Fourlis Holdings S.A. (FOYRK) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Costantino, your Chorus Call operator. Welcome, and thank you for joining the Fourlis Group conference call and webcast to present and discuss the first half 2024 financial results. We have with us today Mr. Vasileios Fourlis, Chairman; Mr. Dimitrios Valachis, CEO; and Ms. Elena Pappa, Investor Relations and Corporate Affairs Director. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to management.

Good afternoon, and thank you for joining us today. We are delighted to welcome you to our conference call today. We are very satisfied with the progress we are making towards our strategic goals and particularly given the current subdued market conditions. We reinforce the market position of our brands and deliver significant profitability gains more than double. We're also on track to meet our full year '24 guidance. We're also achieving important milestones. The InterIkea Distribution Center that will supply Eastern Mediterranean is on its track as far as construction is concerned. Recently, we signed a very important agreement with Foot Locker, under which we are going to develop the brand to eight countries in the Southeast of Europe. At the same time, our IKEA Patras new store, the first new store of large scale after a number of years is set to open late October, beginning of November. This store is going to serve a large part of Southwestern Greece. Finally, we are on track to deconsolidate Trade Estates, our real estate subsidiary, and thus create a financial reporting that will be much more transparent and clear regarding the performance of both retail and real estate. We are investing in our growth and expansion. Our actions support our further growth and expansion both in existing and new geographies. While at the same time, we reconfirm our focus on free cash flow generation and returning value to our shareholders. At this point, I'd like to pass the floor to our CEO, Dimitrios Valachis to provide further insight into the progress we've made in the first half of the year as far as the financial performance is concern. Dimitrios, the floor is yours.

Thank you very much, Vasileios. Good afternoon to everybody. I will start by repeating once more that we are committed to our growth strategy, and we are very happy to see the positive results of our efforts as these are evidenced in our first half 2024 financial results. Before looking at the numbers, let me say a few words regarding our progress within our business units. And of course, I would like to share information regarding our new partnership with Foot Locker. Number one, we are making good progress with our IKEA store network optimization and expansion plan. The new IKEA store in Patras is -- store in Patras will open at the end of October. Irakleio will follow at the second -- quarter 3 next year and Ellinikon in 2027. At the same time, we examine new IKEA shops in smaller cities, aiming a decrease in our footprint outside the big cities. Our IKEA store in Athens International Airport retail hub is optimized, while the new tenants Intersport and Holland & Barrett drive higher visitorship already. We expect the new tenant Plaisio, a business complementary to ours to drive traffic even higher. Number two, we expanded further our Intersport store network with 5 new stores, 2 in Greece, 2 in Romania and 1 in Bulgaria, while we continue with our expansion plan for the remainder of the year in order to reach our goal. Third, we continued our expansion into Health & Wellness with 4 new Holland & Barrett stores by the end of first half of 2024. As a result, by now, we have a total of 10 stores and 1 in e-commerce in Greece, and we are also examining new expansion opportunities. Fourth, the project of the construction of InterIkea International Distribution Center is progressing according to the project time line with Trade Logistics preparing for the operational management of this new distribution center within 2025. This collaboration enhances Trade Logistics position as a third party provider and supports our goal to make it a profit center for the group. Fifth, regarding Trade Estates that was listed last November in the Athens Stock Exchange, we reconfirm that by the end of 2024, we plan to sell a part of Fourlis Group's stake in Trade Estates in order to deconsolidate Trade Estates from Fourlis Group consolidated financial statements. This move will help the retail business to leverage further its balance sheet and provide cash flow through the immediate cash proceeds as well as Trade Estates continued the dividend stream. Last, I would like to say a few words about our partnership with Foot Locker announced the 28th of August. What is the deal about? We have signed exclusive licensing agreements with Foot Locker for the further expansion of its store network and e-commerce network in the Southeast European region, in particular, Greece, Romania, Bulgaria, Cyprus, Slovenia, Croatia, Bosnia, Herzegovina and Montenegro. And on top of that agreement, to acquire Foot Locker's operations in Greece and Romania, it currently includes 6 stores; 3 in Greece, plus a new -- one e-commerce and 3 stores in Romania. The acquisition of Foot Locker's operations in Greece and Romania is subject to certain CPs and anticipated to close in the first half of 2025. Who is Foot Locker? Foot Locker is one of the largest chains of sporting good stores in the world. It was founded back in 1974, and it is headquartered in New York in United States with more than 50 years of history and approximately 2,500 stores in 26 countries across North America and Europe, Asia, Australia and New Zealand. Foot Locker is the global leader in the sneaker market with strong physical presence and online presence. The brand has better consumer awareness than any other retail brand in the industry. Foot Locker's employees, the stripers are trusted advisors and members of the local community. Foot Locker has a very active and successful social engagement. So two powerful forces are combined, the leader sneakers, Footlocker, and the leader sport performers Intersport. And this forms Fourlis Group sports retail business unit. This is a partnership of strategic component for us. On one hand, it allows us to tap into the athleisure segment of the sports market in Southeastern Europe, a fast-growing market expected to grow by high single-digit growth and reached EUR 3.7 billion by 2026, a market that is currently underserved. Moreover, it allows us to expand our geographical footprint in 8 countries and opens up new opportunities for the whole of our group. Our ecosystem that includes existing partnerships, suppliers, trade logistics services, the group serve business services and Trade Estates will create synergies. We are honored to partner with the #1 global brand in the sneaker market, and this is a vote of confidence in our group, and we're excited about the opportunities that lie ahead. Regarding our plan, we anticipate generating EUR 30 million in the first year of operation 2025 and this will reach EUR 100 million by the third year, 2027. And by end of 2029, we're going to grow to EUR 250 million, supported by operations of 80 stores, including -- across Southeast European region, including 80 shops across the 8 countries that will complement in Foot Locker's physical store presence. To achieve this expansion, we plan to invest approximately EUR 40 million CapEx. The expansion plan will primarily be funded through the operational profitability of the group's retail operations including Foot Locker's profitability, along with the group's existing cash reserves and future revenues from the divestment of Trade Estates. Our long-term plan involves the rollout of 120 stores plus the e-commerce stores at full development. We target an EBITDA of 8% to 10% as the expansion progress, which reflects the synergies and efficiencies that will be realized through the combined and complementary operations. Let me repeat here that this is a margin-accretive deal, not dilutive to the group's prices. According to our plans, to support retail business unit with these movements will be more than double, and we have set to over achieve our medium-term targets already communicated to you. As a result, Fourlis Group today has 3 frontline retail business pillars. Number one, the home servicing with IKEA and number two, the sports retail business unit that now includes Intersport and Foot Locker businesses, the Health & Wellness that at present is only Holland & Barrett, plus Trade Logistics our logistics arm focusing on serving the group's activities as well as the third party provider on its way to become a profit center for Fourlis Group plus real estate investments are soon to be consolidated from the group. Let's move now to the financial highlights of the group half 1 2024 results. Let me repeat here that as we did in fiscal year 2023 results and the first quarter results of this year, we provide reconciliation tables within the group's consolidated figures and the group figures from its retail businesses in the appendix of this presentation. So starting with the retail business performance. Revenue from the group's retail business was up by 2.2% year-on-year, reaching EUR 245 million. The market, particularly the home furnishings market is slow. But nevertheless, we preserved our market shares, therefore, driving volume sales higher across our business units and regions. The new lower prices policy implemented in IKEA stores and targeted activations across the business units and channels brought higher traffic in both our physical and e-commerce stores. The gross profit margin for the group's retail business increased by 180 basis points to 46.4% this year compared to 44.6% in the first half of last year, highlighting the group's competitive advantage in its supply chain. The gross profit margin improvement, together with cost optimization and operating efficiencies led to a significant improvement in profitability. EBITDA was up by 42% to EUR 16 million versus EUR 11.3 million last year, and the EBITDA margin rising to 6.5% from 4.7% last year. EBIT accordingly more than doubled, reaching EUR 8.4 million or EUR 3.9 million in the first half of last year. The EBIT margin increased 3.4% this year versus 1.6% in the first half of last year. Before moving to the consolidated group P&L, we need to first look at Trade Estates performance that is added on the retail business figures. Trade Estates generate significant value to the group on the back of its high yielding and high-quality portfolio of real estate assets. Trade Estate posted a 71% increase in total income in the first half of this year, 70% growth in EBITDA and 16% increase in EBIT and 60% increase in funds from operations. As of the end of June of this year, the gross asset value stands at EUR 499 million, while its net asset value reached EUR 303.6 million. Based on its agreed development plan by 2027, Trade Estate will have a strong high-yielding property portfolio of around EUR 720 million to EUR 740 million. As mentioned earlier, we are in good progress and aim to deconsolidate Trade Estate by year-end. Post deconsolidation, apart from the immediate cost proceeds, the balance for this group going forward include a sustainable dividend stream from Trade Estate. Why? Because high dividend payout is on the back of its growing portfolio of high yielding and high-quality real estate assets. And also, we're going to have an upside in our profitability through the group's participation in Trade Estates. Referring now to the group P&L on a consolidated basis, sales grew by 4.2% reaching EUR 257 million, driven by volume growth in the group's retail businesses and as well as Trade Estate's third-party revenue growth. The group's higher gross profit margin, cost control and higher productivity led to significant increase in profitability. EBITDA was up by 62.3%, reaching EUR 27.7 million from EUR 17.1 million last year with an improvement of margin -- EBITDA margin 6.9% to 10.8% this year. EBIT more than doubled, reached EUR 24.8 million this year from EUR 10.9 million first half of last year with the margin reaching 9.6% versus 4.4% last year. Net income after minorities presented a substantial growth, reaching EUR 7.2 million from EUR 1.3 million last year. In the first half of 2024, we continued to improve our operating cash flow generation, driven by improved business profitability and improved working capital. This is a trend that will continue throughout the year and will enable us to execute our expansionary plans while also continuing returns to our shareholders. As we did in the first half of 2024 through the dividend payment and the treasury share buyback, the first half of 2024 CapEx related to the retail business amounted to EUR 9.1 million and relates mainly to the group store network expansion and maintenance. The net debt of the group retail business during the first half of 2024 stood at EUR 95 million, which is EUR 15 million lower compared to last year's respective period. We are committed to reducing further the group's retail net debt position. And I would like to also note that the expansion of Foot Locker stores will be funded mainly through the operational profitability of the group's retail operations, Foot Locker's profitability, the group existing cash reserves as well as cash from the forthcoming sale of Fourlis Group stake in Trade Estates. And with that, we move on to the analysis of our business units, Elena, the floor is yours.

Thank you, Mr. Valachis. Starting with Retail Home Furnishing. According to the strategy, our priorities involve maintaining a healthy brand demand, network expansion and top customer experience and service. To that end, as mentioned earlier, the new IKEA store in Patras will open on October 30. IKEA store at Irakleio will be complete within the first half of 2025. The IKEA store in the Athens International Airport retail hub is by now optimized, while the new tenant, Intersport and Holland & Barrett already drive higher traffic. The last tenant Plaisio, expected to open by the year-end will further support visitorship. Moreover, further expansion is examined through new IKEA shops in smaller cities aiming at increasing our footprint outside the big cities and the strong activation plan for all the countries is organized as well. In terms of key figures, our IKEA stores continue to represent one of the best performing regions for the InterIkea group. In a subdued home furnacing market, we maintained our market shares. Sales were driven by volume in Q2, showing a steady pace versus the first quarter of 2024. Since March, we have implemented a new lower price policy that had a positive impact in our brand health and volume. Therefore, sales were up by 1.1% in the first half of 2024, reaching EUR 106.5 million (sic) [ EUR 160.5 million ]. The competitive advantage that the Home Furnishing retail business has in supply chain led to a significant improvement in gross profit margin, which together with our focus on cost control and efficiency resulted in significant improvement in profitability. Therefore, gross profit margin was up from 44.2% to 46.3%. EBITDA was up by 73% to EUR 15.5 million from EUR 8.9 million in the first half of last year, and the respective margin was up to 9.6% from 5.6%. EBIT more than doubled at EUR 11.7 million from EUR 5.3 million and the EBIT margin was up to 7.3% from 3.3% in the last half of last -- in the first half of last year. Moving now to the sports retail segment. In alignment with our commitment to deliver a modernized and customer-centric retail experience, so far, we have opened 5 stores, 2 of them are in Greece in Mitilini and Athens International Airport, 2 of them are in Romania at Sibiu and Pitesti, and 1 in Bulgaria at Veliko Tarnovo, while we also continue with our expansion plan for the remainder of the year in order to reach our goals. We also focus on targeted activations and enhanced e-commerce strategy to bring higher visitorship as well as efficiencies through streamlining our logistics operations. In terms of figures, the Intersport business increased its sales growth pace in the second quarter due to higher traffic in both the physical and the e-commerce channel. Therefore, sales in the first half of 2024 were up by 3.6% at EUR 83.4 million. The sports retail gross profit margin improved versus last year first half, reaching 46.4% from 45.4% in the first half of 2023. Higher operating expenses within the first half of 2024, predominantly driven by marketing investments in growth initiatives are aligned with our strategy therefore, led to an Intersport EBIT at EUR 0.4 million from EUR 1.1 million in last year's first half. Moving to the Retail Health & Wellness segment. Within the first half of 2024, 4 new Holland & Barrett stores were established. By now, we have opened 10 stores in total under the group's refined store development strategy that includes Shop-in-Shop in Alfa-Beta Vassilopoulos. We are very happy with the performance of our stores as we see high level of returning customers and high loyalty rates. So our strategy focuses on increasing brand awareness further going forward. In terms of financial, during the first half of 2024, like-for-like stores posted a significant plus 60% year-on-year sales growth on the back of strong customer conversion and loyalty membership rates. Total sales reached EUR 1 million from EUR 0.3 million in last year's first half. The Holland & Barrett e-commerce shows a dynamic presence with its participation. In total, Holland & Barrett sales up 18% in the first year of its operation. The gross profit margin improved to 51.2% from 50.5% in the first half of 2023. And while the development of Holland & Barrett stores network and infrastructure continues, the existing stores EBIT improved year-on-year. Therefore, operating losses from Holland & Barrett stood at 1.1% from 0.9% in last year's first half. At this point, we are at your disposal for any questions you may have. We will start with audio questions first. So operator?

[Operator Instructions] The first question comes from the line of Stamatios Draziotis with Eurobank Equities.

A few from my side, please. Firstly, just on the top line. I'm just wondering if there was a slowdown in the second quarter in terms of top line growth mainly due to IKEA revenues being down in the second quarter. I understand that it is a drag due to pricing effectively. But maybe if you could provide some granularity as to the moving parts of this minus 2% in the second quarter, i.e., volumes, pricing and mix? And secondly, and maybe related to the first question, I'm just struggling a bit to reconciliate the top line decline in the second quarter with the significant uptick in gross margins which expanded quite substantially actually to 48% in Q2, which is quite an impressive performance. Could you maybe elaborate on this and how it stacks up effectively with the drag from pricing? And lastly -- well, lastly, I would like to move to the OpEx, actually, which for IKEA seem to have decreased notably again in the second quarter. Could you tell us why this has been the case and if there is anything nonrecurring over there? So any -- I don't know, any income related to subsidies, maybe from the franchisor?

Thank you very much for the question -- questions, actually. Let me [indiscernible] that our growing quarter 2 is just the price increase we applied, while volume in quarter 2 in IKEA was up by [ 3% ]. So we maintain our growth, [indiscernible] the part of our savings with our suppliers, to our consumers, this is why we have a low sales. This [indiscernible] gross profit is sustainable because it's the new prices of the suppliers on last throughout the year and the years to come. As regard to OpEx, we maintain a very good control over our OpEx and we are leveraging our operational efficiencies. And this -- the OpEx are growing below the growth of sales. This is something that we consider that is in the right direction.

If I may follow up with the last point. Actually, I'm just wondering because on a year-on-year basis, the OpEx for IKEA seem to be down. So I'm just wondering why this was the case? And obviously, given the increasing capacity, I guess this is counterintuitive, right? The OpEx should be increasing. So was there anything nonrecurring? This is basically what I'm wondering about.

Some of these cost savings and optimizations from the restructuring of the network, that's it.

[Operator Instructions] Ladies and gentlemen, there are no audio questions at this time. I will now pass the floor over to management for any written questions from our webcast participants. Thank you.

Moving to the first question from our -- online. The question comes from [ Luca Orsini ]. What is your target ownership of Trade Estate post the consolidation? Why do you maintain an equity structure that gets in the stock exchange on top of the discount to NAV? You also get the holding company discount. You know my view that two businesses should be kept totally separated through a spin-off of Trade Estate. You know that at the moment, we do own a Fourlis 63% of Trade Estate. And as we have mentioned, we are planning to deconsolidate by the end of the year, Trade Estate with our intention to drop Fourlis participation to just below 50%. So by the end of the year, this will have been done. Again, I'm moving on to the second question from Luca Orsini. Can you comment on current business and your view for the second part of the year? Is the improvement in profitability structural?

Yes. Let me take that, Elena. As I explained before, the profitability is being driven by two factors: number one, our strong supply -- our strong position in the supply chain that we managed to have significant decreases in the cost of our goods and in our operational efficiency. So growth is structural and will continue throughout the year and next year. In terms of top line, it depends, of course, in the market because we have double-digit in other businesses, but we will continue maintaining and even growing at low single digit of share in terms of volume. And we expect that we're going meet the guidance that we provide to you for EUR 550 million at the end of 2024.

Moving on to the next one, by [ Bernd ] from Zenon Investments. Very good your operating figures. Congratulations. In essence, the only big disappointment is the sluggish share price development? Could you share your perspective on how you think this discount applied by financial markets to the value of Fourlis Group can be at least partially closed? We are making strategic movements in the group. Catalyst for our performance, the performance of our retail business and Trade Estate and consolidation. What we are implying at the moment within our strategy and these actions we believe will help the group. So basically, the performance of the retail business, when the consolidation of Trade Estates is completed, will provide the appreciation to the value of the company that the company deserves. From Spiros Tsagkalakis, Pantelakis Securities. Excellent set of half 1 2024 results. Could you please provide some color with regards to Q3 top line growth of IKEA stores? Since year-on-year comparisons turned less challenging in half 2, what should we expect for Q3?

For Q3, we are performing better than the first half of the year in terms of top line growth. And you could expect something, let's say, the growth rate will probably double versus the one we have in the first half. In terms of -- I recall that we are 2% more in the first half. The quarter 3 will be almost double this growth rate.

Next one comes from Mr. [indiscernible] from ProtoThema. Could you tell us more about your plan with Foot Locker? For example, in which countries, will you launch the 15 to 20 stores in the first year? Also how you are going to finance the 5-year plan? And second question, what does that mean for Intersport growth plan? What's the plan there?

Thank you for the question. We are planning to start focusing for 2025 with three countries. Greece and Romania in 2025 from April onwards starting with the acquisition of the 3 shops in Greece and the 3 shops in Romania of existing Foot Locker. And in the meantime, we are already starting our presence in Bulgaria market from -- before the end of the year. So by 2025, we will operate -- we'll be operating with more than 5 shops in every country, namely Greece, Romania, Bulgaria. In terms of finances, as we said before, this is going to be financed by the group performance, the funds from the deconsolidation of our -- deconsolidation of Trade Estates by the shares we're going to sell. And this is partially from loans, but this will be the minor part of the financing. For Intersport growth plan, I would like to say repeat here, as we said in the press conference that Intersport will continue its growth plans and actually is going to benefit in the bottom line. We have no negative effect. We will have a positive effect [indiscernible] by increased visitorship. And -- excuse me. Sorry for that. What I said is that Intersport is going to have an independent growth. We have an independent team. It's going to be a different team for Intersport, a different team that is focused on the growth of Foot Locker. We expect positive impact from the Foot Locker both in top line because some of the shops will be very close to each other and going to have increased visitorship. And also, we're going to have a positive impact on the bottom line, using rationalization and of our store network and have a better return of top line per square meter occupied.

Next question comes from Mr. Brad Virbitsky from Equinox Partners. You characterized the home goods market as weak currently. Why do you think this is the case given the strong GDP growth -- Greek GDP growth? And what could happen to improve the market? Yes, the Home Furnishings market is -- we are seeing a negative low single-digit figure from the market. We actually grew or performing better than the market. Particularly in Greece, we performed significantly better. And this is what we will continue to do. This is why we have shown in our results, both in Q1 and Q2 that we preserve our volume growth despite this market. And this is what we will deliver in the future as well, based on IKEA's strong market share gains. [ Yen ] from Equinox Partners. First one, could you please go over CapEx related to Foot Locker in more detail? How much do you expect to invest overall in the next three years? And the second one, could you give your 2024 outlook for Intersport revenues and margins? CapEx for Foot Locker, well, according to the plans, we estimate we will be opening 10 to 15 stores every year. The CapEx per store, you can estimate on average is EUR 500,000. So the plan involved in the first year, approximately EUR 7 million in the third year where we estimate 40 stores, that means approximately 20 years. And for the 5-year plan, we estimate EUR 35 million to EUR 40 million of CapEx. Now in terms of Intersport '24 outlook. We have estimated a mid-single-digit growth in terms of sales and a margin higher than that of 2023. So this means according to our strategy, and this is why we have invested on marketing initiatives in the first half of this year in order to bring growth in the third and fourth quarter, we expect a double-digit growth on EBIT from Intersport by year-end. Banking News, Mr. [ Katka ]. Have you decided how the 63% will drop to below 50%, Trade Estate, it's only 3 months left and there are rumors for placement? Placement, yes, we will proceed to a deconsolidation by year-end. And this placement is one of the options that we examined. [ Merle Berthe ] from Business Daily. Could you say the CapEx for the full year? As we have communicated in the past, the full year CapEx -- full year '24 CapEx, including maintenance, is going to be around EUR 30 million for all businesses. Brad Virbitsky from Equinox Partners. Again, another one. What sort of operational losses do you expect as you ramp up Foot Lockers operations? Do you expect these stores to have a similar margin to your other retail businesses over time? And do you plan to locate these stores next to existing Intersport locations?

Let me take that, Elena. We don't see any operational losses from the Foot Locker operations. So we're going to invest, but the Foot Lockers operation is going to be profitable from the first year, the shops are very profitable. And this answers also your second question. The margin of this business is a bit over the Intersport's margin due to the assortment that they are selling and the agreements they enjoy with the suppliers. Now about the store locations, we're going to have an optimization of our store network being -- and be a combination of optimizing what we have and increase in the number of stores at the proper locations. Some of them were, as I said, will be close to the Intersport stores. It would add to the visitorship and then maybe also the OpEx of the Intersport stores.

Moving on to the next question from Equinox Partners. Could you also give an update on canceling treasury shares and buybacks? At the moment, the company owned 3.6% of treasury shares. We do have an approval to go up to the 5%. Canceling treasury shares, it is an option for us. We need approval from the BOD of that, but it is an intention that we have. The next one is from [indiscernible]. During the press conference about Foot Locker, you mentioned a probable acquisition of retail network in Bulgaria. When the acquisition will close?

Yes. I mean we said that. And to be very honest, this deal has been finalized. So as I said, we're going to be open in Bulgaria before the end of the year. We are now on the drafting phase. And as soon as we have the signatures, we're going to make the relative announcement.

We don't have any online questions, but can we please check with audio questions, please?

[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to management for any closing comments. Thank you.

We are very happy with our performance, and we expect that this will continue and even improve in the next quarters provided that the market will not change something dramatically. And we are confirming the guidance we gave to you during the General Assembly. And thank you very much for your attention, and let's renew our appointment for a quarter from now which we hope we're going to have even better results on the top line. Thank you very much. Elena?

Thank you very much for your attention. Have a nice day.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for calling. Have a pleasant evening.