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

Ladies and gentlemen, welcome to the Geox Group 9-month 2021 Results Conference Call. [Operator Instructions] The call is chaired by Geox' Vice Chairman, Mr. Enrico Moretti Polegato; and the CEO, Mr. Livio Libralesso. Now I would like to turn the conference over to Mr. Enrico Moretti Polegato. Please go ahead, sir.

Welcome, everybody. The 9 months results highlights an important improvement compared to last year in a scenario still complex and that was impacted by the pandemic. This situation impacted both the production side with the temporary close of some factories in there in China and the commercial side, with the closure of stores in Russia. Despite this scenario, revenues increased in the 9 months. The marginality of stores continues to be in strong progress, cash and the financial indicators are under control. These are the first important results of the initiatives undertaken since the beginning of 2020. In these months, we have carried out the deep reorganization of numerous markets to make our business model even more efficient, digital and in line with market trends. We have dismissed nonprofitable and nonstrategic activities in order to create additional resources to invest in higher-value assets. In 9 months, market and channels on which we mainly focus our attention continue to grow in a significant way. Russia reported revenues up by 44% on 2020 and 11% on 2019. Digital channel now represents 1/3 of the group revenues have shown a plus 30% growth in both 2020 and 2019. And the start of the fourth quarter is showing a further improvement in performance. Today, the RSA in our stores are growing by 50% on the first quarter of 2020 and by about 3% on the fourth quarter 2019. The scenario remains very complex, but we are confident that our efforts and our work are going in the right direction. Next second day of December, we will present the financial community a new industrial plan aimed at increasing the relevance of our values of our brand and an approach focused on customer centrality and distribution. Thank you, everybody. I hand over to our CEO, Mr. Livio Libralesso.

Thank you. Good morning, and good afternoon. Thank you for joining us today to discuss 9 months '21 net sales net financial position, current trading and some trends for full year 2021. Let's start with Slide #2 with the highlights. So net sales at EUR 463 million, up 7.8%, driven by the wholesale growth by the e-commerce solid performance and also by DOS comparable store sales up 12%. Q3 net sales are close to EUR 200 million, plus 7.1%. And in this quarter, the DOS like-for-like has been plus 7.2% on Q3 '20 and minus 3.7% on Q3 '19. Net working capital is under control at EUR 157 million, well below both 9 months '20 that was at EUR 250 and 9 months '19 at EUR 243 million. Net financial debt adjusted before lease liabilities at the end of September was EUR 95 million, in December last year it was in the region of EUR 100 million. Current trading is positive. Since the 1st of July, the store network has been fully opened, excluding just last week in Russia, where we experienced a new lockdown in Moscow and St. Petersburg with 29 doors closed for just last week. Today, the entire network is again fully operative. Comparable store sales year-to-date, week 44, are improving at 17% thank to a good start of Q4 that is up 50% on 2020 and 3% on Q4 '19 with a relevant decrease in lockdown. Please go to Page 3 for a quick overview on the restructuring plan. As already commented and disclosed in July, I said mission accomplished. And in 9 months, we completed all the operation of our organization. In this chart, there are the details of the action taken. I want just to comment the last one. In July, we announced the closure of the Serbian plant. In October, the group sold all the machineries and equipment. And yesterday, the Serbian company finalized the disposal of the premises receiving the proceeds. As said, the group did not incur any material restructuring costs for this tough and fast reorganization. So starting from next December with the Investor Day and the business plan, I hope we will only speak about the future strategy and the future business. Please go to Chart #4 for numbers regarding the store network. Yes, there is a summary of the ongoing portfolio network optimization. The number of modern stores at the end of September is 783 compared with 891 in September last year. So we did the 108 net closure in the last 12 months. So with the net impact on sales in the region of EUR 15 million versus September '20. The plan is to have in Q4, additional 9 net closure for the U.S., but will be exactly balanced by 9 net openings done by franchisees and distributors. Please go to Chart #5. In my opinion, this is an interesting chart. Here, you can easily find all the details regarding like-for-like by quarter, split by brick-and-mortar and web. However, I would like to elaborate a little bit on the comparison base. The dark blue boxes contain the average percentage of closure for lockdown by quarter, experienced the last year and this year -- in this year, in order to better understand the impact of mainly comparison based on actual like-for-like. In this 9 months, the DOS network has been closed on average 19% versus 23% in 9 months '20. Like-for-like has been positive, plus 12%. You can see that third quarter this year is fully comparable, 100% open versus last year, and the like-for-like is plus 7%. So more or less, this is the magnitude of the improvement we are having in the KPI compared to last year. It is important to underline that Q4 this year and Q1 and Q2 next year are expected to deliver an extremely positive like-for-like, also thanks to this really easy comparison days. I mean, the comparison days between fully open network that we assume to have in the next -- in this quarter and the next 2 quarters versus a partially closed network by quarter of last year of 23%, 34% and 20%, respectively. And in fact, Q4 year-to-date is up 50% on 2020. But more important, it is delivering also an encouraging plus 3% positive like-for-like on Q4 '19 to date. So it means that our retail KPIs are able to recover, in any case, the lack of traffic in the region of 20% that we are still experiencing in the network. Please go to Page 6 to comment 9 months pipeline by channel. As said, the top line grew 7.8%, and all channels are positive, and this performance is driven by a stronger wholesale that is up 13%. This positive result is explained by the fact that the weak spring/summer '21 initial order intake has been more than compensated by a positive initial order backlog for 2021 season and by some positive key driver in the in-season management, I mean, a good trend in the orders, both in spring/summer '21 and for Winter '21 due also to a certain shortage of products in the market regarding competitors. An increase in sales of aged inventories according to the cash generation targets and also a material reduction in the commercial condition. Also franchising channel is positive. The growth is 5.5% due to a positive like-for-like and to have favorable timing effect on the different season deliveries that have more than compensated the decrease in the perimeter, minus EUR 5 million or minus 15%. DOS channel delivered a slightly positive growth, plus 1.4% as a combination of strong web like-for-like, plus 25%. A good brick-and-mortar like-for-like, plus 8.8% that have been able to compensate the negative perimeter effect, EUR 10 million or minus 7%. And this is exactly in line with our strategy to close nonrelevant marginal locations, brick-and-mortar location in order to move to digital new stores, both with direct size and alliances in marketplaces with our digital key account. On Page 7, there is a very quick overview to net sales by region. All the region are positive. Italy positive trend is supported by a really strong wholesale, plus 24%. In Europe, wholesale grew 10% on average, while franchising and DOS suffered a more severe lockdown versus 9 months '20, especially in Germany, Austria, U.K. and the Netherlands. North America is finally up 4.2%, thanks to a good Q3, up 28%. After the heavy organization implemented with the closure of 10 DOS in Canada and the exit from brick-and-mortar retail in the U.S., the group is now focusing the business on online and on wholesale key account partnerships, both brick-and-mortar and digital. Rest of the world is positive double-digit, 16% as a combination of 2 performance or 2 opposite performance is different by geography. Asia Pacific is down 6.8% due to 2 exceptional events. I mean, the liquidation of the Japanese subsidiary, moving the business to new distributors that will be at full speed in 2022 and the closure of the contract with the wholesale Mainland China distributors. However, like-for-like in China is positive, 19% in our network and the new strategy to have different distributors by provinces is gaining traction under the drive of the new General Manager. On the other side, on the positive side, Eastern Europe continues to outperform, delivering plus 23%, driven by Russia, up 44% in 2020 and up 11% on 2019. Like-for-like in Russia has been plus 56% in 2020 and 20% in 2019. Russia is actually close to 10% of the entire business of the group. On Page 8, net sales by product. Sorry for the voice. Just to say that ready-to-wear has been more than compensated -- has been more impacted by the pandemic, with ready-to-wear specialists really prudent in buying the new product. On the other side, performances of footwear has been fostered by Spherica performances by Nintendo's Super Mario by really strong back-to-school and by Amphibiox. These products have been really well supported by the advertising campaign launch in spring, in summer and in fall. Please go to Chart #9 to comment direct online evolution of top line. Online sales are up 25% on 9 months '20 and 75% in 9 months '19 with a really stricter full price approach, close to 500 basis points versus 9 months '19. Please go to Chart #10 to comment working capital and net financial position evolution. Net operating working capital landed at EUR 157 million, the lowest in recent years, mainly thanks to a good performance in inventories down EUR 30 million and also to credit management with the receivables down EUR 30 million as well. Inventories are under control, thanks to the action taken and a careful buying for winter '20 and spring/summer '21, with a reduction of EUR 100 million in new purchases compared with the previous corresponding season. In addition, the progressive reopenings of DOS and outlet delivered in Q2 and Q3, a cash generation, so that decreased from the seasonal peak in April at EUR 125 million to EUR 108 million at the end of this September. In addition, the fair value of our hedging instrument is positive EUR 13.5 million. Consequently, net financial position before our lease liabilities but including the positive value of hedging was additionally down at EUR 95 million. Please go now to Page 15 for the outlook. The recent evolution of the pandemic is increasing again, volatility and uncertainty. In particular, the resurgence of infection in Far East countries led to factories lockdown in some Asian areas still characterized by low incidence of vaccinated population. I mean, especially Vietnam, where the group produce about 15% of its collection as well as other short production stoppages in some areas of China. And this, combined with general complexities of port congestion and container shortages has actually resulted in 3 factors impacting the business. First, a temporary shortage of some product line for replenishments in the direct distributor network and also franchising, penalizing, especially with release the last 2 weeks of September. And we have been able to recover these sales in the first weeks of October in any case. A cancellation or revision of the commercial conditioning of some orders in the multi-brand channel due to the delays in deliveries or production constraints and a greater recourse compared to forecast to our transport in order to comply with the delivery time requested. To quantify the overall impact of this factor in the second half. And so on the entire financial year, we can say that approximately, we deal with EUR 14 million of lower revenues and EUR 14 million in terms of a lower gross margin, EUR 7 million linked to lower revenue and EUR 7 million linked to the increase in the air transport cost. However, we maintain the guidance, I mean, considering the positive start in Q4 '21 for DOS, where like-for-like is up 50%, a little bit better than the expectation on 2020 and 3% on 2019, confirming also relevant improvement in markdown, 800 basis points versus 2020 and 360 basis points versus 2019. And assuming to maintain this good double-digit trend in the orders in the wholesale channel also for the remaining 1 month enough. And assuming that no additional lockdown will occur within year-end, then we confirm the previous guidance of full year '21 sales expected above EUR 600 million with a low double-digit growth versus last year. And full year '21 gross margin up 300 basis points versus last year in the lower end of the previous guidance, so that was 300, 350 basis point of improvement. We are now ready to open the Q&A session and take your questions.

[Operator Instructions] The first question is from Oriana Cardani with Intesa Sanpaolo.

Yes. The first one is on logistics program. Are you seeing any sort of ongoing pressure in terms of overall supply chain that could impact your product availability or your profitability also in the first quarter of next year? And the second question is on pricing power. As inflationary pressures are getting bigger also for next year, do you think you could pass them to the clients with repricing in 2022?

Thank you for these 2 questions. So for sure, let's say that things are improving once Vietnam exit from the lockdown, we took the decision to cancel some production orders in order to, let's say, free up production capacity to match spring/summer '22 production. Otherwise, we would have also delays regarding spring/summer '22. So today, the entire production footprint is open, maybe not at full speed. So for the time being, we are not, let's say, forecasting another disruption in the production capacity. But for sure, we are really monitoring day-by-day, the situation in order to take any mitigation action in case they will be required. For sure, logistics is still a little bit impacted in terms of time and lead time in order to get the products by sea from Asia to Europe and even more to North America. And in my opinion, we can quantify this delay in the region of 10, 15 days. So there is a strong pressure on companies in order to anticipate initial order campaign and also in there, let's say, forecast capabilities to address in advance the assessment and the allocation of the orders to the different production sites. So for sure, at least the transportation costs will impact also Q1 '22. We hope that given the fact that for us Vietnam was just 15 and not 50 like many competitors, especially in the sports goods and sporting industry that are releasing a really tough press release in this week in these days. Let's say we hope to have been able to manage at least the quantities, at least the quantities. We are working on the -- expecting the due days regarding spring/summer '22 receiving some deliveries. So the real issue is what about the prices and if the company is able to pass 100% of this increase that putting together raw materials and transportation, we may think to 5% to 10%. It depends from the country to prices or for sure, luxury is increasing prices with no problem because it increased prices is even more sort of exclusivity focus for brands like ours, the pricing power is lower for sure. So when we talk about prices we are really evaluating this. For sure, we are continuing the action undertaking in order to reduce costs and to be more efficient. However, for future collection, I mean spring/summer '22 and also for winter '22, we also proceed with a reasonable and, I would say, weighted price increase. To give an example, spring/summer '22, we increased wholesale price list in the region of 5% on adult and less on kid because kid is really, really growing. It is clear that this may had first impact on the expected gross -- standard gross margin, but we are working in order to recover the additional gross margin reducing commercial condition and the discounts of the network. So I maintain the, let's say, our target to be able to increase the gross margin compared to 2021 in 2022. For winter '22, so why we have been a little bit prudent because for us, it is mandatory to recover top line. And this, let's say, 5% on adult paid a lot because the initial order collection of spring/summer '22 has been plus 25%, so double-digit. So okay, you have seen that our pricing power and the fact that now Geox is quite strong in the market in the wholesale because we invested a lot with several advertising campaign, we have seen, okay, the EUR 700 million that is to overcome the EUR 700 million of 2022, that is our target is feasible. Now in fall/winter '22, we will increase prices in the region of 8% to 10%. Again, with the focus to be able to increase the gross margin and eventually still an additional reduction in discounts and commercial condition for wholesale. A couple of months ago, I would have said there is no problem to increase the gross margin in 2022. Today, after what we have seen in terms of raw materials and transportation increase of expenses, I can say we are working in order to deliver an increase in gross margin also in 2022. Joint with strong increase in the top line because our goal is to overcome EUR 700 million. And I strongly believe that this is absolutely feasible according to our first, let's say, insight regarding next year, and especially considering the fact that in the first half of 2022, we hope to have the full network open. And consequently, the comparison base is easier in the region of 25% of closure experienced this year. And the 25% of growth of the wholesale backlog is in the right direction.

Next question is from Marco Baccaglio with Kepler.

One is a clarification, what is the net financial position at the end of September? Because in the presentation, I read EUR 109.1 million at Page 10, while in the press release, I read EUR 95 million. And is it correct that you are saying that you expect a further improvement by year-end? And the second question is, if you can break down this 22% of online sales, how much is you and how much is third parties?

Okay. So net financial position is, let's say, net financial position versus banks plus or minus the fair value hedge of derivatives. So EUR 108 million is the debt. And then there is -- we have EUR 13.5 million of positive value of our derivatives because we have been able to, let's say, to cover U.S. dollar for winter for full year of '22 quite well, let's say, in the regional average of 1.19, 1.20. So the value is at EUR 13.5 million. And so EUR 108 million, less the total value means EUR 95 million. That is the net financial position before IFRS 16. So assuming the same value of hedging. What about the EUR 108 million of debt, we are -- this is important also to say that today, we have been able to let's say, to close the most part of the negotiation we had in place with the landlords. So in June, the outstanding debt regarding nonpaid rent was EUR 14 million. At the end of September was EUR 9 million. So the EUR 108 million debt include also this additional payment. Today, it is EUR 4.5 million. It means that we have been able to close more or less all the litigation -- all the negotiation we had and notwithstanding this factor, we assume to be able to be regarding debt versus bank in the region of EUR 100 million, EUR 110 million, as I said in the last call. Then we will see what about the positive value of derivatives. Regarding the online, putting together wholesale web and direct web, the growth is 30%. Direct web the growth is like-for-like is 25%. Today, we are in the region of EUR 140 million at this -- at September and EUR 38 million direct web, EUR 102 million wholesale web.

[Operator Instructions] Mr. Moretti Polegato, there are no more questions registered at this time.

Okay. So thank you for your time. We are inviting you to the Investor Day on December 2. It will be in the afternoon at 2:30 p.m., we will provide also the streaming and so I hope we will be able in that Investor Day to clarify the future strategy. I'm really pleased to say that reorganization process has been finished, completed. So now we -- so on my table, there are -- there is no other big challenges to manage and also to have been able to sell the premises in Serbia and to close also in very -- in 3 months. Also, this deal has been important. Let's focus on the future. Thank you very much. Bye.

Ladies and gentlemen, thank you for joining the conference is now over, and you may disconnect your telephones.