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

Ladies and gentlemen, welcome to the Geox Group 9 Month 2023 Sales Presentation. [Operator Instructions] The call is chaired by Geox's 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. Year '23 looks like a year of stabilization and moderate growth after the strong increases recorded in the previous 2 years. Sales reached EUR 582 million, up 2.3% at current exchange rates, 4.1% at constant exchange rates compared to the first 9 months of '22. This result was due to the good performance of sales in the multiple channel, combined with the positive performance of our stores comparable sales. This allowed us to offset both negative impact optimization of the perimeter of the stores in terms of sales and the difficulties resulting from the unusual weather conditions that occurred both in May and September. This result give more value considering that it was achieved in a complex macroeconomic situation characterized by strong geopolitical tensions, high interest and inflation rates that induce strong concerns and more cautious behaviors. The group continued to invest in the most strategic important areas of the business, including marketing, digital and product innovation. In this regard, in September, a major strategic marketing initiative was unveiled. The Oscar winning actress Penelope Cruz was named global brand ambassador of Geox. The collaboration project reflects and emphasizes the distinctive traits that unite the Oscar-winning actress and our Brand by placing even greater emphasis on style, comfort and quality, which have always been Geox's founding values. In addition, we firmly believe that the strong double-digit rebounding sales recorded in October and November is related to the strategic evolution of Geox towards the new lifestyle brand positioning. Net financial position and working capital are still under control because of strict inventory control, rigorous management of both interest rate and currency hedges. In any event, the scenario's complexity forces us to continue taking a cautious approach that is centered on strict cost management and seeking for additional improvements. Thank you. Please, Livio go on.

Thank you. Good morning, and good afternoon. Thank you for joining us today to discuss 9 months sales and net financial position, current trading and some trends expected for full year '23. Let's start with Slide #3 with the executive summary. So net sales of EUR 582 million, up 4.1% versus last year at constant exchange and 2.3% reported. Net working capital amounts to EUR 177 million versus EUR 123 million in September last year due to the complexity -- completely different dynamics in flows of payments to suppliers that will be reassured in the next 2 quarters. Consequently, the adjusted net financial position before IFRS 16 lease liabilities was minus EUR 129 million as a result of a bank debt of EUR 139 million and a positive mark-to-market of hedging instruments of EUR 10 million. In September last year, bank debt was EUR 114 million, and the positive value of derivatives was EUR 70 million. Let me move to Page 4 to comment our new Global Ambassador project. It is a new chapter in the marketing strategies of Geox brand, the star who fits our shoes perfectly. The goal of this project are to grow brand awareness and build emotional connection with our audience, to keep pursuing the path of a Premium Lifestyle Brand and to unlock the real business potential of a woman market. The result will be able to obtain our outstanding in my opinion. I would say a worldwide star and a worldwide brand led to a worldwide successful marketing campaign. Please go to Page 5, to comment the current trading that has been materially improved by this strategic evolution towards this new lifestyle brand positioning. But let start examining the key factors of the third quarter. Comparable sales in July and the first half of August have been positive, high single digit then the unusually hot-weather condition delayed the start of the full winter season and starting from the second half of August until the end of September and the first week of October, the performances worsened at minus 10%. Then the weather condition normalized. In addition, Geox unveiled the marketing project and started with the marketing campaign worldwide. So performances in the remaining part of October have been really positive, high double digit in the region of 25%, 30%, and this trend keeps going in November to date with a plus 15%. All in all, week 44 to date, comparable store sales are positive 3% on last year and 4% in 2019. Let's comment on wholesale, current trading also looking in the box down at your right, you see that wholesale is up 8% September year-to-date. Thanks also to an easy comparison base. Last year, as you may remember, we experienced material delays in deliveries, so we shipped a lot of products in October. This year, supply chain fully recovered the performances, and we shipped most of the products regarding full winter within September. In addition, the fourth quarter will be also penalized by expected lower reorders due to the late start of the season. So wholesale at the end of a weak October is up 3%, and we consider this as a good proxy for full year growth in this channel. In the next page, there is the status of the optimization of brick-and-mortar retail network. During the last 12 months, we closed approximately 60 stores affecting sales this year by EUR 12 million, however, with no impact on profitability. Today, the network is composed by 656 stores, out of which are 261 DOS. And this optimization has been almost completed, no material differences within year-end. Please go to Chart #7 to give some flavor to top line split between brick-and-mortar and digital. The growth is -- the total growth is EUR 13 million. This growth is totally due to brick-and-mortar, while digital sales, including our direct e-commerce and the other players are slightly negative. This trend in digital is fully aligned with 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 26% of total turnover, in line with the best practice in our industry. However, remarkable to say these last 4 weeks have been able to tune positive sales however digital channel for the entire 2023 to date, covering the gap with last year. I mean, in the last 4 weeks in a row, a growth in the region of 40%, 50% per week. And this represent in my opinion, a clear sign that the marketing campaign and the Ambassador project is really driving good results driven by given by women that is really growing. Please go to Page 8 to comment on the top line split between B2B and B2C dynamics at constant exchange. There is a headwind due to the ruble devaluation in the region of EUR 10 million in 9 months. It will be in the region of EUR 13 million to EUR 15 million at year-end. Wholesale and franchising together delivered a 9% growth, mainly as a result of positive initial orders and better timing in deliveries. DOS and web together are at minus 3.6%, driven by a positive like-for-like, 3% as disclosed, but more than offset by the planned perimeter reduction, resulting in the already commented 6 net closure of EUR 12 million. At Page 9, there are just for your reference, the numbers split by channel nothing to add to what already disclosed. So please go to Page 10, where there is a very quick overview to net sales by region. Italy was up 6% supported by double digit growth from wholesale, while franchising in U.S. top line has been driven by negative perimeter effect. Europe is down mid-single digit, suffering lower reorders than the big online players like Amazon and Zalando. And also our brick-and-mortar and digital suffered in Germany and in Switzerland where recession is stronger than in the rest of the Europe. In North America, the performances of all channels are positive mid- to high single digit, but does not compensate the completion of the brick-and-mortar rationalization in Canada. Rest of the world is positive in all the geographies, Asia Pacific in the region of low double digit, Eastern Europe countries double digit and stronger performances in Middle East, high double digit. On Page 11, there is the details of net sales by product. Just to say that footwear grew 1.7%, while ready-to-wear grew close to 8%. We are confident that in the fourth quarter, ready-to-wear will deliver good results due to the fact that the comparison base is easy if you remember, last year, we incurred fire event in the fourth quarter. Please go to Chart #13 to comment on working capital and net financial position evolution. Net financial position before IFRS 16 stood at EUR 129 million as a result of bank debt amounting to EUR 139 million, EUR 25 million more than September last year and the positive fair value of hedging instruments amounting to EUR 10 million. This EUR 25 million increase in debt is totally driven by net working capital, seasonal dynamics. Net working capital amounts to EUR 177 million, up from EUR 123 million in September '22. Inventories are lean and under control at EUR 259 million, totally in line with the previous year, and mildly referred finished goods related to the current and future season. So no issue regarding inventory. Also, receivables are very healthy at EUR 155 million versus EUR 144 million in September last year despite the 8% growth of third-party sales. So we are delivering also a slight improvement in average collection days. The increase in net working capital is therefore exclusively related to the significant reduction in trade payables approximately EUR 50 million due to the improved efficiency of the supply chain that enabled the receiving of finished products earlier than in previous year with a consequent anticipation of payments deadline. This made it possible to provide an excellent level of service to the market and to reduce cancellation due to late deliveries that impacted last year. This time issue will be, in any case, reabsorbed in next quarters. Please go now to Page 13 for the outlook regarding 2023. As a summary, we can consider 2023 as a year of stabilization and moderate growth after the strong double-digit increase recorded in the last 2 years. We have incurred 3 non-company-specific headwinds. The first one is the currency devaluation, mainly linked to ruble that is expected to impact our top line in the region of [ EUR 15 million ]. Unusual weather condition with heavily-rainy May and really-hot September that really impacted our direct sales in the region of EUR 15 million. And this bad weather condition also frozen reorders from wholesale and franchising both in spring/summer and the fall/winter driving to weak second and fourth quarter for a total of EUR 15 million impact. So we assume for the full year, revenues growing low to mid-single digits at constant exchange rates substantially flat at current exchange rates. Regarding gross margin, it is believed that this can further uplift in respect to the previous full year guidance and thus reached an improvement by about 250, 300 basis points over the full year. Thanks to our policies aimed at containing discounts and to the efficiency of the supply chain cost structure. Let me end this first part of the call, announcing that Geox is strengthening its management team with the addition of 4 senior managers. First one, Andrea Maldi, who as of December 4, is appointed as Chief Financial Officer. He has recently held the role of CFO at Fiera Milano S.p.A. And previously, he served as group CFO at Borsa Italiana S.p.A., where he was also an executive member of the Board of Directors. And from 2009 to 2014, he was the CFO for General Electric Corporate Energy business in Italy, also serving as a legal representative for the Italian branch. So we are really -- we will really improve and strengthen our investor relation activity. Then we appointed Carsten Richter as Managing Director -- the Managing Director for country speaking countries. He has an extensive experience from the footwear and fashion industry. Over the past 15 years, he has been responsible for business in the Western region and Europe and headed the footwear division for the PVH brand, Tommy Hilfiger, Tommy Jeans, Calvin Klein -- Calvin Klein Jeans. And before joining the PVH Corp, he worked as a sales manager footwear for Esprit and another brand, Kangaroos. Then Paolo Gajo is -- we announced his appointment as country manager for the Italian market in November this week. Since 2016, he has been in charge of Timberland wholesale and distributor business in EMEA, Middle East and Africa after having held the role of Country Sales Director Italy and Greece since 2012. Previously, he managed -- he held the position of increasing responsibility for other brand of VF Corporation group. You may remember that in -- sorry, late last year in December, we also hired [indiscernible] that previously was the General Manager of the VF Corporation brands in Asia Pacific based on Hong Kong. We believe that now the team -- management team is already to start and to foster the commercial and geographical expansion of our project and of the brand. We are now ready to open the Q&A section and take your questions.

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

The first one concerns the distribution network. Did you consider the rationalization of your retail completed? Or could further actions be taken next year in terms of net closure? And as for your wholesale channel, are you satisfied with your distributor, so a more selective policy may be taken in the future? And my third question concerns the spring-summer collection, '24 collection. Can you tell us how you [indiscernible] was for this collection?

As far as the optimization of the network, I can say that also in 2023 it is completed. Also in 2023, we started to do selective openings. We have opened Munich, a couple of stores in London, and we are also fostering the openings of our franchisees, especially in Middle East and in Asia Pacific. So our plan, we have done a sort of big reorganization of the sales force because in January, we engaged a new country manager in Canada. Now a new country manager for -- and then a new country manager for Asia Pacific and now a new country manager in Germany, Austria and Switzerland and the new country manager for Italy. Why? Because it's necessary for sure, to start also a selective approach to distribution, but we would like to create, I say, an environment. So why we opened Munich? It's part of our [indiscernible] strategy, a new flagship but also a new wholesale strategy that allowed us to open real important premium location with [ theater ] group and consequently, we are backing Munich. So the new openings of selective new stores will be really focused on a larger strategy regarding the territory where we will open. So I think I have also answered the question regarding selective distribution. I would say we -- I have people with really extensive experience in shoe and ready-to-wear brands -- premium brands. So Mr. Richter and Paolo Gajo have been able to take full responsibility over Timberland and Tommy projects in Europe that drove to really important growth. And I assume that they will be able to exploit also the potential of Geox driving their countries to additional growth in comparison with what we are delivering today. And this will go through a better approach to the distribution. In spring-summer '24 the campaign is quite difficult, I would say, because we are meeting customers that were a little bit suffering for both in spring-summer and in full winter. However, we are not satisfied because our target was -- were a little bit higher, but we will devote all our efforts to deliver on the backlog we have been able to collect and then to foster more season management than what we experienced this year. So time to work, but we are confident that we'll be able to deliver results.

The next question is from Francesco Brilli with Intermonte.

Good evening, I have a few questions from my side. The first one, it is more general on market conditions, weather condition, headwinds in general. Is there any action that could be taken or you have thought to in order to deal with the increasingly common, unstable and unpredictable weather condition, which are continuing to affect sales growth and pace in terms of collections or something that just -- if there are some projects in order to tackle these -- this issue? And then more and more on the numbers. The second one is on working capital on sales. If you can provide an indication for the end of the year and this -- and also on the gross margin indication of the expansion without the -- I mean, with less contribution from volumes, the gross margin expansion is -- if you can provide some color on the building blocks and this expansion compared to last year? And then lastly on the addition to the team, which you just unveiled is something that was already planned or you just felt the need to add some specific skills to the company?

[Foreign Language] So the first one, action to be taken for sure, marketing because we have seen that notwithstanding all the headwinds today women products are driving the growth. And this is, in my opinion, really linked to the good project that we have been able to deliver that give value to the investment in style and on the products that we did. It is clear that in the last 1.5 month, people that are entering the stores and are joining our benefit program with the registration on average are -- have 10 years lower average age in comparison with the bulk of our customers. So marketing is sure of utmost importance. The other big trend in our industry is the fact that see now buy now, where now is absolutely a must. And consequently, it is clear season are changing and consequently, we must assume that also next year, maybe spring will be a little bit cold and fall will be a little bit hot than what we were used to experience. And consequently, it's necessary to work on best seller to maintain a different approach to supply chain in order to inject flexibility and to focus on carryover that proved to be really a best seller. And this is part of the changing environment of retail industries, and I think we are equipped to successfully manage this kind of changes. Working capital, as you have seen, there is -- no issue regarding inventories, exactly the same amount of September last year. There is no issue regarding receivable exactly or at better, just EUR 5 million more than last year, notwithstanding the fact that the turnover in third party is really higher than this amount. It means that our customers' clients portfolio is really healthy. And in addition, as you may remember, is ensured. So I'm really satisfied with our customers' portfolio. So why there is this unusual, let's say, increase. It is just due to suppliers. Last year, we experienced really late receivings that shift the payments in the region of EUR 30 million from 2022 to the first quarter 2023. And this year, we have been able to recover any problem with supply chain. You know Stefano Orsi from Armani joined the group in 2021 is starting really to deliver a really important improvement in our efficiency. So not only we have reduced it to zero, [ I phrase ] but also we have been able to receive from supplier products in order to be able to match completely the deadline requested by our customers. But this as a consequence. We have increased the payments of new products within this year. So this increase is totally due to goods that we have already paid and the next 2 quarters, we will sold and cash the money for this product and consequently next year will be really easy as we assume to pay in the region of EUR 50 million lower payments to supplier than this year because now the situation, the trend has completely normalized. Gross margin. I'm really pleased and satisfied we are obtaining this kind of results in terms of like-for-like really decreasing discounts. Traffic is not so satisfactory in the stores, so it is still below 2019. However, as I have said, year-to-date, week 44, we are 4.3% up in terms of like-for-like in comparison with 2019 and 3% up in comparison with last year. So gross margin -- sorry, the reduction in discount is really important, and this is the first pillar of this gross margin expansion in percentage and the other derives from supply chain efficiencies. We are, let's say, putting the most of our focus and attention and reaction to be able to compensate with higher gross margin in percentage, what is not coming from the weaker-than-expected sales. So we are not giving up the possibility to deliver a 15 to 20 EBIT at EUR 20 million EBIT at year-end. I'm a little bit, let's say, prudent because situation is really volatile, but I think we can absolutely improve the percentage regarding profitability. And then in the next business plan, once we'll be able to deliver additional growth I think that the profitability can materially improve also volume-wise. The team, let's say that these are not new position. We decided to change the management we had in these regions trying to involve into our higher senior people with really strong experience in our industry, I mean, shoes and ready-to-wear in international premium brands because we need to play a different championship and in order to win in a different league, you need different players. I think now the team is fine. We don't need additional players. We have adjusted to focus on delivering results.

Livio, just if I may, I have a quick follow-up on 2024. So next year. I mean, if you will be able to deliver this gross margin expansion should we consider the level of -- I mean the level of cost percentage on sales to be -- I mean, to be the same next year, of course, with potentially higher operating leverage from volumes?

Yes. We are finalizing the business plan country by country. So we are a little bit ahead in improving the gross margin. The new business plan 2024, 2026 is assumed. In the new business plan, we are assuming that maybe we can also deliver additional improvement, but it's -- it's -- this is our target. It's too early to quantify this kind of additional improvement. But let's take this gross margin for achieved, and then we must work in additional improvements.

[Operator Instructions] Next question is from Andrea Bonfa with Banca Akros.

Very quickly, most of my answer has already been -- most of my questions have already been answered. I would like just in your say inputs or what is the [ big ] comment on the strategic initiative with Penelope Cruz and his role -- her role as a global ambassador for Geox. As far as today, are you happy with this? Can you comment on it? [indiscernible] to understand if this kind of initiatives are positive for a brand like yours?

Yes, we are really satisfied after really a tough September with negative like-for-like, let's say, the team also in the stores were really eager to see new people, the increase in footfall and the increase in sales. And I have to say that the performance is that we have been able to see in -- starting from week 41, has been really impressive. So given -- just to give you a more number, the first week of October was still negative, mid-single digit and then plus 7%, plus 33%, plus 28%. And November is still growing. And e-commerce has been really impressive. The traffic in our website is really increasing and starting from week 41, e-comm was plus 40, plus 46, plus 61 and plus 56. So for sure, I'm not assuming this kind of performances for all the rest of the week because unfortunately, TV campaigns ended and now it's time to sell also other kind of products. But last month, 4 weeks in a row have been really exciting for the brand and for women product. So yes, I think we have find a proper way to make customer understanding all the investment in product, in style, in communication, in tone of voice that we did. We are just moving from a conversation based on how, let's stay clever we are in doing production or in doing technology to a different tone of voice, to a different language on how Geox can improve people wellbeing on the move. And so this is a completely different story. You've seen Spherica advertising, Amphibiox advertising and now Penelope, we're really doing a rebrand towards lifestyle brand because this means that not only footwear, but also ready-to-wear, and also bags and leather goods have room in our home to be, let's say, relevant for the final customer. So in my opinion, the strategy is absolutely right. The project, as we have seen is able to, let's say, take from the market really senior management that comes from really important groups because they like the project. So for sure, 2023 has been really tough, many headwinds, we must keep the right direction and the focus on next business plan.

The next question is from Federico Belluati with Kepler Cheuvreux.

My question is regarding operating expenses, are you leveraging some savings due to the lower supplies or...

Let's say, that regarding budget, absolutely, yes. Regarding last year, we assume to be more or less at the same level of operating expenses. This means that we have been able to find some savings that will be able to compensate, unfortunately, the increase due to the inflation rate, especially on rents that have an indexes -- that are indexed to inflation. So the fact that we will be able to maintain more or less the same level of operating expenses means that we have been able to find additional savings. But now we need top line growth in order to deliver strong operating leverage. There is no additional material room for cost savings.

[Operator Instructions] Gentlemen, there are no more questions registered at this time. I'll turn the conference back to you for the closing remarks.

[indiscernible], thank you very much for your time. We will present top line late January, early February. We will present the corporate calendar soon. And then full year in March -- in the first week of March also. Thank you very much. Keep in touch, feel free to ask any question or doubt you may have to me or to Luca. And starting from December the first -- the fourth also to the new CFO that we will introduce to you. Thank you very much. Bye.

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