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

Good afternoon, and welcome to Geox's First Quarter 2023 Results Conference Call. [Operator Instructions] The call will be hosted by Geox Group's Vice Chairman, Mr. Enrico Moretti Polegato; and Chief Executive Officer, Mr. Livio Libralesso. Now I would like to turn the conference over to Mr. Enrico Moretti Polegato. Please go ahead, sir.

Welcome, everybody. Revenues for the first quarter of '23 are very good. The 21% growth is due to both the multi-brand customer order backlog and the year-over-year shipment advance that allowed us to deliver an excellent level of service to the market. Comparable sales for our stores are growing almost double digit and have offset both some nonstrategic store closures and the initial weakness in the online sales. In April, we saw some signs of caution from the market. However, comparable sales in stores remain positive, while online sales are recovering well. Growth at the end of April stands at 8%, and we can estimate that we will also see this growth in June. We are, therefore, seeing a good start of '23 despite an international geopolitical context that is still uncertain and inflationary environment that seems more persistent than expected. A very positive factor is that the [indiscernible] in policy, the reduction of discounts and the reduction in time and cost of delivery confirm expectations for a good increase in industrial margins. The results obtained by Geox in this are changing -- sorry, uncertain and volatile context is short term, strengthen even more the path we have taken allowing us to look with confidence at the medium to long-term prospects of both our brand and entire sector. Now let me hand over to Livio Libralesso, our CEO, for the results presentation.

Thank you, and good morning, and good afternoon. Thank you for joining us today to discuss Q1 sales, current trading and some trends expected for full year '23. Mr. Polegato gave a quick view regarding the main topics. So net sales were EUR 223 million, up 21%. Really strong quarter that is not only due to the double-digit order backlog that we collected regarding Spring/Summer '23 in wholesale, but also for 50% due to really a different and an easy comparison base. The adjusted net financial position before IFRS 16 lease liabilities was EUR 98 million. In December last year, it was EUR 50 million, and this increase is totally linked to the working capital evolution. Net working capital was at EUR 142 million or 18% on sales versus 16% in March last year, and we will comment in a while this increase. Current trading is positive. Year-to-date, last Friday, like-for-like of our own network is up 4%, both on 2022 and on 2019, with a relevant improvement in markdowns. It's important to stress the fact that at April, year-to-date sales were let's say, at a normal comparison base. So it's important to immediately give to you the fact that wholesale sales at the end of April was up 13%, in line with the initial order backlog. Franchising up mid-single digit and summarizing these trends, total sales at the end of April were up high single digit or 8%. And we consider this growth rate as a good proxy of June growth rate. Supply chain issues are really improving with the level of service, really close to pre-pandemic level. Please go to Page 4 to see the status of the network rationalization. Nothing new. During the last 12 months, we closed approximately 64 stores, out of which 30 in this quarter. Today, the network is composed by 787 stores, out of which 291 are DOS. This optimization will be almost completed within 2023 with additional 17 net closures. So the DOS channel is still suffering a little bit of negative perimeter effect, but it seems that the like-for-like is able to compensate. Flip at Page 5 to describe like-for-like. The entire network is open and the pandemic has been declared over. We see a recovery in touristic flows with also a good percentage of tax refund customers. However, still below pre-pandemic period. Q1 like-for-like is 3.5 positive as a combination of a strong brick-and-mortar that is growing 9%. And a double-digit decrease in e-commerce that until March has been really weak. Starting from the first week of April, e-commerce sales revamped with 5 weeks in a row, positive double-digit on last year. Year-to-date like-for-like is mid-single-digit positive, also on 2019, despite the fact that traffic is still down 20%. So it means that all the other retail KPIs are really improving. We are also delivering a good reduction in markdowns, 300 basis points year-to-date. All in all, April and May have been positive, but below expectation and also reorders from wholesale and franchising are below last year. So we need to wait a little bit in order to see if this is due to the still challenging weather condition or to a prudent approach of customer spending, facing a more persistent than expected inflationary context and recession stress. Please go to Chart #6 to comment on top line. Total sales arrived at EUR 244 million, recording a growth of EUR 39 million or 21%. As I said, initial order was really positive and then the different timing in deliveries in wholesale and franchising. An important thing is that this year, the level of service is really good. And consequently, we are not suffering material -- any material cancellation of our healthy order backlogs. This growth is driven by brick-and-mortar with a weight of 75% on total sales, while digital accounts for the remaining 25%. Please go to Page 7 to comment top line split by channel. All channels were positive. Wholesale was up 33% in April after the reabsorption of the delivery shift, it was 13%. Franchising was up 32%. In April, total sales were up 5.5%. The DOS channel delivered a slightly positive growth, 1.3% as a combination of a sound brick-and-mortar like-for-like, positive 9% that balanced the negative perimeter effect and the weakness of e-commerce in Q1. As said, e-commerce is contributing to the growth starting from the 1st of April. Also in April, the channel is globally slightly positive. On Page 8, there is a very quick overview to net sales by region. All regions were strongly positive for the reasons discussed. Italy was up 30%. Europe grew 10%. North America was up 50%. Also thanks to a really good e-commerce performance, really positive in comparison to Europe. Rest of the world was positive 29%. On Page 12, the details of net sales by product. Just to say that footwear grew 25%, while ready-to-wear was down 3%, impacted by the shortage of product during the sales period in January and in February due to the fire event that occurred last year. As you may remember, it destroyed 30% of the product, and we have been fully reimbursed by the insurance company in December, January and February. Please go to Chart #10 to comment on working capital and net financial position evolution. It is necessary to spend some details. The net operating working capital stood at EUR 142 million, up from EUR 112 million in March last year and EUR 77 million in December '22. It accounted for 12% on last 12 month sales. It was 16% in March last year and 10% in December '22. As you remember, I said in the last conference call that 10% is not sustainable, and the normal rate of our business today is in the region of 16%. In June, you will see again a sharp decrease to 10%. And then at year-end, back to 16% in December. The trend is really a roller coaster. And it is because 2023 is really a year of strong discontinuity in working capital and cash flow for 2 factors. On the one hand, the group with the full winter '22 has finished reusing the excess of unsold inventory and is now coping with increase in orders exclusively by increasing purchases of new products. On the other hand, the supply chain problems experienced in 2022 are leading to a shift of more payments to the first half of this year in the amount of about EUR 18 million, while the reestablished reliability of the supply chain in 2023 is leading to an advance in Spring/Summer '22 payments in the amount of about EUR 57 million. Overall, the first half of this year, will therefore, record higher payments to suppliers of about EUR 75 million, notwithstanding the fact that we have just purchased EUR 17 million more. So We are really managing a strong rebalancing in payments of suppliers. This has led to a strong reduction in trade payables compared to December 2022, with a consequent increase in working capital and then equal absorbing of cash. However, the second quarter is expected to generate a positive cash flow with a reduction of net debt compared to March. Net debt at the end of March was at EUR 115 million. The fair value add of derivatives was positive at EUR 17.7 million and consequently, net financial position before IFRS 16 for lease liabilities was at minus EUR 97.8 million versus minus EUR 58 million in March last year. Please go now to Page 11 for the outlook regarding 2023. I want to be a little bit detailed in order to make you doing really a good math regarding the full year. So we have said that -- remembering, year-to-date like-for-like is positive mid-single digit. Total sales at the end of April, 8% growth rate and 8% will be the growth rate of H1. Moving to H2. Full winter '23 initial order backlog is up 12%. We will invoice 12% more in full winter '23 in comparison with the full winter '22. However, we assume the same level of reorders and also the same level of early shipment of a full winter in H1 and of spring/summer '22, '24 in Q4 '23 in the region of EUR 17 million. It is also important to notice that we assume now -- we have assumed for the forecast that the ruble will be on average, in the region of 87%-90% in comparison with the second half of last year that was in the region of 60%. So this means that we will experience in the total year at least EUR 16 million of lower sales due to the conversion of U.S. dollar and ruble. So at the end, we assume that second half will be positive low single digits. Having this in mind, we revised a little bit the target. We -- I confirm that we are in line with the business plan. Previous guidance was a growth in top line of 6% to 8%. Now I'm saying 4% to 6%. However, there is really good news. Supply chain is really performing. We didn't use material -- discounts are really decreasing. And consequently, we will deliver an increase in gross margin in the first half in the region of 200 basis points. And in the second half, for the time being, I can increase the guidance to 150 basis points. So it is materially higher than the full year guidance that was 100 to 150. So this will recover the prudence in the top line that we are now suggesting. We are now ready to open the Q&A section and take your questions.

[Operator Instructions] The first question is from Andrea Bonfa of Banca Akros.

I'm still doing my homework from the information that you provide us. And my first, anyway, question is, can you explain the gain -- now that you work your ForEx calculation for the second on the ruble and on the dollar? And how this does not translate into an impact on the gross margin?

Okay. You know that Russia for us is in the region of 10% of the total turnover. So last year, it was EUR 17 million. If we consider sales in rubles because we have a company in Russia that sells directly ruble to the final customer. And then converting euros, euro for consolidation purposes. It is clear that given the same amount of ruble to translate at the second half at 60 or 90 is completely, completely different. For sure, we are also translating costs, cost of goods sold and expenses that will decrease. So the impact of these exchange rate conversion is just on the profit of the company. And given the fact that, in any case, transfer pricing is weak, let's say, maintaining most of the margin, from profitability point of view, there is not a material impact. It is more a top line impact. And the same is for U.S. dollar because now we are assuming an average rate of 1.10 and last year, if I remember well, was in the region of 1 or 1.05. And this is the same. It's an impact on top line. It is not a material impact on profit. The other benefit from the supply chain, a reduction of transportation costs and in any case, a weaker U.S. dollar for the transportation means that these efficiencies are compensating all the other factors on the gross margin, including the fact that there is a negative channel mix because the increase of wholesale sales is increasing in respect of retail sales.

Okay. And if I may, in the -- if let's say that now there are a lot of moving parts, but if you had an EBIT in mind, let's say, at the beginning of the year, with this reduction, let's say, potential reduction in sales, but higher gross margin, is the EBIT -- the absolute EBIT you had in mind a confirmed or is it different?

Confirmed, unchanged.

[Operator Instructions] Next question comes from Federico Belluati of Kepler Cheuvreux.

My question is regarding working capital. Since it has increased from 10% to more or less 18% of sales. So I'm asking if this is the normalized level we should expect for the year-end in 2023? Or it's more due to a seasonality effect?

Okay. You will see really a strange trend in working capital. So June, again, in the region of 10%, because we will anticipate also for winter '23 purchases from suppliers. And consequently, at June, we will have more or less 100% of the buying and 100% of payables. And then we will deliver the goods to the market. Again, without high frames and again, without suffering we hope cancellation. And consequently, also the second half is in a good trend to improve gross margin. But also in the second half, we will pay more suppliers than last year. And consequently, at year-end, finally, we will have the, let's say, normal stabilized incidence of working capital on last 12 months of sales that will be in the region of 16%. This is materially lower than the guidance we gave in 2021 in the business plan that was in the region of 21% to 23%. And this is due to the fact that in the business plan, the network optimization was in the region of 20%. As a matter of fact, given the several waves of COVID, we decided to rationalize more. And so if we look at the numbers, finally, we rationalized 30%. So we materially reduced the invested capital. To give you an example, at the end of 2016 -- '19, the invested capital with EUR 800 million of turnover was in the region of EUR 600 million. This quarter with the last 12 months sales in the region of EUR 700-something million, the invested capital is a little bit higher than EUR 350 million. So there is really a strong reduction in the invested capital. And this is the reason why we have been able to keep under control the debt, notwithstanding the huge losses that we suffered in 2020 and 2021. This year, the group is back to a good level of EBITDA. Consequently, we will be also at a net result, and we will be able to, let's say, absorb this strong discontinuity in working capital because as you have seen last year, we have been able to squeeze until 10%. It's no longer possible, because now we have to finance the growth of the top line buying new products. We, as a matter of fact, got rid of unsold goods and now it's necessary to buy if we want to deliver and to be in line with our order backlogs.

Okay. And if I may, I would like to make a question also on the sales. You cut your guidance. And looking at results, I notice that upper end was more or less flat compared to last year. So I'm asking the reason behind also this gap from an upper end or other underlying results?

No, no, no. Q1 as a matter of fact is made by, let's say, I would say, more than 80% regarding the sales period in January and February. And we were empty of product for sales. Consequently, Apparel really delivered a negative like-for-like in comparison with last year due to the shortage of product. Then Apparel in Spring/Summer is doing according to the expectation. And -- but Apparel in Spring/Summer is not so important because we produce and deliver more jackets than total looks. And consequently, fall/winter is the real core season for Apparel.

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

A question on net debt. So can you give us an idea of your target of net debt for the year-end?

Let's say that we more or less maintain the guidance on 2024. So for sure, maybe not '20 or '30, but '40 or '50, but in that direction. This year is a little bit challenging. And so we are doing our best, as we have written in the press release in order to protect the cash flow because, as I have said, to give you an example to pay in the first 6 months, EUR 75 million more than last year. And having bought just EUR 17 million more in products means that there is really a rebalancing and the working capital is fastly going to normality. So I think that at the year-end, that will be higher than what we expected at the beginning of this year. And we are -- but there is a lot of weapons and actions that we can put in place in order to maintain that under control.