of our Beyond Everyday strategic plan. So, moving on to Slide 8, the illustrative timetable shows all the steps already completed as well as the final milestone before closing the offer. We are still awaiting merger control approval from the European Commission. Now we are working on it, though we have not yet formally notified Brussels to date. Subject to obtaining this clearance and if successful, the offer should reopen for a period of at least 10 trading days. I will now hand over to Jean-Brieuc Le Tinier, our CFO, who will walk us through our financial results in detail.

Thank you, Enrique. Good evening, everyone. As Enrique mentioned in his opening remarks, group revenue increased by over 0.6% on a like-for-like basis during the first half, driven by the strong performance of the rest of Europe in our online sales. Online sales now account for more than 21% of revenue over the period and grew by more than 4%. Click & Collect remains the cornerstone of our omnichannel model with nearly 1 out of every 2 online orders collected in store. Slide 10. Let's look at our performance by product category. The categories highlighted in green are those that delivered the strongest growth. Let me start with home appliances. Small domestic appliances benefited in particular from innovation in the Beauty and Home Care segments. Large domestic appliances also proved resilient, supported in particular by the 2 heat waves in May and June, which boosted demand for products related to thermal comfort. Services and diversification continued their positive momentum and remained on a growth trajectory. Overall, consumer electronics recorded growth, although performance varied across categories. The personal computer market continued to benefit from the replacement cycle driven by the end of Windows 10 support as well as a new post-pandemic renewal cycle. Television sales accelerated, particularly in June, posting double-digit growth, supported by the FIFA World Cup. By contrast, mobile phones highlighted in red on the slide as well as audio and photography products posted a slight decline. Editorial products also declined, reflecting a subdued book market. And like in previous years, there were no major publishing releases during the period. By comparison, last year's sales were significantly boosted by the success of the Housemaid book series. Gaming was affected by a negative comparison base. As a reminder, the second quarter of '25 benefited from the highly successful launch of the Switch 2 console. Looking ahead, the second half will be marked by the release of GTA VI, undoubtedly the most eagerly anticipated video game of the decade. Turning now to Slide 11. Let's review the group's performance by geography. France, which accounts for 58% of the group's total revenue was broadly stable with like-for-like revenue down just 0.7%, compared with the first half of '25. The consumer environment in France remains challenging. Nevertheless, we delivered a solid performance that significantly outperformed the overall market trend based on the latest Banque de France data, published at the end of May. As a reminder, June data are not yet available. In the rest of Europe, which now represents more than 40% of the group's total revenue, business remains strong with like-for-like revenue increasing by nearly 3%. Italy delivered growth with strong momentum across all sales channels and product categories. Belgium grew by nearly 6%, gaining market share in a favorable consumer environment. Portugal recorded 9% growth, driven by the strong performance of both brands and the successful rollout of the Darty brand. Spain posted growth of nearly 2%, driven by in-store sales. It is also worth noting that stores refurbished in '25 are delivering particularly strong performances. Finally, in Switzerland, revenue declined by 1.9%, reflecting the weaker book market and the negative comparison base in gaming. Turning to Slide 12. Our gross margin also improved, increasing by 40 basis points compared with H1 '25. This improvement primarily reflects the continued expansion of our services business whose contribution to value creation continues to grow. The continued rollout of Darty Max remains a key driver of improvements in our business mix and further validates our strategy focused on recurring revenue streams. Our product mix was also favorable during the period with higher sales in higher-margin product categories. In addition, the impact of franchise operations on our gross margin has now become negligible. Let me now turn to the other components of the income statement on Slide 13. As I've just highlighted, our gross margin rate improved as of the end of June. Operating expenses amounted to EUR 1.325 billion in H1 '26, up EUR 23 million compared with H1 '25. Overall, costs remain well under control despite higher expenses, particularly logistics costs associated with a strong level of business toward the end of the half year. The many efficiency initiatives implemented across the group, nevertheless offset the vast majority of inflationary cost pressures. Recurring EBITDA reached EUR 197 million at the end of June '26, an increase of EUR 4 million year-on-year. Recurring operating income, RROI came to a loss of EUR 34 million compared with a loss of EUR 38 million at the end of June '25. This improvement of nearly 10% reflects the group's ability to preserve both margins and cost discipline despite a subdued consumer environment. The integration of Unieuro is progressing very well. We have successfully implemented our initiatives, both in terms of procurement synergies and sourcing and reaffirm our target of delivering EUR 20 million of synergies by the end of '26. As Enrique mentioned earlier, we have also begun deploying each other's areas of expertise since the beginning of the year. Nonrecurring items amounted to a net expense of EUR 16 million. The EUR 5 million (sic) [ EUR 6 million ] increase compared with last year, mainly reflects restructuring costs related to workforce and organizational adjustment plans in France and internationally. As a result, operating income came to a loss of EUR 51 million for the first half, broadly stable compared with last year. Net financial expense amounted to EUR 62 million, an increase of EUR 7 million compared with the end of June '25. This change mainly reflects the group's new financing structure as well as one-off financial income recognized in the first half of '25 following the early redemption of the OCEANE convertible bonds in March '25. After recognizing a tax benefit of EUR 28 million, net income from continuing operations attributable to the group amounted to a loss of EUR 82 million. Let us now move on to the analysis of free cash flow at the end of June, shown on Slide 14. Operating free cash flow, excluding IFRS 16 amounted to negative EUR 793 million, compared with negative EUR 845 million as of June 30 of '25, in line with our expectations. The improvement was primarily driven by better working capital performance. As a reminder, working capital is highly seasonal and typically reaches its lowest point in June. Operating capital expenditure totaled EUR 74 million as of June 30, '26, fully in line with our Beyond Everyday target of investing around EUR 200 million per year on average through to 2030. The group's financial position remains healthy and robust, as you can see on Slide 15. Gross financial debt, excluding IFRS 16, amounted to EUR 1.253 billion and includes our 2 outstanding debt instruments, the remaining OCEANE convertible bonds and the European Investment Bank loan. At the end of June '26, the group reported a net cash position of EUR 516 million, complemented by EUR 600 million of undrawn committed credit facilities comprising the revolving credit facility and the DDTL. As a reminder, these undrawn facilities fully covered both our '29 refinancing requirements in terms of amounts and our 2032 maturity profile. Accordingly, net financial debt, excluding IFRS 16, stood at EUR 737 million at the end of June 2026. Finally, the rating agencies, S&P Global, Fitch Ratings and Scope Ratings currently rate the group BB+, BB+ and BBB-, respectively. In early June '26, S&P revised its outlook to positive from stable. This reflects the potential for an upgrade of Fnac Darty's credit rating over the next 6 to 12 months, should EP Group's acquisition be successfully completed. Fitch Ratings and Scope Ratings continue to maintain a stable outlook. Overall, we continue to benefit from a strong long-term liquidity profile. With that, I will now hand over back to Enrique for the concluding remarks.

Thank you, Jean-Brieuc. On Slide 7, you see that we have the ability to make progress even when we are in a challenging environment, especially in France, thanks to the diversification of our service operations and to the growing contribution of the international business. So, we would like to confirm our objectives for the 2030 plan and the one given 2026, we confirm our expectations of growth in our recurring operating margins. And I would like to thank you for your attention, and we are now available for your questions.

[Operator Instructions] [Foreign Language] If ask question in English. [indiscernible] Bloomberg Intelligence.

Hi, this is [indiscernible] from Bloomberg Intelligence. I have a couple. First of all, I'd like to ask you whether you've noticed the increasing prices of memory chips and whether that affects your inventory planning, especially in terms of bringing inventory forward? That will be my first question. And then the second one, with the acquisition by the Kretinsky's Group is going ahead, are you -- and upon the approval from the European Commission, are you looking to delist following the acquisition? Or will you remain trading?

[Foreign Language] We understood your question. So, regarding the price, well, there were a few announcements made by the industry. It was a little bit disorganized, but it is -- well, we can see that there is going to be a price increase in the months to come because of the price increase of the components. At the moment, it doesn't have a significant impact, but quite a few manufacturers such as Apple and others have made announcements. They said that there were going to be a price increase. Now it doesn't have any impact on our inventories yet. We can't make any comments here because we are not aware of the quantity of the amount or the volume of the increases, but we are likely to see a price increase for a few product categories, and it can have potentially an impact on global sales. But it's too early to say because we do not know what it's going to look like yet. It can have -- it could have a limited impact on the products. Regarding the operation, it is an ongoing operation. We are waiting, as we said, for the go-ahead of the European Competition authorities, which is pending for the second half of the year. We are waiting for the results of the operation. And no matter the result, we would not be delisted for at least 12 months. This was a commitment. For 12 months, the listing will continue. As for the future, well, we will see. Time will tell. However, number one, we need to know the success rate of the offer. And second, there is a 12-month period, which cannot change, and we will remain listed for at least 12 months.