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

Ladies and gentlemen, welcome to the Geox Group First Quarter 2020 Results Conference Call. [Operator Instructions] The call will be chaired by Mr. Enrico Moretti Polegato, Vice President; and Mr. Livio Libralesso, CEO of Geox Group. Mr. Moretti Polegato, you have the floor, sir.

Good afternoon, everyone. Despite being based on a common approach, the strategies we are implementing are being adapted based on the decisions made by various governments in the countries where we operate. We got through Phase 1 of the pandemic, and we are now heading towards production activities being able to start up again. Despite the difficulties that everyone has had to face over the last few months, for us, it was an important opportunities to redefine our work plan based on what the new market will be like. We believe that in the new market, there will be an even more direct link between companies and the consumers. Using this important dialogue helps us understanding what we have to do. In this regard, our e-commerce channel has recorded strong growth, being the only channel that has remained operational after all of our stores were closed. We believe that this channel will represent an important area of development for Geox in the future and will be integrated in our omnichannel approach. Geox great success in the world of e-commerce is due to a number of factors: a very strong brand awareness, a global distribution network, a high level of customer loyalty built up over the years and mostly because Geox is recognized for its reliability and for its guaranteed products. That's why we are confident about our future prospects. Back to the current situation. I feel that I must also remind you for all the measures we have taken so far, such as constantly protecting our colleagues by strictly complying with applicable legislation to prevent the spread of the virus, also using serological tests for employees still coming to work. To sum up, as a Vice Chair, and in the name of Geox majority shareholder, the financial holding company, LIR, I would like to thank everyone who has worked with the company during this difficult time, often sacrificing the time with their families. A special thanks to our CEO, Livio Libralesso, who is demonstrating a very high degree of professionalism in carrying out his role. Thank you, and now let me carry over to Livio for the sales presentation for the first Q year '20.

Thank you, Enrico. So good morning, and good afternoon. Thank you for joining us today to discuss Q1 2020 sales and trends. Geox already disclosed the trends in the press release dated March 27. So today, I will just give a quick overview to top line information in order to focus on current trading and coronavirus impact and on reopening plans in progress. Let's start with Slide 2. From a social point of view, the pandemic is an unprecedented severe situation, and protecting our people, their families and our customers is one of our top priority. The other top priority is to protect the company and its financial stability. In any case, the social responsibility is one of Geox' fundamental value, so in order to contribute to the collective effort to reduce the contagion, we did our best. The group decided in March to temporarily close all of its direct operating stores, Asia Pacific excluded. The owners, family and the company have made important donation regarding intensive care beds, ventilators and facemasks, and we immediately reduced the physical presence in all the regional quarters with massive recourse to remote working. And now that we're entering the lowering phase, the company is implementing, in a very strict way, sanitary protocols. In addition, senior management have announced all variable fees for 2020, reducing also their fixed pay by 20% each week and donating at least 1 day of unused holiday until business resumes. These savings will go towards refinancing the company existing welfare plan based on a digital platform, where people can buy product and services focused on health, safety and families using a sort of rechargeable credit card. And finally, as you have seen on the cover, the group started the production of reusable masks for people and customers soon in the stores in order to be more sustainable. Please go to Page 3. There is the network status as of today. North America, still closed. In Europe, Germany, Austria and the Netherlands are the first-movers countries, together with Poland and Hungary that we included in the rest of the world. Having a look to the Europe box, you can see that Geox decided to open according to a program divided into 3 ways regarding Germany and Austria and the Netherlands: the first, starting on April 27, with 11 stores; the second on May 2, with 23 stores; and the third, tomorrow, with additional 14 stores so that the network in Germany and Austria will be completely open. In a while, we will comment on current trading. Italy still closed until May 18, and rest of the world is still 65% closed. You see in the box that the open stores are 63 in China, Hong Kong and Macau, 10 in Poland and 1 in Hungary. Please go to Page 4, where you can find the resume of the official opening days. Please note that I do not feel confident in confirming all these days because the situation changes day by day. In addition, it is important to underline that malls and department stores reopening will often be delayed by competent authorities compared to self-standing stores in city centers. May 11 is an important day for the big countries like France, Spain, Benelux and Switzerland. However, in France, malls with more than 40,000 square meter are not allowed to open until the end of May. May 12, Russia. But in my opinion, no chance to respect this date. The situation is dramatic in Moscow, with more than 10,000 new cases per day. So I think that the government will be forced to postpone the reopening at least until the end of May. May 16, U.S. Again, more likely it will be postponed to the end of May. May 18, Italy. And we suppose that only self-standing stores will be allowed to open with postponements regarding department store. At Page 5, there are the highlights of the presentation. So Q1 group sales at EUR 183 million, down 30% compared with last year, as expected, with brick-and-mortar distribution really impacted by COVID-19. On the contrary, a good and strong performance of online channel up 21% in Q1, with a further strong acceleration in April up 102%. We confirm that our global team is managing carefully the situation at an international level and is implementing an aggressive plan to mitigate the impact of the emergency on the business. Last but not least, the group is extending the financial resources in order to properly manage the COVID-19 financial needs, and we have been successful -- already successful in securing some additional credit lines. Please go to Page 6 to comment net sales by channel. Wholesale is down 27%, impacted by the lockdown measures that determined the suspension of deliveries to partners from mid-March. Franchising is delivering real EBIT drop, minus 64%. However, it is important to clarify that it is a sort of timing effect because there are 3 important assumption behind this strange trend. The main reason is explained in the box. You see that the gross deliveries declined 33% due to the suspension of the deliveries from mid-March, like for wholesale. In addition, there is a perimeter effect of minus 53 stores, 13%, compared to March '19. But the most important assumption is that, and this is the news, we expect sold goods at the end of the season to be at least the double compared to last year, and this determined a double provision to return funds. You know that most of our franchisee have the right of returns, so franchising is early reflecting what are our assumption at the end of this spring-summer season. U.S. is down 20%, and this is totally due to the temporary store closures after a positive start in January. Please go to Page 7 for the current trading as of week 18. Thus like-for-like is keeping worsening being stores still closed. You see minus 21% as of March and 39% as of May 3. The real positive news is that the e-com is really outperforming. March was a little bit impacted in terms of traffic and conversion. And then suddenly, in April, traffic rebounded, recovered, and the conversion rate doubled. Consequently, April has been able to deliver a plus 102%, driving the year-to-date performance to plus 41%. Please have a look at the pictures down on the right for our really strong collaboration in kids. I mean, Disney Frozen, Disney Mickey Mouse and all the other characters and the collaboration regarding sustainability with WWF. Why I'm underlying this? Please skip to Page 8. There are the KPIs of April web performances. As I have said, the total traffic declined in June -- in March and then recovered in April, where the decline is just 10% in main regions. Germany excluded because the traffic is up 60%, but really showed a better quality with the conversion rate in April that more than doubled, plus 120%. The average ticket is slightly down, minus 10%. This is a mix effect mainly due to the really outperformance of kids shoes, plus 240% season-to-date. There is also an higher relative increase for the younger cluster, 18 to 34 years old, especially women, and we think this is likely driven by moms because kids is up, as I have said, 240% year-to-date. Also, benefit customers -- the benefit -- the customers that belong to the loyalty program more than doubled in April 2020 versus April 2019, thanks also to a positive acquisition rate. New customer represented 50% of the total benefit customers in April and also probably driven by moms. So kids is really performing strong during this spring-summer. On Page 9, you can see the comparison in the recovery trends for the stores that have opened. China, Hong Kong and Macau have recovered close to 50% of the initial drop. In Austria and Germany, the trend seems better. Just one week -- I mean in the first week, the week of the 27th of April, the same drop in traffic, minus 80%, minus 90% experienced in February in China, are delivering a better like-for-like in terms of sales, just minus 70%. And also, this is due to a really better conversion rate. It seems that the motivation to buy is really high. The first days of this week 19, Monday, Tuesday and Wednesday, are doing better, minus 60% is the traffic and minus 35% in sales. But I strongly believe that it is too early to consider this trend as a proxy, I would say, as I hope for the near future. On Page 10, a very quick view to net sales by region. Italy has been more impacted by store closures given the concentration of DOS and franchising stores. It is down 46%. Europe has the same number of stores. However, the lockdown started 1 month later, and wholesale deliveries are normally anticipated compared to Italy. So Europe less suffered when deliveries were suspended. North America is down 15%, and the trend is the same as Europe. Rest of the world is down 25% as a result of 2 different balancing scenarios. The negative performance of Asia Pacific that experienced the first lockdown, and this performance has been mitigated by the positive trend of wholesale in Eastern Europe and a very healthy double-digit growth like-for-like in Russia, where DOS were performing very well until mid-April. On Page 11, net sales by product. Little to say, apparel is doing a little bit better, and now it is 11% on the total group sales. On Page 12, you can find the store network evolution. The rationalization plan is ongoing, and Q1 recorded 31 net closures. We have a little bit slowdown the renovation of the network in order to cut CapEx. And we are further analyzing the profitability of the chain. And I think we will be able to close a little bit more stores this year, but inside -- as of today, inside the perimeter, we have already impaired. So as of today, no material change in the impairment we did last year. On Page 13, there is the operating working capital and the net financial position. We are not used to disclose this in the interim statement, but I think that the situation needs to be really clear also on this. So net financial position before fair value adds at the end of April is minus EUR 79 million versus EUR 66 million in April 2019. So the impact of COVID-19 is not so in portal -- so important until April because net working capital is still sound at 28% of revenues compared with 34% in Q1 last year. This is due to a strict management of our receivable and the renewal of the vendor financing program that enabled the group to mitigate the early sign of increase in the inventories due to store closures. It is important to underline that the fair value adds of derivative instrument is not included in these figures, and it was EUR 17 million positive at the end of March compared with a EUR 9 million positive at the end of March last year. So our hedging will provide the company with additional positive cash flow. On Page 13 (sic) [ 14 ], you find the contingency plan in place to mitigate the impact of COVID-19 different cluster of action. First of all, safeguard the liquidity position. So we are strictly managing receivable. As I have said, the renewal of the vendor financing program to have more flexibility on payments to suppliers. And also, we are managing the increase of the current credit line in order to have the best fit for this extraordinary situation. On the last box on the right, the net working capital increase limitation action. We have cutted fall-winter '20 buying by 20% in the region of EUR 40 million, and we will extend the sellout period of spring-summer '20 to fall-winter '20 transition. I mean, we will keep the product -- the summer product in stores until September, and this is a common practice disclosed by our industry. And also, we are managing to postpone some deliveries of fall-winter '20 products to the transition of spring-summer '21. The aim is to reduce future buyings and to use the products we have in our warehouse. And the rest of unsold goods will be sold in our really well-performing network. You know that we have a network of more than 90 outlets located in the best fashion district and outlet village, and the turnover is more than EUR 100 million, and it is really profitable. I want also to underline a project we launched, we call it One Geox One Team, and it is devoted to making support to our wholesale trade partner. The aim is to protect our spring-summer '20 to ship backlog in order to be able to reduce cancellation and also to protect our fall-winter '20 orders backlog in order to be able to have wholesale receivings goods in due days. Then there is, as I have said, the CapEx optimization. We are going to cut the budget. It was EUR 40 million. We will save EUR 15 million, reducing CapEx by 40%, and we will focus just on IT and essential investment to make the business model more flexible, more digital and consumer-oriented, with a real perfect merge between digital and the brick-and-mortar distribution. Needless to say that also OpEx will be under strict control. Rent renegotiation is really in progress. We are making use of all the support made available by the different authorities in each states regarding the furlough of people and the cash integration. I would say we are cutting all the discretionary spending and postponing marketing expenses when we will be able to drive people to store. For sure, we are not saving A&P and performance marketing on the digital because as you have seen performance are really important. Page 15, there is the outlook or better. It is extremely complex to make any kind of annual forecast, so we're going to comment second quarter. And I want just to better explain the fact that the management is really in close contact with wholesale clients in the various countries and is strengthening partnership by offering a support package. It is aimed to encouraging payment, and so generating cash flow, as well protecting our backlog. It is made of a number of initiatives. First, the possibility is to collect summer products at a discount in order to boost margin performance, leading up to and during the sale period. I refer especially to sandals because when customers will receive deliveries, they will start the sales period. So it is real important to make them understand that they can have a margin also on these new deliveries. Flexible deliveries is proposed also for closed-toe shoes that have been ordered but not yet collected. We are ready to postpone said deliveries to spring-summer '21 with no charge for warehouse costing -- costs. Flexibility is also agreed for the delivery of our winter products given the attendance in the market to keep the summer collection in stores until at least at the end of September. And we are offering an incentive for quick payment of overdue receivable and the full payment to be duly made for the current collection. And we are experiencing that this wholesale package support is well accepted by customers, and cash of receivable are doing better -- a little bit better than my expectation. These market dynamics, in any case, and especially the temporary closure of store in April and May, joint with the realistic possibility that shopping center will remain closed also in June and the fact that stores will gradually be reopen in a context of people, mobility being strongly reduced, and with the lack of tourist, shall, in any case, drive to a negative impact of COVID-19 also in the second quarter of the year. So we expect that sales in the second quarter will record a greater drop compared with the same period last year than the one recorded in the first quarter as the business nonetheless this year started positive in January. So this is more or less the big picture. We are ready to take -- to open the Q&A session and to take your question.

[Operator Instructions] The first question comes from Mr. Francesco Brilli of Intermonte.

First of all, my compliments for the presentation, very comprehensive and rich. And then I have a couple of questions. And the first one on the online. I see that it's performing very well. I was just wondering if that you can give us a sense of the return rate that you are seeing on the channel, and how you are managing the returns. Are you forced to apply some specific operations on products? And are you able to put them on sales again after the returns? And then the second one. You mentioned that you were already successful in securing new credit lines. And if you can give us some additional color on this. And that's it.

Just a second? Okay. So online, let's say that we are having the result of the investment that we did in the past. You know that in 2018, we decided to insource the e-commerce in Italy and Europe. And then in July '19, we did the insource of U.S. and Canada. And we created a really strong team, hiring people and skills from outside the web directories from YOOX and then moved to another company in our industry. And also the store managers and the other people on CRM are really specialists. And consequently, I think that given the fact that we are investing also money in advertising with really a good return on investment, the performance is probably slightly due also to the professional way we manage. Back to your question, when we decided to insource, we did directly the logistics because we, let's say, the look and feel, the site is under sales force. So it is in cloud. The investment was not so important, but we did a partnership with the #1 in this industry as of today. So we decided to insource the logistics. And consequently, returns, given the fact that our loyal customers is -- knows very well the product, is in the region of 20%, so a little bit lower than the market average, I would say. And we are able to reuse, I would say, returns in a short period of time because we do directly the logistics. And consequently, the integration of our warehouse is really, really working and important. Why? We must be really fast because you know that we have to give back the money to pay to the customers once we receive and do the quality control. And so the service -- the level of service we have to grant to our customer has to be really, really important. And consequently, we are forced to immediately process and let's say, re-prepare the returns. Credit line, yes. You know that in Italy, there is the liquidity decree, I would say. It is a little bit late because the rate has not been decided by banks. Also such did not publish, let's say, the website in order to obtain the warranty in really a quick way. So we, at this date, are considering such warranty and such a credit -- and bank credit lines granted by such as a sort of backup. And consequently, we started a couple of months ago to negotiate with banks different credit lines. Our aim is to have a perfect match between short-term credit lines with the normal seasonality of the business, medium-term credit lines devoted to the una tantum cash absorption of COVID-19. I mean, 18, 24, 36 months because, as a matter of fact, what does COVID-19 means for our sector means and sold goods at the end of spring-summer. There are 2 possible options: discount as much as a company can in order to make cash, and maybe pure retailers will try to do this way. On the other side, brands cannot do like this. So we have seen that luxury is saying that they will not discount. They will keep all the goods to the next season. We are a little bit in the middle. So for sure, we will be a little bit promotional on discontinued products and on the products that we will put in the outlet next first half of 2021. We will protect carryover and best seller and the news of the capsule of spring/summer '20 because we will re-present this in our full-priced network in spring/summer '21, and we will try to enrich spring-summer '21 with additional newness and capsule. But for sure, we'll try to use the goods that we have already paid to our vendors. Back to your question regarding credit lines. We have been able to secure, I would say, EUR 30 million. And we, in any case, are negotiating additional credit lines. Having in mind that in any case liquidity credit lines granted by such are in our radar. So we are also -- frankly speaking, we would also be already have -- already started and prepared all the documentation, so it's just a matter to understand which will be the amount of CapEx in next 3 years. And maybe in case we will not be successful in securing all the money we need with this kind of a time scenario, maybe we can also recover to get a couple lines of such.

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

Okay. So thank you very much for your time. Feel free to contact Simone Maggi, our IR Manager, or myself for any doubts you may have. We will be glad to reply. Thank you very much.

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