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

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Geox First Half 2021 Results Presentation. [Operator Instructions] The call will be held by Mr. Enrico Moretti Polegato, Vice President; and Mr. Livio Libralesso, Chairman of the Geox Group. Mr. Moretti Polegato, you have the floor, sir.

Welcome, everybody. Thank you for being with us. In the scenario still impacted by the pandemic, the result of the first half shows significant improvement compared to last year. Revenues are substantially growing double digits, marginality of stores in the strong progress, costs continue to decrease, cash and the main equity and financial indicators are under control. These are the first fruits of the initiatives undertaken since the beginning of 2020. These are strong signs that encourage us to look with more confidence to the future and to continue with more determination of the work started in these months, months in which we carried out a deep reorganization of our business model to make it more efficient, digital and in line with market trends. We are, therefore, exiting from nonprofitable and nonstrategic activities in order to free more resources to invest in high-value assets, in the first half of these markets and channels on which we are most focusing our attention, continue to grow in a significant way. Russia reported revenues up by 64% and is already above the pre-pandemic levels of 2019. The digital channels, which now represent 1/3 of the group's revenues, showed a plus 50% growth. In the second quarter, revenues practically doubled in all main countries. Spherica, supported by a major television advertising campaign, as today, asset through at 85%. The start of the third quarter is showing further consolidation of our performance. In July, with all our stores open again, sales are up 23% and are close to the pre-pandemic levels. Also, an even more important aspect must be underlined. Sales are increasing with a significant reduction in markdown. This shows that our revenues for customers and our level of service are improving. The scenario remains complex, but we are convinced more than ever that our work is leading us in the right direction Wishing for a gradual return to normality, we are prescribing that in the next quarter, the results of our efforts will be even more tangible. Thank you, everybody. I leave the stage to our CEO, Livio Libralesso.

Thank you. Good morning, and good afternoon. Thank you for joining us today to discuss H1 '21 financial results. Let's start with Slide #2 with the highlights. So sales at EUR 264 million, up 8.4% or 10% at constant ForEx, driven by a strong second quarter that is up 90%. Gross margin at 47.9%, delivering 690 basis points of improvement in comparison with H1 last year. EBIT at minus EUR 29 million with no special item incurred this year versus an EBIT adjusted of minus EUR 17 million in H1 '20. This improvement has been supported by the gross margin expansion and further cost reduction, minus 8.5%. Net working capital is under control at EUR 169 million, well below H1 '20 that was at EUR 223 million. Net financial debt adjusted before IFRS 16 lease liabilities is EUR 108 million, in line with March, after the peak of April. So May and June generated EUR 12 million of cash, thanks to the reopenings. In December, you remember, it was EUR 100 million of debt. Current trading today, the full network is open. Comparable store sales year-to-date, the week 29, are up 17%, thanks to a good like-for-like also in July. That is up 23% versus 2020 and minus 6% on July '19. Please go to Page 3 for a quick overview on the restructuring plan. I would say mission accomplished in H1. Finally, the unpleasant job is finished, and now we can -- we should focus on the strategic revamping of the brand. During the last 24 months, we closed 177 stores or 18% of the network with a strong acceleration in the last 12 months. The optimization will be almost completed within year-end with additional 50 store -- net store closure. In Canada, we closed 10 stores and the remaining 20 are now at variable or discounted rents in 2021. In the U.S., we exited from brick-and-mortar retail, focusing the business on web and wholesale key account. In Europe, we implemented a general network optimization, including the closure of the [ 3 ] branches of the Italian retail company. And then we moved the optimized network into each country subsidiary for a fully omnichannel approach and the material administrative savings. A special focus has been dedicated to U.K. and Germany, with 2 successful out-of-court restructuring. We closed 3 stores out of 6 in U.K. and 11 out of 27 in Germany. The remaining stores are now with reduced rent in 2021. In Japan, we are going to liquidate the subsidiary, closing 7 DOS and moving the business to a new distributors that is taking over the best locations and will add additional wholesale business starting from spring/summer '22. Finally, today, the group announces the shutdown of the Serbian plant, following the decrease in demand of dressy leather shoes. As I said, the group did not incur any material restructuring costs for this tough and fast reorganization. H1 has been positively impacted by the reduction in expenses. [ Day 2 ] will increase the savings that will be at full speed in 2022. Please go to Chart #4. Yet there is a summary of the ongoing portfolio network optimization. The number of monobrand stores at the end of June is 810 compared with 936 in June last year. So we did 126 net closure in the last 12 months, with an impact in this half of EUR 9.5 million in terms of sales versus June '20. As said, there are additional 15 net closure planned within year-end, 16 franchising, 26 U.S. and 8 under license agreement. The final number of monobrand stores will be at year-end in the region of 760. Please go to Chart #5. There are some interesting details for your review. You can see that H1 percentage of closure by country and the reopening calendar. 100% of the store network is open from July 1. However, the trend has been really different country by country. In some countries, in Europe, lockdowns have been really tough. And so you may appreciate some really positive like-for-like. To give some example, Italy has been closed, on average, 28% of the time versus 41% last year. So like-for-like is plus 20%. France has been closed 52% of the time versus 38%. And notwithstanding this factor, the like-for-like, at plus 12%, can be considered really strong. Like-for-like in Russia is up 109% and China, 26%, confirming the strong momentum of the brand in these countries are less impacted by lockdown this year. Please go to Chart #6 to see the U.S. operating status and like-for-like by month. The blue boxes contain the average percentage of closure by month. In this half, the network has been closed, on average, 28% versus 35% in H1 '20. On the other side, you can see that starting from mid-March this year, the comparison base in terms of closure percentage is really easy, and consequently, Geox experienced a progressive improvement in like-for-like. Second quarter like-for-like is up 56%. It is important to underline also a strong year-to-date reduction in markdowns with 700 basis points on 2020 and 400 basis points on 2019 year-to-date. Please go to Page 7 to comment H1 top line by channel. As said, the top line grew 8.4%, driven by a strong performance in wholesale that is up 16.8%. The company has been able to reduce cancellation compared to the previous season and delivered a really good season management with an increase of EUR 9 million on reorders and EUR 7 million in the sale of old stock, older season stock. On top of that, the customers asked for EUR 5 million of fall/winter '21 early deliveries. Franchising is flat, driven by the positive like-for-like and by a favorable timing effect on the different season deliveries. DOS is flat and missed a little bit the expectation due to the longer lockdowns and restrictions experienced in Germany Austria, France, U.K. and Canada. However, the strategy is working because the positive like-for-like and the growth for the online compensated the negative perimeter effect. On Page 8, there is a very quick view to net sales by region. Italy and Europe had a very similar high single-digit growth, supported by wholesale up in the region of 20%, and by like-for-like, up 20% in Italy and 5% in Europe. In Europe, a little bit depressed by Germany, Austria and the Netherlands. However, both Italy and Europe delivered a plus 100% in the second quarter, and this is quite remarkable considering that these are our core markets, but also the more impacted by the pandemic. North America is down 11% after the heavy reorganization implemented with the closure of 10 U.S. and Canada and the exit from the brick and mortar in the U.S. Rest of the World is a positive double-digit as a combination of 2 performances different by geography. Asia Pacific is down 9% with 2 exceptional events: I mean the liquidation of the Japanese subsidiary moving the business to a new distributor; and the closure of the contract with the wholesale Mainland China distributor. However, like-for-like in China is positive 26% 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, Eastern Europe continues really to outperform. It is up 28%, with Russia up 64% on 2020 and up 9% in 2019. Like-for-like in Russia is impressive. It has been plus 100% on 2020 and plus 25% on 2019. The brand momentum in Russia is really, really strong. On Page 9, net sales by product. Just to say that ready-to-wear is more impacted by the pandemic with the ready-to-wear specialists really prudent in buying new products. On the other side, performance of footwear has been fostered by Spherica performances. Please go to Chart 10 to comment direct online evolution of top line. There are a couple of important messages. Online sales are up 30% on H1 2020 and 80% on H1 2019. However, as you can see, Q2 2021 has been minus 7%. In order to better understand this result, let's analyze the performance by gender and by channel, online and brick and mortar. You can see that Q2 '20, kid was up 153% as a consequence of the full lockdown of the brick-and-mortar network. In Q2, this year, kid like-for-like online was minus 36%. But like-for-like kid brick-and-mortar was plus 60%. So there is in place a normalization of customer behaviors after the reopening coming back to the physical stores. Man and woman did not suffer from the abnormal comparison base and are positive double digit. In addition, this chart shows really an important information on brick-and-mortar and also on web, our stricter full price approach in all channels in the second quarter with an average 90 -- 900 bps decrease in discounts and markdown in all the channels. Please go to Chart 11 to comment on working capital and net financial position evolution. Net operating working capital landed at EUR 169 million, the lowest in recent years, mainly thanks to a good performance in credit management, minus EUR 28 million in receivable and also the good performance of our vendor payment agreements that allowed the payables to grow EUR 33 million. Also inventories are under control, thanks to the action taken on a Carrefour buying for fall/winter '20 and spring/summer '21 with a reduction of EUR 100 million in new purchases compared with the previous corresponding seasons. In addition, the progressive reopening of DOS and outlet delivered in May and June a positive cash generation, so that the debt decreased from the seasonal peak in April at EUR 125 million to EUR 108 million at the end of June. On Page 12, there is the income statement. Sales at EUR 264 million, as already commented. Gross margin is EUR 127 million or 47.9% on sales, with an increase of 690 basis points. This is the combination of plus 860 basis points due to material reduction in markdowns and no needs of additional inventory breakdown and minus 170 basis points, totally due to the different channel mix with a lower weight of DOS revenues and also in this case, the impact has been mitigated by the lower average markdown. The total operating costs are EUR 156 million down and with an additional 8.5% reduction or EUR 15 million. In particular, G&A at EUR 125 million are down 9% or EUR 13 million in H1 '21 and includes EUR 7.1 million of furlough contribution, EUR 5.7 million of government support on rents and structural costs, EUR 4.3 million of rent reduction and a 20% increase in advertising and promotion. At the end, EBIT is at minus EUR 29 million with no special item recorded this year. In H1 '20, EBIT adjusted was negative minus EUR 70 million. Again, the company decided to maintain a prudent approach not recording EUR 11.5 million of deferred tax assets. To give the precise information, there are in the region of EUR 40 million of deferred tax assets on losses not recorded in our financial statements. Consequently, in the next years, once we will be profitable, we can recover this amount of tax assets. Please go to Chart 13 for the balance sheet. It remains quite safe. The invested capital is decreasing in line with the strict control over CapEx, over working capital and the depreciation of the right of use regarding stores. Please go now to Page 14 for the cash flow statement. I would like to comment the restated before IFRS 16 because this is the real net financial position versus banks. The operating cash flow in the -- look at the right part in the -- before the last column, the operating cash flow is negative EUR 29 million due to the loss. However, there is a mitigation because the decrease in working capital generated EUR 13 million of cash. CapEx are still under strict control, and we invested EUR 7.3 million versus EUR 9.1 million in the same period last year. And considering also EUR 4.4 million of positive hedging valuation, the net financial debt is EUR 108 million before IFRS 16 liabilities. Please go now to Page 15 for the outlook. It remains unchanged. So considering that we are experiencing a positive start in Q3 for the U.S., the like-for-like of July is plus 23% and the total year-to-date is plus 17%. Considering that we have been able to collect a mid-single-digit positive for winter '21 initial order collection in wholesale, we assume that, in case no more market lockdowns will happen in second half, we may deliver a low double-digit growth in top line. Considering the fact that we will keep maintaining a really strong focus to cost management and also in markdown reduction, we believe that in terms of EBITDA, we will be able to reduce the loss also in comparison with the first half. So let's say that the transformation journey is well on track. On this respect, please go to Page 16. Just an update on our transformation journey. It won't be the same company. In green, the update. So let's say that as far as the team is concerned, now it is completely done. A new brand officer is joining the company and a new merchandising officer on footwear just joined the company, and he will add his seniority in footwear and accessories. He spent 25 years of his career in also luxury brand in this industry. We don't want to increase prices. Our dream is to increase the perception of the products in front of the final customers, more style, Italian touch and so on in order to be more relevant for the final customer joined with our, let's say, revamping a relaunch of the brand that we plan in 2022. The rationalization process has been completed. And as I said, we, tomorrow, today announce the closure of the Serbian plant. We are now open to -- we're now ready to open the Q&A session and take your questions.

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

Congratulations for the results and for the achievement and the progression of your plan. I have a quick question on -- based on the results achieved mainly on the cash generation for the second part of the year. Can you provide some additional indication on net financial position at the end of the year? And probably, is it fair to consider a number -- a better number compared to what's indicated in the last conference call?

Let's say that there is a high degree of uncertainty also regarding this new Delta variance. But I think that we should stay in the region of 100 to 110 like in June. In case reopenings will be, let's say, at the full speed, maybe we can also improve the situation. You know that, in my opinion, the fact that we decided to cut fall/winter '20 buying of EUR 40 million and then spring/summer '21 of EUR 60 million was really the most important decision we took last year because today, we are in the position to protect our inventories. We are not forced to sell off inventory. So we can protect the product, we can protect the brand. And we are delivering, let's say, a sort of positive like-for-like with real and material decrease in discount. And starting from June, fortunately, also our really strong outlet network is fully reopened. Unfortunately, there are still important limitation to the traffic to tourism. And consequently, tourists are really important for fashion district outlet and the McArthurGlen and all the other champions in Europe. And consequently, maybe we can do better, but it is early to say.

Yes. If I may, so a quick follow-up question. On the Serbian plant, probably I just missed it, but can you provide us with some indication on the impact that you will have? And the second one is on the online channel. I saw this something -- some normalization in the trends between online and brick-and-mortar. Just can you share with us, what are your expectations going forward for this year and also next year?

Okay. So starting from the easy one that is online. We did, in second quarter this year, really an experiment. I mean a 100% alignment of discount policy regarding both brick-and-mortar and online. And consequently, notwithstanding the fact that kids was a little bit weak compared to the exceptional performance of second quarter last year with a plus 153%, we decided not to push on promotion because, as matter of fact, our target is to reduce markdown. And the expectation for -- so now, we are absolutely in line in any case with our expectation that is in the region of plus 30% on 2020, considering the full year. As far as the Serbian plant is concerned, it's a pity because we -- let's say that's when we built the premises and the factory, the project was really to increase the quality and the volumes of dressy leather shoes. Unfortunately, in the last 5 years, customers' demand and customers' behavior went in a different direction. So it is not sustainable any longer to move production from Asia to Serbia in order to support the full production capacity of this big, big plant. So we have been forced, let's say, also considering COVID that drove to really a reduction in the volumes and also in this kind of formal back-to-work dressy shoes. It was necessary to take these absolute unpleasant decision. As a matter of fact, the factory, in any case, is quite lean. So as of to date, to give an example, the raw material at just EUR 1.2 million and a small depreciation has been fully recorded at June because we will be able to absorb these raw materials in the other -- selling them to the other suppliers. And as far as the net book value of the CapEx, it is in the region of EUR 9.5 million. We assume to be able to sell the premises with no material losses according to the fair market value that we received from 1 Serbian real estate advisory firm and 1 international real estate advisory firm. So for the time being, we do not see material restructuring costs. The liquidation process in Serbia, according to Serbian Law, is quite, let's say, light in terms of restructuring charges. In any case, we are in strict contact with the Serbian government in order to support our best transition to new investors that will locate their investment and production in our premises so that, with our support and the focus of the government, we will be able to mitigate the impact of this closure in Serbian society.

The next question is from Oriana Cardani of Intesa Sanpaolo.

Yes. The first one is about current trading condition. July started well, very well. Is it true for both retail and wholesale? And do you think that the good start could continue on the same path in Q3? The second question is on gross margin in the second part of the year. Do you believe that any temporary closure of factories by your suppliers due to COVID in emerging markets may [ manage ] gross margin in the second part of the year? And finally, for -- the last question is on fall/winter collection. For summer, spring/summer, you focused on 2 main products. Will you have the same approach also in fall/winter?

Okay. Thank you for your question. So current trading, in some countries, we are doing really well. Fortunately, this year, the sales period has been placed exactly as in the normal years because last year was really a problem because the postponement of sales period induced the companies, in any case, to do promotion because people was waiting for promotion and for the sales period. So to do promotion also before the sales period, and consequently, we experienced like, let's say, the industry really a longer period of markdowns. This year, fortunately, July is just the sales period for Europe and starting from mid-June for Northern Europe. So let's say, I think that this performance is quite good compared to last year, also due to the fact that we are in the full -- in July in the full of the sales period and maybe last year, some countries were not in the sales period. However, it seems that people, once they can enter the stores, are really willing to buy because this positive result we are experiencing has been obtained notwithstanding in brick-and-mortar really a material fall in traffic in any case. So it means that retail KPIs, in terms of conversion of units per ticket and also fortunately in terms of average price due to the reduction in markdown, are really working in this season. So we hope that once movement restrictions will ease a little bit in the second half, we should be able to improve the performance. So today, we have, let's say, positive expectation for Q3 in retail. And for wholesale is more or less the same. And the demonstration of this is the fact that we have been able to place EUR 9 million of reorders more than in Q2 last year. So let's cross finger, and let's see what about lockdowns or not. Production problems in the supply chain, to say that the industry is suffering a couple of problems, the first one is that there are still some lockdown, short-terms lockdowns in Vietnam, in Indonesia and in other countries. There is a sort of stop and go. They close 1 week, reopen 2 or 3 weeks, close 1 week. So let's say that maybe some delays may happen. We are really closely monitoring the situation in order to take all the necessary actions to mitigate eventually the impact. And one of the action may be higher freight. So as you said, the real problem of our industry in the near future is the increase in costs of transportation. Fortunately, we are one of the most important importer of shoes and apparel in Europe. Consequently, we have long-term contracts with the companies. And consequently, 2021 is not materially impacted by this increase in the cost of transportation. For sure, it will be a little bit, but not materially. We hope that in the second half, the pressure will decrease and consequently, we hope to be able to, let's say, have a better situation in 2022. However, the price list of 2023, too, are reflecting a sort of a slight increase in prices because it is necessary to recover the margin and consequently, in some cases, to pass part of this impact on the price of the product. Fall/winter '21 approach in terms of advertising, yes, we will continue in this approach, albeit a little bit different approach, but with the same tone of voice and also the new language that we are using like Spherica TV campaign. The TV campaign, we will have a couple of TV campaign, the first one really important in 12 countries regarding back-to-school, also in order to promote the important collaboration we have with Disney and also with Nintendo for the Super Mario, let's say, Super Mario products. So we will have really a strong collaboration, Disney more for girls and Nintendo Super Mario more for kids. And then in October and November, there will be a TV campaign regarding Amphibiox. So not just 1 product like Spherica, but a family of waterproof products that are really important for us in fall/winter and also in spring/summer, at the beginning of the spring/summer. And it will be with the same, let's say, a story like Spherica with really important creative ideas behind with the same agency that has been chosen for Spherica campaign. As a matter of fact, for sure, advertising will be part of the brand revamping and brand reactivation that we are planning also for 2022. And this will mean also an increase in marketing spending. And this is the reason why were being so, let's say, tough in following all the necessary reorganization action in order also to free up resources for the investment we are doing in the digital transformation, but also to increase a little bit of the marketing spending.

[Operator Instructions] The next question is a follow-up from Francesco Brilli of Intermonte.

Yes. Just a quick one on prices. You mentioned that you will implement on the [indiscernible] a price increase starting with the beginning of 2022 for the full category. Is that right? So something that you are envisaging for the next year?

I would like to be a little bit clearer. Let's say that we are not going to increase prices, let's say, on all the products. The increase in prices will be, on average, in the range of 2% to 3%. So really a slight increase on average. The recovery of the profit of the margin should drive from our approach to reduce markdown. Once -- once and when our, let's say, brand will be back in terms of consideration from the final customers and also in terms of appeal and the perception for the final customers, then in case the brand will have more pricing power, we may consider to create capsule or projects with a higher price. But really, really very prudent in this market situation. So let's say that increase in prices or rationalization of the collection in order to increase the -- to reduce the number of SKUs and to increase the quantities by SKU will be the main action to protect the margin. And I would like to take this question also to give a little bit of flavor regarding gross margin in the second half because you have seen that we have been able to deliver really an important improvement in gross margin in first half. Also, due to the fact that first half last year was heavily impacted by huge inventory write down and the second half last year was normal, I would say. We will have the same situation this year. So big improvement in the first half and then more or less the same margin in second half. Provided that, in any case, we'll try to improve the gross margin reducing the markdown and discount. But this is something that we can build week by week during the second half. So for the time being, I would recommend to assume the same gross margin in each -- in the second half of 2021 compared with the second half of 2020. So at the year end, 350 basis points of improvement on the full year compared to last year.

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

As usual, thank you very much for your time. Feel free to contact Simone or myself for any information or doubt you may have. We are here, and we'll be happy to answer to your question. Thank you very much. Keep in touch on November, and we will inform you about eventually the new Investor Day that I think, in case of no lockdown, consequent normalization of the volatility, we will held in November. Thank you very much.