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

Ladies and gentlemen, welcome to the Geox Group First Half 2020 Results Conference Call. [Operator Instructions] The call is chaired by Geox's Vice President, 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.

Good evening, everybody. First half of 2020 was characterized by the COVID-19 pandemic with health, economic and social repercussions on a global scale. Geox's debt with these exceptional circumstances by seeking action aimed at both managing today's difficult context and planning for the upcoming future. On the one hand, the profit on these figures for the first 6 months of the year negatively reflect the fact that our stores were closed for over 2 months. On the other hand, our balance sheet results confirmed the solidity the group thanks to our prudent and effective financial management. The fact that we have successfully [ subscribed ] the solidity means that we are now able to continue to speed up the measures to digitalize our business model with greater determination, building on the excellent results that we are seeing. Our strong commitment to invest in the digital channel started 2 years ago when we searched our e-commerce site, first in Europe and then in North America. Since then, we have recorded double-digit growth both in 2018 and 2019. This growth was further strengthened in the first half of 2020, plus 40%. Thanks also to the acquisition of new customers and excellent performance of our achievements range. Today, the group's total digital sales, including those generated by partners who distribute our products online, represent 1/4 of our business, boasting very good levels of profitability. Based on these results, we recently announced a review of the business model in North America and, along with certain lines, we will soon -- we will soon be expanding our range of digital services to cover also franchise stores. The aim of these measures is to define customer service-based integration between physical and digital channels and ensuring increasingly high-quality shopping experiences. This would also allow us to continue our rationalization plan for stores that do not have this strategic importance or that do not offer contractual terms and conditions that are in line with the new scenario. We are convinced that this approach, combined with our brand values, such as sustainability and people's well-being will allow us to meet new needs in consumption habits of our increasingly selected customer base, improving significantly, at the same time, the group profitability profile. Thank you very much. This is all for me. And let me hand over to Livio for the presentation.

Thank you, Enrico. Good morning and good afternoon. Thank you for joining us today to discuss H1 2020 results. Geox already disclosed the numbers regarding top line and sales plan in the press release dated July 30. So today, I will just give a quick overview to top line information in order to focus on current trading profit and loss and some trends. Let's start with Slide #2, the highlights. Sales at EUR 243 million, down 39% due to the temporary store closure caused by the COVID-19 emergency. Today, the network of direct operated store is fully operational and the performance is gradually recovering, with like-for-like in the U.S. stores retuning to be positive in August during the summer sale period. The e-commerce channel continues to record a strong growth, plus 40% since the beginning of the year, plus 59% in the second quarter alone. And this is also thanks to the acquisition of new online customers, more than 1/3 new subscription to our benefit programs. As at June, the digital channel, direct and indirect, represented around 25% of the group's total revenues with a good level of profitability. This means that the digital transformation of the business model is gathering speed, aimed at perfectly integrating the physical and digital channels with an increasingly omnichannel approach. Better, I would say, a new detailed approach. The adjusted EBIT amounts to minus EUR 70 million, reflecting the fact that sales practically halted in the second quarter due to the lockdown and including an extraordinary inventory write-down of EUR 15 million. Geox has been also able to obtain a significant cost reduction of 15% compared with previous year. Finally, the group balance sheet and financial position is solid. Thanks to the action taken, Geox has been able to keep the debt under close control despite the effects of the pandemic. The net financial position at June [ 3 ] IFRS 16 amounts to EUR 88.8 million. And it is important to underline that in July and August, Geox has been able to generate cash. And as of today, it is in the region of EUR 80 million, thanks to the good performance of the summer sales and payments being successfully collected from clients. Please go to Page 3. In order to share with you some insights regarding our industry that will better explain the trends that Geox will explain. The message that our retail has been impacted earlier than wholesale from COVID-19, and we think it will be back earlier than wholesale. Retail wise, Geox did in January and February, the spring -- the pre spring flows and then the lockdown impacted most of the full price season. And then after the reopening, the industry delayed the sale period until mid-September, experiencing a progressive recovery in traffic. If we consider for winter '20, retail wise, we consulted the pre-fall flows and also the industry has substantially been concerning the pre-fall flows focusing on back-to-school. And in this week, mid-September, there is the shift towards the full fall-winter merchandising at the full price. If we consider wholesale, wholesale suffered less in H1. However, it will need a couple of seasons before to recover completely, I mean for winter '20 and spring-summer '21. The impact of COVID on wholesale will deal with the pre season, spring, summer '20, and the lockdown caused additional order cancellation and then in season, lower reorders and lower promotion and stock sale. As far as the fall-winter '20 is, and will be, concerned, the industry experienced an nonstop of the initial order selling campaign on 15th of March. And then Geox has been in close contact with our clients in order to define another balance, the real amount that they were willing to receive after COVID outbreak. The combined impact of these 2 factors in the '21 cut on band of the fall-winter that we disclosed in May. On the other side, we have been able to manage the delays in production, having the industry postponed the same period of spring-summer '20. So just in September, we are moving to full winter. Finally, the last season that may be impacted is the fact that now we are visiting the clients to collect the spring-summer '21 order, initial order collection. And market condition are tough due to the high level of unsold goods and the threat for the future experienced by our clients. Having this in mind, let's go to analyze Geox's specific performances. Please go to Page 4, where there is the traffic and like-for-like evolution. Starting from the reopening in week 18, you can see that there is a perfect correlation between traffic and sales. However, like-for-like performed better than traffic. And this better trend is increasing. This is due to the fact that all the retail TPI and especially the conversion rates are improving, and this is a mitigation to the loss in traffic. You see a progressive recovery in traffic from minus 90% of week 18 to minus 15% in week 32. The weekly like-for-like improved from minus 90% in week 18 until the top of a positive double-digit in week 22 during the sale period. There are some events that can be considered the triggers of this acceleration. For sure, in May, the ramp-up of the reopenings, and then in June, week 23, the start-up of the sales season in Germany and Austria. On week 25, you can see that the start of the sales in Spain did not deliver any boost and why? Because most of our stores are in Barcelona and Madrid and Spain and especially these 2 cities are experiencing really a drop or, I would say, a lack in the tourism. Then really, a good jump on week 28 with the start of sales season in France. And starting from mid-July, France delivered 6 -- 5, 6 weeks in a row of really good performances. Then you can see in week 30, the 1st of August, the start of the sales in Italy. And consequently, the subsequent week with the sale period at full speed in all the main countries, we have been able to record a record plus 15% in like-for-like. And we have been also positive in the last week of August, in the first week of September, with really a positive back-to-school. It's important to underline that we were live with the TV and the advertising campaign and our really important collab with Disney and with WWF joined with our investment in the collection range regarding uniform, especially for England, Canada and all the countries that is using uniform for back-to-school have been able to be positive. Unfortunately, last week, some problem due to the hot weather and to the increasing concerns on COVID-19 revamping. You know that Hungary closed again the borders. Eastern Europe countries and the Balkans are experiencing really a big jump in the number of cases and also our main markets like Spain, France and Germany and Austria are experiencing some difficult. In my opinion, also the shift to the full price fall-winter may have a little bit lowered the enthusiasm we experienced during the sale period. Go to Page 6 -- 5. Sorry, I missed. In order to better understand the focus on our DOS. You can see in this chart the like-for-like by month. So as of June, the like-for-like was minus 41%; then July, minus 29%; positive in August, plus 3%; and September, season-to-date, is minus 3%. Like-for-like, mid-September year-to-date is minus 33%. On the top right box, you can see the like-for-like year-to-date trend in online. So plus 40% in June and then July, 19% due to the fact that we were on the sale period in the brick-and-mortar network. August really positive, jumped again to 67% due to the back-to-school. Kids is really overperforming. It is plus 100% from the beginning of the year. So also, year-to-date, in September, online is plus 40%. Total, our like-for-like in the second quarter for the first of July until mid-September is minus 13%. So this is a first indication regarding the performance of the first quarter. Please go to Page 6, to understand the reason behind the growth of e-commerce that we are experiencing in all the main countries. First of all, 25% of revenues came from loyalty program customers. And our loyalty program is working. New customers represent 1/3 of the total online benefit sales and all the KPIs of the program are really positive. The average basket is up 10%. The average spending, up 43%. The frequency is up 18%. Unit per ticket, up 8%, and the markdown is down 3.8%. This is important. We decided both in the physical channel and in the e-commerce to be less promotional than last year due to the fact that the traffic was weak. So we tried to save some margin. So why, in any case, we are experiencing an increase in the average markdown that in a while, we see have impacted the gross margin? Because, as a matter of fact, the first half has just January and February sales period and also mid-March, then we skip the full price season. And at the reopening mid-June, we started with the sale period in German-speaking countries. And then France and then Italian consequently, the weight over the same period, month, is much higher than last year. There is also an increase in our online customer base because the young cluster, 18 to 34, is growing, especially on women, driven by man. In fact, the kid sales represents 40% of the total versus the 28% of last year. As a matter of fact, we are seeing the results of the big investment in terms of people and also the collaboration we have with Salesforce. So we completed the project. So first, let's say, demand world and e-com model. And then we finished the implementation of the CRM engine. And now we have finished the implementation of the marketing program. So let's say that our CRM team has a really strong win on using in cloud. So with more investment, one among the leaders in this sector. Skip to Page 7 to comment on net sales on our channel very quickly. You see that the wholesale is down EUR 34.6 million or 34.6% or EUR 75 million, impacted by the pandemic, mainly due to EUR 26 million of cancellation, EUR 30 million of lower reorders and promotional sales and EUR 23 million of shifting deliveries to H2, mainly regarding full winter product. Stores are still full of spring-summer and also clients requested to deliver later the following. Franchising is delivering really a big drop, minus 50% or EUR 20 million, EUR 10 million due to the store closure during the lockdown, EUR 4 million due to the rationalization of the perimeter and EUR 4 million still again for delivery shift. Thus, U.S. is down 40% or EUR 72 million, and this is totally in line with the like-for-like decrease at June due to the store closure. On Page 8, a very quick view to the net sales by region. Italy is down 48% and has been more impacted by store closure, given the concentration of the U.S. and franchising stores. Europe is down 35%. Europe has the same number of stores compared to Italy. 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 46%, having a higher weight of U.S. Rest of the world is down 32%, and the impact of COVID has been mitigated by the positive trend of wholesale in Eastern Europe and the stronger performance in Russia. As you may remember, Russia were performing very well until mid-April, then the outbreak of COVID. But today, last 2 weeks in Russia are really positive double-digit, positive traffic in the mall and 100% of the department store are open. So we are experiencing again a really brilliant result in Russia. On Page 9, net sales by product. Apparel is doing a little bit better than footwear, and it is 9% on the total turnover. On Page 10, you can find the store network evolution. The rationalization plan is ongoing and H1 recorded 40 net closures. In the second half, we assume to close additional 40 U.S. net and 20 franchising net, as explained in January. On Page 11, there is the income statement. First of all, it is IFRS 16 compliant. You can find in the annex, the profit and loss, excluding the IFRS 16 impact. Sales at EUR 244 million, as already commented. Gross margin is EUR 100 million or 41% on sales, with 990 basis point decrease. EUR 620 million are due to an extraordinary EUR 15 million write-down of inventories, considering the increase of unsold goods due to COVID-19. The remaining 370 bps are explained by a different channel mix with a lower weight of U.S. revenues, a higher average markdown due to the closure during the full price season and some negative production variances in our Serbian plant due to the COVID interruption in production. The total operating costs are EUR 170 million, down 15%, with a net saving of EUR 30 million compared to last year. As a matter of fact, total gross saving are EUR 36 million, EUR 14 million in the DOS network for personnel and rent reduction. And in G&A expenses at the headquarter for personnel and administrative cost reduction, EUR 6.1 million selling and distribution; EUR 2.8 million AMP, and EUR 2.6 million reduction. This EUR 36 million have more than compensated EUR 6 million of additional costs due to COVID-19 out of which EUR 5.6 million for receivable write off. In the chart, you can see also a summary regarding savings and extra costs related to COVID impact. So we have already commented the EUR 15 million inventories, 5.6% receivable, 0.4% regarding the G&A logistics and also the signification of the premises. I wanted to underline also the fact that COVID-19 has also been considered as a trigger event for asset impairment under different expectation compared to last year. So we do the math. We analyzed 100% of the network, taking also into consideration the acceleration, the rationalization plan that we have planned. The outcome is an additional EUR 13 million of asset impairment. And this is mainly related to the store in New York, 34th Street, that we decided to close more than the office just for this store. We ran the impairment test under real prudent assumption because we are now creating the business plan. Consequently, as of today, the company has not a business plan in order to evaluate the impairment. So we made the assumption that are a common understanding that COVID-19 will also impact next year. And then we'll be at the same level of 2019 in 2022 and then growth. So under this general assumption, our assets, our invested capital is really, really safe, absolutely safe. As you know, we have no intangible goodwill brand and so on. And as I have said, we have considered in the impairment, 100% of our net. So under 50 stores. I want also to spend some words regarding rent reduction. The rent reduction included in June profit and loss is just EUR 3 million. Out of the EUR 7 million obtained until to date -- until today related to H1, and therefore, cast in the region of EUR 10 million, EUR 12 million for the full year. So that is the reason why we consider just EUR 3 million. The EUR 3 million deals with rent contracts not falling within the scope of IFRS 16. Because generally speaking, renegotiation of a contract under these accounting principles should be recorded as a change in the contract with a restatement of the right of views, and the liabilities and no impact on profit and loss. However, COVID-19 is really an unprecedented event and the International Accounting Standard Board at the end of May, issued an amendment to IFRS 16 to allow the company to recognize in this special situation, the savings in the profit and loss. Unfortunately, the European Union Commission has not already endorsed this amendment. And hopefully, we'll do that within year-end. So in order to have a clean opinion, avoiding any qualified opinion, as you have seen for other players from the auditors, we preferred to wait for this endorsement before recognizing the additional savings. But the numbers, I want to be clear. We just recognized EUR 3 million. We have obtained EUR 7.2 million. And at year-end, I hope, EUR 10 million to EUR 12 million of savings. As I have already said, EBITDA -- EBIT adjusted minus EUR 70 million. And another important information regarding deferred tax assets on the loss. We took a prudent approach due to the fact that the Board of Director did not yet approve the business plan. We have been suggested by the auditors to postpone the deferred tax asset valuation to year-end when the new business plan will be available. And consequently, there is no deferred tax assets regarding the loss of the first half accounted in this financial statement. At the end, the net loss is EUR 82 million. Let's go to Page 12. There is the balance sheet, solid as usual. You can see an important information regarding the working capital. So go to the next slide. You can see that the working capital evolution. Working capital is EUR 223 million. And it is lower than the EUR 235 million of last year. And also, inventories are lower than last year. Why? Because we are seeing the result of the action taken. Regarding inventories, as I have already said, we cut the buying of full winter of EUR 40 million, 21%. And consequently, we are maintaining inventories under control. In addition, the wholesale support package that we implemented immediately during the pandemic has been able to deliver really good results. You can see that we have been able to cash money from our clients. Receivable are delivering a reduction. And consequently, as you can see in the box on the right, the financial position is absolutely under controlled. We have been absorbing cash until May. And then June and July, stabilization. And August -- sorry, May and June stabilization. And then July and August, we have been able to deliver cash generation and free cash flow of EUR 12 million. Next slide, the cash flow statement. I prefer to comment the cash flow restated. So let's have a look to the last column. As a matter of fact, the funds from economics is negative EUR 32 million. This is the monetary part of the loss. Then the working capital absorbed EUR 56 million, and we invested EUR 9 million of CapEx. So that the total cash absorption, the total change in the net financial position is close to EUR 100 million. That is the reason why starting from the positive EUR 5 million before the derivatives. We ended up with EUR 95 million before the derivatives and EUR 88 million after the positive value of our hedging contract. Last page, the outlook. The outlook is a summary of what we have been discussing until now. So we confirm that the estimation regarding the full year are really difficult to make. And so we prefer to give you a clear analysis of the current trading. What is important underlying is that last week was really tough, I mean, COVID cases increased. And again, people was a little bit scared. And consequently, the traffic from minus 15% fall down again and minus 30%. And this is the reason why, after, let's say, 5 weeks of a positive like-for-like, we have seen again a negative like-for-like, but we will manage. I guess that we can do our best to deliver the better result we can. It's important to underline that fourth quarter-to-date is minus 13% in our U.S. network. As I have said, all sales, the early stop of the order campaign and the subsequent negotiation with our clients to be sure that we will receive the goods we produce, delivered a minus 21% in the buyings. So now it's really important to focus on in season management, on reorders, on promotional sales close to the same period in fall-winter. And also, we must be in the market to try to collect any orders we can in case things will improve regarding the sales of our clients. There is no risk of cancellation in my opinion in fall-winter '20 because we have already discounted a safe and healthy portfolio. I believe -- we believe that second half will be better than first half. The final result will absolutely depend from development of COVID-19 and the recovery in traffic. I have finished. I'm ready to take your question.

[Operator Instructions] The first question is from Marco Baccaglio with Kepler.

I have a question on the U.S. network. I've seen that the closures of the 40 U.S. actually is not yet in the numbers, which means that the number of doors at the end of June was very close last year to the end of the year. So I was wondering if you have any idea about what kind of one-off costs. And what [ kind of ] pays a negative contribution could that bring that to the top line? The second question is about the control of a net financial position. If you have -- obviously, estimates are extremely difficult to do. But do you -- if you expect a significant additional cash burn in the second half of the year. If you have any plan, any idea of that scenario.

Okay. So first of all, lump sum to exit our extraordinary costs for this first round of closure and also for the closure in the second half is not material because we have -- let's say, we are closing first the stores in the countries where we are allowed to exit due to the way out in the contract or due to the legislation of the country that allowed the tenant to exit with 6 months’ notice. So we are just optimizing the timing of the exit. And what about the space effect we forecast at year-end? We guess that our estimation is in the region of 8% to 9%. And the remaining part of the performance is totally due to the like-for-like. I expect that we, let's say, ran a sort of scenario analysis. In U.S., like-for-like is better than my initial assumption I made in March and April because I was, let's say, under the assumption that the performance should have been similar to the one experienced in Asia Pacific. Fortunately, the recovery in traffic has been really faster than in Asia Pacific. And consequently, the situation is better. It was really positive in August and also during the first week of September because we were starting to see really a positive like-for-like for several weeks in a row. Unfortunately, last week, the news flow has been really, really tough. So let's say that I can assume that 13% is the third quarter-to-date, like-for-like. Consequently, I don't know, from 10 to 20 could be the -- from a minus 10 to minus 20 should be achievable. Unless the coronavirus impact should worsen in a tougher way than today.