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

Ladies and gentlemen, welcome to the Geox Group First Quarter 2022 Results Conference Call. [Operator Instructions] The call will be chaired by Geox's Vice Chairman, Mr. Enrico Moretti Polegato; and the CEO, Mr. Livio Libralesso. I would now like to turn the conference over to Mr. Rico Moretti Polegato. Please go ahead, sir.

Good evening, everybody. Good morning, depending on time. First quarter 2022 results show a major improvement over last year's first quarter with double-digit growth across our distribution channels. Growth in the second quarter is accelerating and consolidating this positive evidence. Revenues at the end of April are up 32% and sales from our physical stores essentially doubled from last year, with countries already above pre-pandemic levels. Good news is also coming from the multi-brand channel. Order intake for the spring-summer season showed double-digit growth orders. But for the fall-winter season reported plus 26% returning to 2019 levels. Also, in financial terms, we are seeing a progressive and continuous improvement in both the financial position and working capital. These are the first important feedback from the initiatives undertaken with a new strategic plan aimed at making our business model increasingly efficient, flexible and in line with market trends. However, the scenario remains particularly complex due to the conflict in Ukraine, the pandemic evolution in China and the difficult situation in the supply chain. Nevertheless, our sales performance leaves us to believe that we are on the right path. The brand is becoming increasingly relevant to consumers again, and our investments in research, product and marketing are yielding very positive returns. In 2022, we will see a significant revenue growth in line with the plan and despite the complexities described above. So we are extremely confident that once we get through this extraordinary situation, the fruits of our job would be even more tangible. Now before handing over to Livio, let me underline the outstanding performance of our CEO and all of our management in such a difficult environment. And let me just stress the confidence that the Board has in the capability of our CEO and our management to deliver the results we promised. Now let me over to Livio, and let me thank you.

[Foreign Language] Hi, everyone. Thank you for joining us today to discuss Q1 '22 net sales, net financial position, current trading and some trends for full year 2022. Let's start with Slide #3 with the executive summary. So first quarter net sales are at EUR 184 million, up 24%, driven by an easy comparison base, but also by our investment in products and brand revamping. Net working capital is under control at EUR 104 million, well below Q1 '21 that was at EUR 183 million. Consequently, the adjusted net financial position before IFRS16 lease liabilities was minus EUR 58 million. In December last year, it was at minus EUR 64 million. And in a while, we will comment on the split between the bank debt and the positive fair value -- the positive fair value of our derivatives. Current trading is encouraging. Like-for-like year-to-date, today the week 18 is up 60% on 2021 and just slightly below 2019, just minus 3%. With a relevant improvement in markdown, Q2 from the first of April to date is up 76% versus Q2 '21 and plus 3% on Q2 2019. So we're experiencing really a good start of spring-summer '22 products. In April, we have been able to recover the shift in deliveries in the wholesale channel due to the delays in receiving goods that we experienced in March. So our total sales at the end of April jumped at plus 32%. On the other side, pressure on margins continues to be strong due to international geopolitical situation to the cost inflation and to the COVID-19 impacts on the supply chain. However, our strict approach in reducing discounts and expenses has been able in the first quarter to absorb this impact for the time being. In order to better understand the drivers behind this positive performance, please go to Page 4. During the last 36 months, we closed approximately 240 stores or 25% of the network. Today, the network is composed by 750 stores, out of which 340 DOS. This optimization will be almost completed within year-end with additional 30 DOS net closure. Please go to Chart #5 to elaborate a little bit on the easy comparison days actual like-for-like. Dark blue boxes contain the average percentage of closure for lockdown by quarter experienced in 2020 and 2021. Q1 and Q2 this year are expected to be fully open while last year, the network was closed on average, respectively, 34% and 20% in Q2. However, you can see that like-for-like by quarter is very solid, with plus 54% in Q1 and Q2 to date, week 18, is delivering, as I said, a plus 76%. This means that all the retail KPIs are improving substantially, recovering the gap on traffic. I mean, the conversion rate, average selling price and unit per ticket joined with a material reduction in discount. Please go to Page 6 to better appreciate the positive performance of retail KPIs. The blue line represents like-for-like versus 2019, and the gray line, traffic versus 2019. You see that like-for-like is strictly correlated to traffic. However, notwithstanding still a minus 35% in terms of traffic, comparable store sales year-to-date week 18 are just 3% below 2019. And from April, the performance is plus 3% on 2019. As a matter of fact, stores have been now fully filled with merchandise regarding spring-summer, and the marketing investment we did is driving this positive performance. After this deep dive on the drivers, please go to Page 7 to comment Q1 top line split in brick-and-mortar and digital. The growth of 24% is driven by brick-and-mortar, while digital, including e-tailers, is up just low single digit. This is absolutely aligned with market trends in this quarter and reflect the stabilization of volumes after 2 years of overperformance due to the severe lockdown in brick-and-mortar. Please remember that year-to-date, brick-and-mortar performance like-for-like is 99% positive for regular and 87% positive for outlet. At Page 8, there are 2 charts to better understand direct online trends. In the first chart, you can see the gross merchandising value, I mean, delivery gross over returns year-to-date until May 10. It is EUR 24 million and '22 trend is similar to '21, so at the same level, except in January, where we suffered a really soft discount policy that we decided to implement at the beginning of the sales period, and from mid-March to mid-April due to the delays in receiving goods, especially kids products. In the second chart, however, you can appreciate that in any case, direct digital sales are completely at a different level in comparison with 2019, more than the double EUR 24 million versus EUR 11 million. Please go to Page 9 to comment top line split by channel. As said, top line grew 24% and all channels are positive. This performance is due to a positive wholesale that is up 11%, however, below the 25% growth recorded by the initial order backlog, and this is due to some delays in deliveries. In April, as said, we're being able to recover this shift, and now wholesale sales is up 15% versus last year. Also franchising channel is really positive. The growth is 49%, driven by the reopening process after the severe lockdown in Q1 '21. DOS channel delivered a strong positive growth, 44% as a combination of a sound brick-and-mortar trend, partially offset by a negative perimeter effect and then -- and also the high single-digit negative online performance already commented. On Page 10, there is a very quick overview to net sales by region. All regions are positive. Italy is really doing well. It is up 62%, supported by a strong like-for-like in retail; DOS up 100%; Franchising, 86%; and Wholesale, 26%. In Italy, we are really the leader in the market in our premium segment. Europe grew 21% based on the same drivers. Like-for-like DOS, up 39%; franchising, 67%. In Europe, wholesale is up 13%, with German-speaking countries running a little bit slower in comparison with the other because they have being still more impacted by traffic due to a worse pandemic situation. North America is up 10%. In North America, the supply chain constraints and the port congestion had a higher impact on late receivings. Today, the situation is more or less solved. Rest of the world is positive, 5% as a combination of 2 performances different by geography. Asia Pacific is down 12%, and this is due to the business restructuring in Japan where we liquidated the subsidiary moving the business to new distributors. And two, the worsening situation in Shanghai, Greater area. However, China, at the end of March is still positive 8%. On the other side, Eastern Europe countries continue to be positive since the outbreak of the crisis occurred late in February and the majority of the wholesale business has been delivered. On Page 11, the details of the net sales by product. Just to say that ready-to-wear is experiencing a good season, both in terms of sell-in and sell-out. For sure, spring-summer for our ready-to-wear business is less important than fall-winter. However, it's important for us to see that apparel is growing 66%, while footwear 20%. Please go to Chart 12 to comment working capital and net financial evolution -- position evolution. Net operating working capital landed at EUR 104 million, really low, mainly thanks to good performance in inventories, down EUR 35 million, and credit management with receivable, down EUR 17 million. Also payables are generating cash, given the fact that they are related to fresh inventory with payments still not due. Net working capital on the last 12 months is 16%, and this is the lowest level since ever. It reflects the fact that we have been able to get treated with the aged inventory, and now we must buy more products in order to fuel sales according to our plan in 2022. We confirm that the normal incidence on sales should be in the region of 20%, 22% hopefully, in the lowest part of the bracket. This good performance in working capital absorbed any seasonality. So bank debt at the end of March is EUR 85 million, roughly in line with December '21. The fair market value of our hedging instruments is positive, amounting to EUR 27 million. And consequently, adjusted net financial position before lease liabilities was additionally down at EUR 58 million versus EUR 110 million in March last year. Please go now to Page 13 for the outlook. So provided that the recent evolution of the international turmoil and the pandemic are increasing in volatility and the uncertainty, we have to consider the summary of our positive current drivers in our business. So as I said, like-for-like year-to-date is up 60%, with a relevant improvement in markdown, 500 basis points versus 2021 and 400 basis points versus 2019. And Q2 to date is plus 3% versus Q2 '19. Total sales at the end of April are plus 32% year-on-year. In wholesale, we assume a yearly growth of 15%, driving this channel really closer to full year '19 level. This is based on the strong initial order backlog, both for spring-summer '22 and fall-winter '22, and assuming to be able to confirm the same level of reorders as in 2021. On the other side, the supply chain issues, port congestion, increased lead time and the greater recourse to air freights are impacting our industry. The overall impact of this factor can be estimated for Geox in H1 '22 at approximately EUR 16 million of lower revenues and EUR 16 million in terms of lower gross margin, EUR 8 million linked to lower revenues and EUR 8 million linked to the increase in air freight to protect wholesale deliveries. However, on the base of this assumption, we maintain -- we are confident that the guideline in terms of top line with a double-digit growth in our revenues will be delivered, and we assume to overcome EUR 700 million. This figure would remain achievable, albeit becoming challenging, even in the event that a diplomatic solution to the Russia-Ukraine crisis is not found soon with a possible consequent strong impact on business in those areas in the second half. In terms of gross margin, the persistence of the above-mentioned material issues in the supply chain impose a greater prudence regarding its annual evolution. However, we will take all the action available in the remaining part of the year, both in terms of the commercial development and cost reduction in order to mitigate this expected negative impacts. We are now ready to open the Q&A session and take your questions.

[Operator Instructions] The first question comes from Oriana Cardani of Intesa Sanpaolo.

Yes. The first one is on the supply chain. You hired new management to reconsider the supply chain configuration at the end of last year. Can you give us some highlights what could change and what are your open options and the timing for the first steps? And the second question is on ForEx restructure. So what kind of impact does it have on the current profitability?

So supply chain. As a matter of fact, our industry must now focus on the first mile, I mean, production and how to move products manufactured in Far East to the distribution centers all over the world. So for sure, we are also planning a sort of near-shoring production in North Africa, in Portugal and in Spain. And as part of our strategy, the non-sneaker segment, and especially the woman products, are some of the driver of the future growth. So this near-shoring will allow non-sneaker to grow. And this is a market rule. So also Geox will benefit from this short lead time compared to sneaker. As far as sneakers are concerned, there are no material, I would say, alternatives to produce in Far East countries. So it is necessary really to strengthen relationship with our long-term suppliers. It is necessary to diversificate the production footprint in order not to depend and to rely just in 1 country for a specific product, but we should be able to move eventually the production. And this is a project to inject flexibility in the supply chain that we are implementing. Thanks also to the investment in people that we are doing in the supply chain. For the time being, as I said, delays on deliveries cost to the group just EUR 8 million. It is not a low amount. However, it means that we have been able to manage the delays, especially due to COVID lockdown in the second half last year. As a matter of fact, today, the only country under a strict lockdown is China. For us, China is not so important in terms of production. So maybe we will see, in any case, an extension in lead time regarding transportation because the port of Shanghai is really important for all the Far East routes. What about U.S. dollar? Let's say, we are in the safe part of the market. We did really a good hedging activity. So 2022 and 2023, I would assume to not to have any impact from U.S. dollar. So we bought time in order to react with the supply chain in case U.S. dollar will remain so strong. So you will see. Today, to give you an example, the fair value of our hedging is EUR 50 million compared to the EUR 27 million we are disclosing regarding March. It means that until December '23, we have the U.S. dollar exchange rate at the business plan level.

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

Okay. So thank you very much for your time. I think that also the other peers are giving a sort of common view regarding 2022. Our industry will experience a rebound in sales, so this year's sales is not the issue. Company in our industry must pay the most of their attention to cost of goods sold and the reduction in all the other expenses to mitigate, eventually the impact in the second half in case this pressure on supply chain will last in the second half. Thank you very much for your time. In case there is no other question, keep in touch. See you in July for the fresh start.

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