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

Ladies and gentlemen, thank you and welcome to the Geox Group Full Year 2022 Results Conference Call. [Operator Instructions] The call is chaired by Geox' Vice Chairman, 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.

Welcome, everybody, to our conference call. 2022 was a really important year for us, and we are satisfied not only for the results, which are better than expected. We have returned to an operating profit and revenues have grown by 21% despite the highly complex environment, but also because the plan of action outlined in the bigger and better strategy plan 2022-'24 is proving to be correct and is bringing important results. This phase is focused on the relaunch of the brand on heavy investments in product and style, on renewed attention to multi-brand distribution on digital and on the productivity of single-brand shops. But these results have been achieved also thanks to skill cohesion and commitment of all of us who face each challenge with great passion and professionalism. We are a forward-looking company, which has made significant investments in the training of our people in their skills and in the digitalization of our business model. This path started in 2020 when we undertook a thorough rationalization of our nonprofitable activities, which freed up resources to increase investments in the more strategic activities needed for the development of the business model and the revenue growth. Today, we are reaping the first important fruits of this intense work. Sales are growing at double-digit rates across all distribution channels and in all major regions, reflecting the increasing appreciation of our products. Operating costs are down 14% compared to 2019, thanks to a more efficient and flexible business model. The good start of 2023 confirms our expectation for both revenues and profitability growth. In a still complex geopolitical and economic scenario, which led us to maintain a prudent approach aimed at tight cost control, we look to the future with confidence and confirm the growth and profitability forecast of the business plan for both 2023 and '24. Thank you. Let me now hand over the conference to our CEO, Livio Libralesso.

[Foreign Language], Enrico. Good morning and good afternoon. Thank you for joining us today to discuss full year '22 results, current trading and some trends expected for full year 2023. In case we are late in sending the presentation, please download the presentation from the website, geox.biz. So let's start with Slide 3 with the executive summary. The second phase of our business plan named the Bigger and Better is bringing the expected results. Net sales were at EUR 736 million, up 21% on December '21, supported by an easy comparison base and boost by our investment in products and in the revamping of the brand. Geox delivered a stronger Q4. It was up 14% on Q4 '21 and 2% on Q4 '19. Gross margin was 47.5% with an increase of 80 basis points primarily driven by the increase in the average selling prices and by the reduction in discounts. Together, they absorbed completely the higher freight costs. EBIT returned positive at EUR 4.3 million. Net working capital is under control at EUR 77 million, well below December '21 that was at EUR 112 million, with a remarkable 10.5% on sales. The adjusted net financial position before IFRS 16 for lease liabilities was minus EUR 49.8 million. In December last year, it was minus EUR 64 million. Current trading is positive. Like-for-like year-to-date week 9 is up mid-single digit on 2022 and 3% on 2019, delivering also a relevant improvement in markdown in the region of 4%. Positive news flow also on wholesale, the initial order campaign is up double digit, and fall-winter '23 is up double digit as well. Pressure on supply chain continues to be recovered, and we are matching requested deliveries due dates with a high level of service without any material cancellation. Please go to Chart #4 to comment the top line. Total sales arrived at EUR 736 million, recording a growth of EUR 127 million or 21%. This growth is driven by brick-and-mortar with an increase of EUR 111 million, while digital sales, including our direct e-commerce and the other well players, is up just high single digit or EUR 60 million. This trend in digital is absolutely aligned with the market trends and reflects the stabilization of volumes after 2 years of overperformance due to the severe lockdown in brick-and-mortar. Total digital sales, however, represent 27% of total turnover, in line with best practice in our industry. Please go to Page 5. You can see the comparison with 2019. Sales are EUR 70 million lower, exactly in line with the perimeter effect due to the network rationalization. While EBITDA under IFRS 16 is EUR 27 million versus EUR 25 million, and the EBIT is positive at EUR 4 million versus loss of EUR 3 million 2019 adjusted. This means that Geox has been able to materially decrease the break-even point. This is due to 2 pillars. The first is at Page 6, and it is the optimization of brick-and-mortar retail network. During the last 36 months, we closed approximately 260 stores or 26% of the network. Today, the network is composed by 717 stores, out of which 315 are DOS. And this optimization will be almost completed within 2023 with additional 31 net closure. The second driver is at Page 7. You can see the overall positive impact of the restructuring process adding to the savings of the network the other G&A optimization. In full year '22, total G&A, including -- excluding A&P and the one-off positive items, were EUR 323 million versus EUR 376 million in 2019 with a decrease of EUR 53 million or 14% on sales -- no, no, 14% on the absolute value. At Page 8, we can elaborate a little bit on the easy comparison base on actual like-for-like. Dark blue boxes contain the average percentage of closure for lockdown by quarter experienced in '21 and in 2022. You can see that in 2022, like-for-like by quarter has been very positive in H1 due to the easy comparison base. Then performance normalized in H2, but still positive. Like-for-like has been positive also in 2019, starting from Q2. In Q4, like-for-like has been weak due to the lack of ready-to-wear products caused by the fire event occurred in September. In 2023, however, current trading week 9 is back to positive both from 2022 and on 2019, thanks to the spring-summer '23 early receivings in stores that compensated lower sale in ready-to-wear. This mean that all the retail KPIs are improving substantially, recovering the gap still present on traffic. I mean conversion, average selling price and the unit per ticket joined with a material reduction in discounts. Please go to Page 9 to comment top line split by channel. All channels were positive. Wholesale was up 21% driven by the positive spring-summer '22 and fall-winter '22 initial order intake and also by a good and seasoned management with reorder that partially offset the cancellation Geox suffered for the delays on deliveries due to the lockdowns in Vietnam and in China. The franchising channel was really positive, up 47% after the total reopening of the network. And also for franchising, we experienced a good level of in-season reorders and also some positive time effects on deliveries. The U.S. channel delivered a positive growth of 16% as a combination of a sound brick-and-mortar trend like-for-like that is up 27%, partially offset by a negative perimeter effect and by the mid- to high single-digit negative online performance of our geox.com. At Page 10, there is the Q4 performance. It has been positive, plus 14%. And it has been supported also by recover -- the reliability of our supply chain that allowed the group to match perfectly the market demand for early spring-summer '23 deliveries. Only the U.S. is flat. And again, this is due to the lack of ready-to-wear in our stores due to the fire that burned 30% of the fall-winter season products. On Page 11, there is a very quick overview to net sales by region. All regions were positive. Italy was up 27%, supported by a strong like-for-like in retail; U.S., up 25%; and franchising, 21%; and also wholesale grew 21%. Europe grew 18% based on the same drivers. North America was up 13%, also thanks to positive e-commerce, high single digit. Rest of the world was positive 22% in total. And it is a combination of 2 performances different by geography. Asia Pacific finally recovered a little bit, and the full year is up 6%, thanks to a good performance in Q4 that was up 23%. This revamping compensated the business restructuring in Japan where we liquidated the subsidiary, moving the business to a new distributor and compensated the strict lockdown in Shanghai greater area from March to June. On the other side, Eastern Europe countries keep growing, and the final number is up 26%. On Page 12, the details of net sales by product. Just to say that ready-to-wear grew 17%, while footwear grew 21%. Please go now to Page 13 for the profit and loss. Sales were at EUR 735 million, as already commented, with an increase of EUR 127 million. Gross margin was EUR 349 million or 47.5% of sales with an increase of 80 basis points. This is the net result of the negative impact coming from a greater recourse toward freight in order to recover the delays due to the lockdown in Vietnam and in China. And this effect has been mitigated by an improvement due to the positive trend of retail full-price sales joined with a material reduction in markdown and by 50 basis points of positive channel mix. The total operating costs were EUR 345 million or 46.9% on sales versus [ 54% ] in 2021. This amount is net of EUR 3 million of extraordinary contribution received in 2022 versus EUR 27 million received in 2021, I mean, social safety nets, governmental support and rent reduction. A&P was EUR 30 million or 4.1% on sales versus EUR 29 million in 2021. EBIT finally is back to positive at EUR 4.3 million versus a loss of EUR 45 million last year. Taxes are EUR 4.6 million. It is a noncash item due to the reversal of deferred tax assets related to timing differences. We have been really prudent. According to ESMA recommendation in COVID-19 situation, the group prudentially did not record any deferred tax assets on fiscal losses to be carried forward. I mean EUR 1 million in full year '22, EUR 18 million regarding full year '21 and EUR 17 million regarding full year '20. In other words, having enough balance of EUR 36 million of tax assets, it means that the group will not pay taxes for the next EUR 160 million, EUR 170 million of pretax results. EBITDA is EUR 79 million or 10.8% on sale, and EBITDA before IFRS 16 is at EUR 27 million or 3.6% on sale. On Page 14, to comment the balance sheet. It is quite healthy. The invested capital keep decreasing in line with the strict control over working capital. And the net equity was at EUR 108 million. Please go to Chart 15 to comment on working capital and net financial position evolution. You can see that the net operating working capital landed at EUR 77 million, lower and lower. As a matter of fact, we got rid of aged inventory. However, now we must buy more in order to fuel the increase in sales in 2023 according to the double-digit growth of the committed backlog of orders received from wholesale. So inventory and receivable are increasing. However, suppliers are financing this increase in fresh inventory to be delivered in coming months. The percentage of net working capital and sales additionally fell to 10.5%. And this percentage is assumed to increase in 2023 given the new normal correlation between sales and purchases of new products. Bank debt at the end of December is EUR 76 million, EUR 7 million lower than June '22 and December '21. And the fair value of our hedging instrument is positive, amounting to EUR 26 million. Consequently, the adjusted net financial position before IFRS 16 for lease liabilities was additionally down at minus EUR 50 million versus minus EUR 65 million in December. So as a matter of fact, the cash flow from operation is more or less neutral. We have been able to extract cash from working capital that fully financed the CapEx, and the free cash flow was EUR 7 million. You can find this information on Page 16, where there is the cash flow statement and in the last 2 columns restated. In order to, let's say, correct the noncash effects of IFRS 16, you can see that we have been able to decrease the bank debt of -- by EUR 7 million, thanks to the squeeze of the working capital that has been really important. Please go now to Page 17 for the outlook regarding 2023. The start of the year has been really positive. So considering that like-for-like of stores is up 4% on 2022, delivering also an ongoing improvement in markdown and considering that the wholesale initial order intake is positive double digit both in spring-summer '23 and fall-winter '23 and considering that the supply chain has been really recovering in terms of lead time reliability and decrease of cost since Q4 last year, we assume that top line will increase 6% to 8% in 2023 and that we will be able to deliver an improvement in gross margin in the region of 100 to 130 basis point. As a matter of fact, we reconfirm the guidance of the business plan both for 2023 and 2024. For sure, uncertainty remains very high due to the current geopolitical situation and the inflationary environment so that we must be really prudent and cautious also in cost controlling. We are now ready to open the Q&A section and take your question.

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

The first one regards current rate. Can you give us some color on what you are seeing in the market at the moment in the different geographies? And then the second question is on the fall-winter collection. We have the opportunity to appreciate the presentation where the formal segment has been reached, especially for women, and also apparel also was reached. So I wonder, how was the new range being received by buyers?

Okay. So current trading, let's say, that in Europe, we are experiencing really an improvement in the sell-out of spring-summer '23 due to the fact that this year, we are really fully in line with the requested delivery date by our network and by also our wholesale franchising business, thanks to really a good job done by our supply chain. And consequently, the mix regarding spring-summer is in the last week in just -- already in the region of 60%. And this is the reason why we are really improving the margin, reducing the average discount because we are moving faster to the new season full price and leaving back fall-winter '22 sales discounted product. And consequently, in Europe, more or less at the same speed. We are positive 4% on last year and also 3% on 2019. In China, we are seeing still problems due to the recent explosion of COVID and the fact that the people are a little bit scared about traveling and so on. So we, in any case, in 2023, we will optimize the network in China. China is not so strategic for us. So we will do our best in order to optimize the network. In North America, we are experiencing a good trend in -- both in brick-and-mortar and in digital sales, brick-and-mortar up double digits and digital sales up high single digit. So -- and we are experiencing since the last quarter of last year a revamping in the Asia Pacific distributor business, especially in Korea, in Vietnam, in Indonesia. So we hope that COVID-19 is behind us, at least in this -- in Europe and North America and in this region. We will see. We are very prudent, but we will see. What about fall-winter collection? You are right, we are investing in style and in products. And I think that this is also part of the reason why we are increasing double digit. As a matter of fact, sneakers are still the most important category. However, especially in women, moccasin, sandals and the ankle boots are back in quite a stronger way, and this is really important for us because these kind of products are far from the sports competitor that might try to gain market share in sneaker, adopting also a lifestyle approach to sneakers. So good. We are in a good situation. We have seen that also for winter '23 and that is at the end of the sales campaign, just another 10 days of order collection reach the -- more or less the target with a double-digit growth. So supply chain is improving. And we believe that 2023 will give us a proper trend in line with the business plan.

The next question is from Andrea Bonfa of Banca Akros.

I got only one, let's say, if you could flesh on your financial charges, which were [ highest in the quarter ]. Is there any particular component that we should be aware of, like [indiscernible].

Yes. Financial charges are a little bit strange, I would say, let me use this kind of word. So first of all, there are in the region of EUR 4 million of financial charges due to IFRS 16 accounting principle. You know that the invoices that we received from landlords must be split in 2 parts. The first one, that is depreciation and amortization. And this is above the EBITDA, the operating result. And the second part is the financial recalculation of the lease agreement that is below operating result. And this means EUR 4 million. In addition, there are EUR 2.5 million due to our debt -- to the average debt during the year and a couple of million due to the -- it's an accounting effect of the time value of our hedging instruments. And finally, in the region of EUR 3 million of cash discount granted, especially to the bank groups in Germany, in France and in Northern Europe.

The next question is from Francesco Brilli of Intermonte.

Congratulations on results. I have a couple of questions. The first one is on net working capital and sales. It's -- that's extremely low this year. What -- if you can share with us what we should think of for the next year. And what is a normal level that you can share with us for this metric going forward? And the second one is on the outlook and the guidance in light of what we are seeing now in the current trading and the -- also the increase in selling prices and the growth in volumes. Is there any caution that you are taking into consideration for the outlook, so high single digit for next year, that we should be aware of?

Francesco, sorry, just to elaborate a little bit on your second question. So if we think to increase prices also in 2024, is this the meaning of the question?

Yes. No, it was just -- just thinking that seeing a double-digit growth in the order intake for fall-winter and the evolution of those and the -- that you highlighted an increase in selling prices, just to understand if embedded in this plus-6%, plus-8% growth in sales. Is there any -- I mean, any caution or something like that?

Okay. Point taken, point taken. So net working capital our, let's say, business plan guidance was in the region of 19% to 22% on sales and i.e. quarter-by-quarter, say that the percentage we have is not sustainable and that we assume that it will increase. However, quarter-by-quarter, we are also showing even a more and more -- a better and better percentage on sales. This is due to, let's say, strict control, I mean. As a matter of fact, I see the results of the sellout. And in 2022 spring-summer and also fall-winter, given the fact that we experienced quite important late deliveries, we suffered, as you know, quite important cancellation in spring-summer and also in fall-winter. So the rule of the house is okay. Retail is not allowed to buy more than the previous season and must absolutely use all the goods that have been late. And consequently, we are keeping selling goods without new buying in retail. We -- I'm giving free open-to-buy in wholesale. Given the fact that it is wholesale give us committed orders and consequently, our responsibility is to produce and to deliver on time. And then given the payment condition, wholesale is requested to pay the invoices it receives. We have been able to put in place a really important international vendor financing program. So a relevant part of our buying from Far East is paid more than 150 days after the shipment of the product from our suppliers. So most of the wholesale business -- we are able to cash most of the wholesale business before we must pay our Far East vendors because according to these international vendor payments program, they can discount at their expenses immediately the invoices that they send to Geox. So we have been able to increase turnover. As you have seen -- as you can see at Page 15 in the working capital schedule, we have been in the last 2 years, we have been able to increase EUR 200 million of turnover without increasing working cap -- or better generating from working capital the cash in order to finance this important growth. Now we need to buy more. And consequently, in 2023, we will experience again an increase in working capital to a normal level, for sure at June. And then December is more, let's say, normal in terms of seasonability because the increase in spring-summer buying is higher than increase in fall-winter buying. So let's assume that this year, we will be more than 15% and traveling towards 20% in the future. The outlook 6%, 8%, given the double-digit growth of our wholesale backlog, yes, it is the initial order backlog. We assume this increase in the initial order and in our budget, there is exactly the same good performance in reordering season. So initial order is up double digit. In-season reorders in our -- are just slightly positive. And so the mix, the total will be lower than double digit in wholesale. And we assume to be able to grow mid- to high single digit in our retail network. And consequently, full year sales guidance is 6% to 8%. There are -- there will be also, as we have said, additional 50 DOS closure. So with an impact on our top line mitigated by 20 new openings in Asia Pacific and in Eastern Europe from our franchisee.

Okay. Just a quick follow-up. Is there -- in this good performance of working capital, is there also an effect of the programs that you announced, the business plan -- back of the business plan that -- or optimization of warehouses? And I mean you mentioned some digitalization and programs to optimize the management of inventory, is -- these programs are already there?

Yes. For sure, to give an important number for us, we said we want to invest in omnichannel approach. In 2022, we have been able to sell EUR 20 million in our retail network of product not present physically in the stores, I mean, sizes that were not present or even products new for the store that the sales assistants have been able to show in our iPad to the customers. So EUR 20 million means more than 7% of the sales obtained with this, let's say, sharing of the inventory between e-commerce and brick-and-mortar stores. And on the other side, in case on the central e-commerce warehouse, there isn't -- the product requested from the customers, we are fully able to deliver to ship from store. So what we call liquid inventory is absolutely one of the crucial project that we have been able to put in place. And we will boost -- in any case, we will foster also an additional integration in this respect. So the digital investment that we are making is gaining traction and delivering results.

[Operator Instructions] The next question is from Federico Belluati of Kepler.

I'm wondering if you can give me some more color regarding the tax rate because as I read on your press release, we should benefit from EUR 25 million tax benefit. So what's the tax rate you should pay anyway, I mean, from, for example, [ IRAP ] or some other international taxes?

Let's say that a standard normal tax rate within the region of 24%, 25% for the group. It is clear that given the fact that we have EUR 36 million of tax asset for the Italian company is not recorded in the financial statements, it means that dividing EUR 36 million by 25% means EUR 140 million, EUR 150 million of pretax that we'll not pay taxes in the next future. So it will be -- the tax rate will be really low, at least in the next 3, 4 years.

Gentlemen, there are no more questions registered at this time.

Okay. If there are no more question, thank you for your time. Feel free to call me or to write to [email protected] for any doubt or any other clarification you may need. Thank you very much. Keep in touch and see you in May for the first quarter results.

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