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

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

Good evening and morning, everybody, depending on your time zones. For over a year now, the economic and social conditions have been deeply affected by the pandemic. However, over the last few weeks, we have all become more confident about the future, thanks to the speeding up of the COVID vaccine campaigns. Performance in the first quarter of '21 does not reflect the one that we are expecting over the coming quarters. As the first 3 months of the year were still affected by high number of store closures in our main markets. Since mid-March, we have been seeing strong improvement in performance. Over the last few weeks, stores have begun to gradually reopen, allowing us to record a significant growth in our direct channel and to complete deliveries to the wholesale channel, which is now ready to receive goods once again. By the end of May, we are also expecting our direct store network to be fully operational again, factory reopenings in a number of countries that are currently still being affected by restrictions, namely Italy, France and Germany. The combination of these factors would allow us to close the first half of the year with very positive results, reaching high single-digit growth in sales by the end of June. During the first quarter, we must also highlight the accident trend that continued to be recorded in those channels and markets not being affected by lockdown measures. Russia and China are growing by 50% and e-commerce channel by 85%. During the first quarter, we have also accelerated the rationalization of our store network and all the measures necessary to define new more streamlined and more efficient business model that is in line with the consumers new buying behavior. These measures are fundamental in order to free up more and more resources for the activities with greater potential, such as the e-commerce channel, advertising, research and development and sustainability. The results achieved over the last few months are giving us confidence in the validity of the path we have taken. Spherica, the most innovative product of the new spring collection, which was supported with an important add campaign is reporting very significant sales figures. In fact, over the last few weeks, we have been selling around 10,000 pairs a week despite many stores still being closed. Conditions are still complex, but we are convinced that the gradual return to normality will allow us to further enhance the results that we are already achieving. So thank you for attending with us, and I leave the floor to our CEO, Livio Libralesso. Thanks once again.

[Foreign Language] So good morning, and good afternoon. Thank you for joining us today to discuss Q1 '21 net sales, net financial position, current trading and some trends for full year 2021. Let's start with Slide #2 with the highlights. Sales of EUR 149 million, down to 19%. These results are not coherent with the trend for H1 '21 expected to be positive, high single digit, and the full year '21 is expected to be positive double digit. So on this call, we will also disclose information regarding the second quarter. There are 3 main reasons behind the top line decrease of EUR 35 million in Q1, EUR 7.4 million due to the ongoing network rationalization in exchange of a better profitability. And then a couple of temporary and contingent factors. I mean EUR 50 million related to temporary store closure due to the strict lockdown measures in Q1 '21 versus Q1 '20, EUR 10 million due to the requested shift in wholesale deliveries from Q1 to April. On the other side, the performance has been solid in the geographic areas and channels not impacted by these contingent lockdowns. In particular, Russia delivering plus 48% and China plus 54%. The online channel continues to outperform as well with a sound plus 85%. And today, I invited to this call Giulio Salvucci our global Web Director and Digital Transformation leader, that in a while, will share with us some reasons that underpin this jump. Net working capital is under control at EUR 183 million versus EUR 208 million recorded in Q1 '20, and the net financial debt at the end of March is EUR 110 million versus EUR 100 million at the end of December last year. Current trading on the right, the start of the Q2 is completely different. Like-for-like is really positive due to the easy comparison base and the reopening trend. Like-for-like, week 18 to date turned out to be positive 3%. We completed deliveries in wholesale and this channel, April to date is up 9%. As a consequence, also total sales did an improvement and are flat at the end of April. We are also experiencing encouraging initial sales figures for the new innovative projects launched with the Spring/Summer '21 collection, Spherica for adults, and Playkix in kids, driving also important reorders in season. Net financial debt at the end of April is EUR 125 million, we may consider this as the seasonal peak of debt affected as well by the ongoing lockdown. Our plan is to stabilize the debt within June and then to generate cash within year-end. Please go to Chart #3. Here, there is a summary of the ongoing network portfolio optimization. The number of monobrand stores at the end of March is 835 compared with 950 in March last year. So we did 115 net closures in the last 12 months, with an impact in term in this quarter of EUR 7.4 million in terms of sales. There are additional 63 net closures planned within year-end, 17 franchising, 31 DOS, and 15% from our distributors. Please go to Chart #4 to see the DOS operating status and like-for-like by month. The blue boxes contain the average percentage of closures by month. In this quarter, the DOS network has been closed 34% on average versus 15% in Q1 2020, EUR 15 million in terms of sales. On the other side, you can see that starting from mid-March, the comparison base in terms of closure percentage is really easy, and consequently, like-for-like is jumping at plus 100 in March 108 in April, triple-digit again in May, so that like-for-like year-to-date, week 18 is positive 3%. Please go to Chart #5, you can see Q1 percentage of closure by country and the reopening calendar. Italy has been closed 39% on average; Germany, 84%; U.K., 100%. So no 1 day of opening during the Q1. Consequently, we've been really successful in rent renegotiation and obtaining support from the government in this country in order to mitigate the impact. The Netherlands, 75%. Today, the view is completely different. Reopenings are going at full speed. And within the end of May, we hope that 100% of the network will be operative, especially France, expected to reopen on May 19 and commercial centers in Italy expected to open also during the weekend from May 22. Please go to Page 6 to comment Q1 top line by channel. Wholesale is down 10% due to the requested shift in deliveries. As said, April, today, it is up 9%, and the same pace is expected in H1, also thanks to good reorders, especially in kids and Spherica. Franchising is down 20% due to the lockdown in the rationalization. However, reopening are in programs and also in franchising, H1 is improving and is expected to be flat. U.S. is down 31%, totally explained by the like-for-like decrease to the additional stricter lockdown closures and the perimeter for the rest. However, in H1, it is expected to deliver a high single-digit growth due to a good second quarter. All in all, as you can see in the chart down on the right, total sale in H1 are also expected to grow high single digit. On Page 7, there is a very quick view to net sales by region. Italy is down 30% and has been more impacted by store closure, 20% of the perimeter, given the concentration of the U.S. and franchising stores in this country. Online is up 55%. The Europe is down 20%, being less affected by the rationalization, thus 13% of the perimeter and online up 98%. North America is down 48% due to the reorganization implemented with the closure of 12 in U.S. and in Canada and the total exit from brick-and-mortar retail in the U.S. focusing the business on online, wholesale and the key account partnership, both for brick-and-mortar and online. Rest of the world is flat or plus 7 at the constant exchange rate, thanks to a good performance of Eastern Europe, plus 7%, driven by Russia, plus 48%. Also, China is doing well, plus 54%. Again, the chart down on the right, you can see that in H1, Italy and North America will be slightly negative, eventually close to the flat. Europe up low double digit, and rest of the world, up double digit. On Page 8 net sales by product, just to say that ready-to-wear is more impacted by the pandemic with the ready-to-wear specialist really prudent in buying new product, especially in the spring/summer. So we have to wait the second half in order to see an improvement also in ready-to-wear. Let me now give the line to Giulio Salvucci for some insights regarding our online.

Thank you, Livio, and good evening, everybody. Today, I would like to share with you some insights from the web business. So let's start from the actual results. We are at Page #9, as anticipated at the beginning, the first quarter recorded a plus 85% in revenues, which is, of course, a very good result. When it comes to the share between online and off-line sales in retail, online accounts for 33% compared to 13% last year. So that's really an interesting result. Some insight about the categories. The kids is growing significantly. And for us also represent a driver to acquire new clients, which is, of course, our goal to convert also in the adult product afterwards. The second quarter, we focused a lot in order to reduce promotions. And at the end of the day, increasing the average ticket and also the marginality. If you can go to Slide #10. Here, you can see that we -- over the last few quarters, we have been able to, of course, increase the traffic on the website, but also increase the conversion rate together. That's really relevant because most of the time, those 2 metrics goes in the opposite direction. So in the next few slides, I would like to explain you some reason why we have been able to achieve this combined result. At Slide #11, you can see that in Q4 2020, we made a major release on the website. It was in October 2020. This major release was affecting 2 main areas: the first 1 is the checkout process. And here, you can see in the red line, what we call the cart abandonment rate. So basically, the number of clients that start the purchase process, but they finally do not complete the order. So we've been able to reduce this rate by 800 basis points, so I would say that we've also been able to increase the conversion rate and maximize the revenues, optimizing the checkout process. In the next one, Slide #12, you can see the same major release also, again, in October 2020, was also about improving the experience on the mobile navigation. So the mobile, it's, of course, the first source of traffic. But the interesting thing is immediately after we released this new layout also the sales coming from mobile exceeded the desktop version. So starting from December 2020, not only we recorded some record month in sales overall, but mobile started to be the first source also for revenues. And lastly, at Slide #13, again, about the optimization of the business, we always try to improve the data analytics part of our job, and we try to make decision on data driven. So there's an interesting partnership. So it's a pilot we made with Google. We've been selected among many, many partners and brands in order to pilot for the first time worldwide. Integrating data coming from the social platform into our advertising platform and the result is an optimization of the web marketing campaign, allowed us to achieve a return on advertising spend of 6% and also time-saving in campaign management of 30%. So that's all from my side, and I will let Livio to continue.

Thank you. Giulio, just to add some flavor to the performance of online, but also to reconfirm that the digital and online are fundamental pillars of our strategy, and we are starting to see the results of the investment in people and technology we did and continues to do. I'm really proud of my team that is able to deal with the champions in this industry like Salesforce with ranking Google as peers. And so all the results derived also from these skills, we have been able to keep inside our company. Please go to Chart 14 to comment working capital and net financial position evolutions. Net operating working capital landed at EUR 183 million from EUR 208 million in Q1 '20, thanks mainly to a strict management of receivable minus EUR 36 million. You've seen last year, really an improvement in cash collection in the second half. And also the first quarter of this year is not bad. Also inventories are under control, thanks to the action taken on a careful buying for fall/winter '20 and spring/summer '21, for a total amount of EUR 100 million lower buying than the previous couple of seasons. However, the lockdown is penalizing our net financial position but it's the seasonal peak in April at EUR 125 million. As a matter of fact, the second and the third wave of lockdowns shifted the expected improvement in cash generation to the second half this year. In any case, that is under control. There is no issue regarding liquidity. We have plenty of credit line committed and not used. Please go to Slide 15. Geox is honored to have received 2 additional rewards regarding sustainability. Geox has been included by La Repubblica Affari & Finanza, among the best of 200 companies in Italy in terms of sustainability commitment. According to a survey made by a German institute based on pure social listening and in-depth analysis of positive and negative posts, comments, engagements and activation made by people in web linked to our brand. Geox position is second in Italy in consumer goods after Nike. Then there is another survey by Il Sole24ore and Statista, included the Geox in the list of 150 companies considered sustainability leaders after an in-depth analysis on 1,500 Italian companies based on 35 KPIs disclosed in the nonfinancial statement. So this is a little bit more, I would say, technical. We are really proud that people are starting to consider the approach of Geox to sustainability. We aim to be, first of all, a sustainable company and a sustainable brand, and then, as you know, we would like also to have a sustainable product, but it is necessary to create a movement. And this is the reason why we joined the Fashion Pact in order to be able to change also the entire supply chain. Please go now to Page 16 for the outlook. The summary, considering all what we have said is that a strong improvement in performance from the mid-March due to the easy comparison base. The fact that the like-for-like is positive at week 18. Also sale is positive plus 9% in -- starting from April. The initial order collection for winter '21 has been positive, mid-single-digit, and so assuming that the U.S. network reopenings will be completed by the end of May and no more stores lockdown in second half '21, we may assume that H1 sales will grow high single digit. And the full year '21 sales will grow low to mid-double-digit. In addition, we may forecast an increase in gross margin due to our approach to reduce the promotion in the region of 250, 300 basis points. And we reiterate our strong commitment to keep expenses under strict control and to complete the rationalization of the geographical footprint within this year. Last but not least, Geox transformation journey is well on track. On the next page, there is summary at a glance that we will comment deeply for the first half results, including also the profit and loss. What I can say today is that in the future, it won't be the same company. We are really working to change the brand perception, the relevance for our customers. Our merchandising approach in order to have a merchandising boost on profitability, also supported by Boston Consulting. And then we are changing, as you know, the business model toward perfect integration between digital and brick-and-mortar in order to get really an omnichannel approach. And we are also starting supported by Accenture to what we call wholesale 2.0. I mean, the new wholesale ecosystem in order to transfer our skills on the digital also wholesale in order to foster productivity to reduce the cost to serve and also to be a front company also in changing the wholesale rules and the way to do business. We are now ready to open the Q&A session and take your questions.

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

Yes 2 questions to start. The first 1 is including the 63 net closures that you expect to perform for the rest of the year, what will be more or less your assumed guidance of a negative impact from these closure of shops? And the second question is a more general one. So really, your guidance, you will be somewhere between EUR 600 million and EUR 650 million sales in 2021. So quite far from the EUR 800 million that you had in 2019 when you were on an adjusted basis, at breakeven point in terms of EBITDA. So I understand that your online business is much more profitable than the other channels. So if we have to take a picture of your company back to EUR 800 million, what would be potentially the profitability that Geox could deliver, if you can share maybe if you could -- maybe not the number, but a few considerations about how to build that kind of scenario?

Thank you, Marco, for these 2 questions. So first of all, the perimeter effect on our DOS and franchising network. You're right, we expect 63 additional closure, out of which, 17 franchising and 31 DOS. As far as the perimeter in U.S. is concerned, we are assuming today that the new openings and the conversion because 31 is net of these [indiscernible] will be, in any case, able to balance the negative perimeter factor. So in my opinion, DOS, will be able to deliver a good performance at the year-end without being materially affected by these additional closures. On the other side, we will experience the reduction in franchising. It is EUR 2.4 million in the first quarter, and it is expected to be in the region of at EUR 5 million to EUR 7 million at year-end. The second question, you are right. We -- today, we think that we'll be able to hit the consensus regarding the top line. As I said, we are really hard-working in order to -- not to be the same company in 2023. So with less revenues, the profitability should be better. Our plan is to do our best this year because it is a little bit difficult to fix a clear indication in terms of profitability. But for sure to be at breakeven next year as operating results without the same EUR 800 million level of turnover experienced in 2019. And then in 2023, we should start, again, a story of growth and profitability. For sure, the level -- with positive EBITDA high up in the region of -- it's difficult to say today because -- but I would say, mid- to high single-digit EBITDA in 2023. For sure, the commitment is to do better in case all our projects regarding brand revamping, regarding the increase of the relevance for our final customers, and also the merchandising boost, I mean, the new project under the support of Boston Consulting will start to drive results, and maybe we can do better. For sure, what we are really far into the process is the reorganization process. I want to disclose some additional information. So we started the real -- reorganization in Canada, and we have been able to exit from the process. So now Canada, this year is 2021 is at breakeven, for sure, because all the remaining 20 DOS are either with a really important discount or on a variable basis regarding the rent and in addition the state is really giving support to the company. In the U.S. we exited from brick-and-mortar retail. So we've been able to really cut the losses. And within June, also U.S. will exit from the restructuring process. And in Europe, we have been really successful in doing an out-of-court restructuring process in U.K. So we closed 3 stores without -- with no penalties. And now there are 4 stores open, out of which, a couple under only variable rent on turnover and the other 2 with the 50% discount. And now Germany is under the same process with a really tough negotiation with the lenders. Given to -- going to Asia Pacific, we decided to change the business model in Japan, we are going to liquidate the subsidiary and we have 2 other distributors in Japan that is placing the orders for fall/winter '21 and spring/summer '22. So also in Japan, we will substitute a loss with a profit. So the 2 countries where we are investing and we are growing really fast is China, but China for us, unfortunately is really, really a small country. Eastern Europe is giving really good results and in Russia the like-for-like we decided to invest in Moscow and St. Petersburg and the like-for-like is really brilliant also in this period. What I want to underline is that, in any case, the improvement in profitability must come from the core markets, especially Italy, France, Spain and Germany. It is clear that our project for 2021 is focused on the core, investing in the core markets, especially in advertising for immediately volumes that will improve the profitability. And then starting from 2022 bigger and better. So boost on these core markets, but also having the first sign of additional improvement in China and in Eastern Europe.

When you talk about EBITDA, you obviously are referring to the pre-IFRS 16 margin, right?

Sorry, unfortunately, [indiscernible] to disclose the EBITDA before -- yes, for sure.

The next question is from Francesco Brilli with Intermonte.

Congratulations for the developments of results. The first 1 is on the online channel. If you can share with us some additional granularity on the KPIs of the online channel? In particular, can we have a sense of the average order value that you are experiencing in the online channel? And do you think that the conversion rate is -- has reached a peak? Or what is the goal for the mid period in conversion rate for the online channel? And the second one is on the working capital and the evolution of the net financial position, what we should expect over the coming quarters in terms of EBIT [indiscernible] absorption, in particular for the inventories for the next couple of quarters? And the net financial position, if you can share with us the landing point that you are expecting for the full year of the net financial position compared to full year 2020?

Okay. Francesco, so I'm lucky today, there is Giulio for e-commerce, I can rest a little bit.

Yes, of course. When it comes to e-com, about the average order value, we are very close to EUR 100. So that's the average ticket we recorded in Q1. The conversion rate is slightly below 2%. So in terms of opportunity still increase the conversion rate. I really believe in the future, we'll be able to keep increasing especially for the main project that even Livio mentioned about, for example, the merchandising optimization, working in order to have a much higher availability of products that's crucial for us. And of course, everything related to the optimization of the interface, which is for us a continuing project. So we are trying to keep building on the website. In terms of additional KPI, I can even mention the return rate, which is about 20% and is absolutely stable, I would say slightly better than last year. So the combination of increasing traffic, increasing conversion rate and keeping stable the return rate, it's a good way for us.

As far as the working capital and net financial position are concerned, before the effect of third wave or lockdown, I would have said that our goal was to reduce the debt compared to December last year, where we hit the EUR 100 million that we disclosed in July and the November. Today, our goal, due to this, as a matter of fact, lockdown that is impacting the cash generation in January, February, March and April. Our target is to be in the region of 100, 120, just to be prudent, but we will do all our best as we have been able to deliver last year to improve this guidance.

Maybe if I may, a follow-up question on the online channel. If you can share with us the -- some additional color on the difference in profitability between the 2 channels?

For sure, you are right. At this stage, web online is more profitable than our DOS chain because there is really a volume effect and economy of scale. For sure, e-comm has the most of the cost variables. However, and it is a little bit more promotional. But the profitability is really important. We want to improve the profitability of the e-commerce or the target of Giulio and also of our supply chain is to be able to be more efficient, especially in the supply chain and the fulfillment of this channel. We say one channel, the reality is that maybe we should talk about 4 different channels if you -- Giulio, if you want to elaborate a little bit on this.

Yes. Of course, today, we just mentioned the direct sales coming through web. Of course, we have a lot of wholesale partners so that's the first one. We consider the first channel web. The second, we have some partnership with our stronger than others. So basically, they are wholesaler, but we've managed some part of the value chain like content, like merchandising, so on and so forth. We recently also launched the so-called marketplace project, which is the e-concession business model and the preliminary results are really satisfactory for us. The road map is to launch many new platforms during this year and even 2022.

Okay. And what about the U.S.? For sure, in any case, brick and mortar should deliver better profitability. And the main reason why I believe that we should be able to deliver better profitability is the fact that we are to increase the percentage of sell-through during the full price season. And this is really important, and this can only come from a different merchandise approach, what I call merchandising boost and from a different relevance of our brand and of our products in front of our final customers. So the 2 strategic, in my opinion, main projects are the strategic and marketing approach with the customer centric strategy, we have now, starting from 9 months ago. And Spherica is really a clear example. We made this project, we created this project planning the success, and we have been successful because there is really a sync of all the functions in the companies to be ready when it was needed. So you have seen the first new way to communicate the value of the brand after -- starting from April last year, really deep surveys regarding our final customers, what it is important for our target personae, which are our target personae and the other customers closer to this in order to be able to increase the range of customers. And then we have really fine-tuned the values of the brand where we have been able to build the new brand narrative and now also to create a really important media reach because as you have seen, we have been on TV -- in television with Spherica, but also on the social, but also with really many, many advertorial. And consequently, today, we have seen for the first time since many quarters, the fact that people, notwithstanding the lockdown is going to our stores and is asking for the product, and it is really an easy to sell product. So to give an example, today, we are at 52% of sell-through full price completely full price. Notwithstanding the fact that France is still closed and Germany is still closed. So maybe we did some mistakes in terms also of buying, but we invested 200,000 pairs, wholesale and retail and web on this project, and it is really a pleasure to see that we have been too much prudent, having seen the result after the windows and then when we decided to create the windows, the sales improved 4x and after the TV campaign 10x. So it is really a different way to manage the business. For sure, it would be important to invest much more to a really ramping of the brand, but this is not time. Maybe next year, it is now important to rationalize the business in order to free up resources for the CapEx and also regarding business model transition and also later for -- to invest in marketing.

[Operator Instructions] Gentlemen, there are no more questions registered this time.

Okay. Thank you very much for your time. Feel free to contact Simone or myself for any doubt you might have for any clarification or additional information, keep in touch and see you in July for the first half. Thank you very much. Bye.

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