Geox S.p.A. (GEO) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Geox Group 9 Months 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Enrico Moretti Polegato, Vice President of the group -- of Grupo Geox. Please go ahead, sir.

Regarding the performance in the first 9 months 2020, was strongly affected by the pandemic. Since the very start of this exceptional situation, Geox has taken all the necessary measures to protect both its people and its solid financial position. Thanks to the efficiency of these measures, we are now able to deal with the current situation in our organized way and look confidently towards the future. Sales have gradually begun to recover in the third quarter, following the reopening of our stores with positive performance being recorded in August, thanks to the summer sales. However, in October, new store closures began to be imposed due to the worsening of the health emergency. As of today, 1/3 of our direct operated stores are temporarily closed once again. With this situation, particularly affecting Italy, our main market. Faced with such challenging circumstances, the direct e-commerce channel is playing an increasingly important role as this is the only channel able to respect social distancing rules. Our direct e-commerce channel has already grown by 40% in the first 9 months of the year and is now recording growth over 70% in the fourth quarter. Together with our solid financial position, this performance is making us even more determined to continue the initiatives already undertaken to implement a streamlined digital and customer-centric business model as soon as possible. A business model able to seize the opportunities that will be created as soon as the emergency is over. We are, therefore, rationalizing our store network, reviewing rent contracts and cutting many costs, but we are also investing. We are continuing to invest in the e-commerce channel, expanding the range of digital services for stores. We are investing in marketing with 2 new [adves] campaigns over the space of just a few months. We are introducing new window displays in our stores. We are reviewing our product collections, further improving the materials and the leather used. And last but not least, we are investing in research and development, just like we always have, in order to ensure the utmost well-being for our customers. Well-being has always been one of Geox core values and today more than ever, it represents a distinctive feature of our brand, a feature that will be increasingly sought after by consumers. Thank you very much. This is all from my side. Let me hand over to our CEO, Livio. Thanks again.

[Foreign Language] So good morning, and good afternoon. Thank you for joining us today. Today, we presented the numbers regarding top line and working capital, net financial position and some trends for the full year also in terms of gross margin. Enrico already commented the part of the highlights, however, please go to Page 2. Sales at EUR 430 million, down 33% due to the temporary store closure and the reduction in traffic caused by COVID-19 emergency. However, the performance gradually recovered during the third quarter that delivered minus 33% -- 23%, with DOS recording positive sales in August and a minus 16% like-for-like in the quarter. The e-commerce channel continues to record strong growth, plus 40% in the first 9 months and plus 43% at week 45, thanks to excellent performance in October, up 84%. Group balance sheet and the financial position is solid, and thanks to the action taken, Geox has been able to capture -- to keep the debt under close control despite the effects of the pandemic. The net financial position at September, 2020 before IFRS 16 amounts to minus EUR 84 million versus minus EUR 20 million at September last year. Net financial position remained in line in October also, and the group generated EUR 8 million of cash in the last 4 months. Please go to Page 3, in order to share with you a summary of how the pandemic is impacting the industry. As far as Q3 is concerned, July, August and September, there are 2 main topics to discuss. The first one, pre full -- flows of product have been substantially canceled, maintaining the spring-summer '20 collection and its [indiscernible] -- period until mid-September. As a matter of fact, fall/winter '20 season experienced an [ad] stopped of the initial order selling campaign on March 15 due to the emergency of the lockdown. And then Geox has been in close contact with its clients in order to define in advance the real amount that we were willing to receive after COVID outbreak, accepting some important cancellation. We chose to this -- the decision to protect cash, satisfying to some extent the top line. The combined impact of these 2 factors is the '21 cut on our buying of fall/winter but we disclosed in May regarding both wholesale and retail. Please go to Page 4 for an update on the current situation regarding lockdowns. As you can see on the chart, there are different types of lockdown by country. However, in the red box, you can see that based on the current information, 35% of our DOS and 28% of our franchising networks are closed the entire week. In addition, considering the stores located in Italy in department stores that are mandatory closed during the week -- during the weekend, this percentage increased, respectively, to 47% for the DODS and 41% for franchising. You can see that France is 100% close; Spain, 30% due mainly to Catalonia; Belgium, 100%; U.K., 100%; Poland, 100%. Please go to Page 5, where there is the monthly trend of the DOD operating status and like-for-like evolution. In the dark blue boxes, they represent the average percentage of DOD closed, during each month and the dotted line represents the like-for-like performances. Starting from the reopening in May, you can see a progressive recovery and comparable sales turned to positive in August. Like-for-like performed better than traffic, thanks to the improvement of all the retail KPI and especially the conversion rate. Also, the first 2 weeks of September have been positive, thanks to a good performance of kids product in back-to-school and adults in back-to-work. Then the tracks regarding the [indiscernible] of the pandemic and the lockdown in June, drove down the traffic again. And you can see minus 15% like-for-like in September, minus 18% in October with the first store closures and minus 52% November to date. However, the Q3 like-for-like is minus 16%, quite good considering the fact that the footprint of our DOS network is focused mainly in Italy, Spain, in France and in Germany. France and Russia, in any case, have been flat or slightly positive in the quarter. Like-for-like year-to-date at September is minus 32%, and also today, it is the same at a week 45. Please go to Page 6 for a focus on performances. Online jumped again with the second wave of restrictions. You see the performance of our direct e-commerce plus 40% in the 9 months. Then Q4 to date is up 72%, thanks to a strong October that delivered a plus 84%. Kids is performing very well online, plus 100%, and represents 37% of year-to-date online revenues, also boosted by our important collaboration with Disney and WWF. Please go to Page 7. To understand, one of the reasons also behind the growth of e-commerce. The investments made on CRM tools and benefit program are gaining traction. Our aim is to better engage our customers and improve our customer-centric approach. 50% of total retail revenues came from loyalty program customers, and there is an increasing incidence of the retail customers, thanks to a more tailored CRM approach. Skip to Page 8 to comment net sales by channel in Q3. This is a new slide compared to the previous presentations. Wholesale is down 23% with a trend in line with the reduction in fall-winter '20 purchases of minus 21%. Franchising is down 47%, impacted also by some shifts in fall-winter '20 deliveries and a negative perimeter effect of minus 14%. DOS trend is completely explained by like-for-like, minus 16% in the quarter and a slightly negative perimeter effect. By region, Italy is down 37%. It is more -- it has been more impacted by the perimeter, both in the wholesale channel with a difficult financial situation of some retail chains. And in retail, minus 8% or 20 net closure in the quarter. Like-for-like has been in line with the trend of the quarter at minus 16%. Online channel, really positive, plus of 74%. Europe is down 9.3% in the quarter. U.K. is positive and benefited from some shift in deliveries. France is flat. Germany and Austria, just slightly negative. North America trend is similar to June, and it is impacted by the strong rationalization of the network we are implementing in Canada and in the U.S. I would say successful implementing. Rest of the world is down 27% with better performances in Eastern Europe and Russia. In Page 9, there is a net sales analysis year-to-date 9 months by channel, and it includes the information regarding H1 we commented last September. So the main topic is that wholesale is down 30%, mainly impacted by the initial order reduction due to the COVID-19, done in close collaboration with customers in the region of EUR 50 million, EUR 56 million for spring-summer and EUR 45 million for fall-winter, the minus 21% I commented and the EUR 220 million of the following cancellation regarding just in spring-summer '20. Franchising drop is 50%, and this is mainly explained by minus 32% in terms of like-for-like, in line with our U.S. network 9 months to date and also the 14% of the rationalization of the perimeter. DOS is down 33%, totally in line with the like-for-like decrease due to the store closure. On Page 10, you can find the details of the 9-month net sales by region, but nothing to add to what we have already discussed, Italy minus 44%, more impacted by the store closure given the concentration of DOS and franchising stores in Italy. Europe minus 25% with a lower number of closures. North America is down 46%, including COVID effects and also the strong rationalization in Canada. Rest of the world is down 30%. On Page 11, net sales by product. Apparel is doing a little bit better, minus 30%. In any case, it remains at 10% on sales. On Page 12, you can find the store network evolution. As the Vice President said, the rationalization plan is ongoing, 9 months recorded the 83 net closures. So today, the total network is 891 stores, out of which 420 DOS compared, respectively, with 974 stores, out of which 454 DOS in December last year. In Q4, we assume to close additional 10 DOS net and 10 franchising net, landing at 870 stores. Please go to Page 15 to comment on working capital and net financial position. Operating working capital landed at EUR 216 million, thanks to a strict management of receivables and the renewal of the vendor financing program that enabled the group to mitigate the increase in inventories. In any case, increase in inventory is not so material because we have been able to cut fall-winter '20 purchases. The ratio in terms of sales, 36% reflects the decrease of sales already described. The net financial position before IFRS 16 and before fair value edge, at the end of October is minus EUR 86 million versus minus EUR 37 million in October last year. The initiative implemented by the group to protect the company cash flow allowed beneficial management, and then in the last 4 months, the group has generated EUR 8 million cash. The second wave of COVID-19 had already been taken into consideration as a possibility and the decision made over the course of the year, with particular reference to rationalizing the store network, limiting investment, significantly cutting operating costs and reducing fall-winter '20 purchases. Will now allow the group to also manage the second wave of emergency in a position of financial security. Also supported by the fact that there are a good number of suitable committed lines of credit available. In any case, we are strongly committed to maintain debt absolutely under control. Finally, on Page 14, there is some guidance regarding the outlook. With regard to full year forecast, the current situation is making it extremely difficult to make any sort of prediction considering the high level of uncertainty surrounding the duration and possible extension of the new lockdown measure currently present in all of the group's main markets. However, the figures published today show the following: First, sales performance in the first 9 months of the year was equal to minus 33%; to date, week 45, the fourth quarter is recording a like-for-like sales performance of minus 30% overall due to the stores being temporary closed again for the month of November, and the strict restriction on people mobility. Considering these trends, it is fair to say that the sales trend for the entire year has already been substantially defined. The actual reduction in turnover for 2020 will nonetheless depend on how the pandemic evolves and on any new decision taken by the various governments in order to combat the spread of the virus. On the other side, a good recovery in terms of gross margin is confirmed for the end of the year. We assume to be able to recover 50% of the drop we recorded in June. Why? Because it is totally due to the provision regarding the excess of inventory of spring-summer '20, so we believe we'll be able to maintain this drop in the region of 450, 500 basis points compared to last year, totally due to the provision for COVID-19 impact. And thanks to our financial solid position, we can continue to focus our efforts, both on managing the current situation and on our medium-term strategy, increasing investment in strategic marketing projects aimed at the customer centricity. And in initiative to transform the business model moving towards a fully omnichannel approach and a segmented distribution. We are now ready to open the Q&A session.

[Operator Instructions] The first question comes from Mr. Marco Baccaglio of Kepler.

I have a question on how you are planning the wholesale campaign for 2021. So what is your spring summer-collection planned production and behavior with very independent retailers you're serving?

So first of all, I want to say that we have been able to produce, receive and deliver 100% of the fall-winter '20. So we have been able to manage COVID-19 regarding fall-winter '20 issues. On the other side, you are right, we started to collect the new orders for spring-summer '21, starting from June. So in the middle of the emergency, we have been able to implement really a well-appreciated showroom, virtual showroom and virtual catalog tools that has been appreciated by the markets. And our customers told us that we have been able to create one of the best tools in the market, really easy to use and really reach in terms of assets and the digital explanation of the products. So we have been able to finish, I would say, the selling campaign, notwithstanding the tough market condition. Our customers are really prudent as an approach to new buying because, as you know, they have experienced the lockdown as well. And so they have a lot of products unsold in their inventories. However, let's say, we have been able to reach the target we defined to the sales force. Below initial orders of spring-summer '20, but as you have understood, those initial orders have been reduced by -- subsequently by cancellation. So we assume to be able to be to be fully positive for [indiscernible] in -- regarding spring-summer '21 compared to this first half 2020. I hope high single, but I hope also double-digit in terms of turnover of invoice regardless spring-summer '21.

Compared to what you reported in H1, Livio?

Yes, yes.