Guararapes Confecções S.A. (RIAA3) Earnings Call Transcript & Summary

[Interpreted] Hi. Good afternoon, everyone. Thank you for joining us for our second quarter 2026 earnings conference call. It was another quarter of progress and to share a bit more about our strategy and everything we've been doing, I'm joined by Andre Farber, our CEO; Miguel Carfuni, our CFO; and Francisco Santos, the Head of Midway Financiera. [Operator Instructions] Before I turn the floor over to Andre, I have a few remarks. This presentation is being recorded and has simultaneous interpretation. The presentation will be held in Portuguese and the English version is available on our IR website. Any statements regarding projections or outlooks reflect our management's expectations, but they do not guarantee future results. That said, I now turn the floor over to Andre.

[Interpreted] Thank you, Iza. Hi, everyone. Thank you for joining us for our second quarter earnings conference call. Once again, you'll see that we delivered very strong and robust results. I've celebrated 3 years with the company this quarter, a period of deep transformation in which we streamlined our businesses, increased our focus, and we have been delivering increasingly better results. You see today that the strategy remains very consistent. We are providing continuity with no change in course. However, as we continue to generate results, we grow more and more confident. Yet at the same time, we feel like we're just getting started and the best is yet to come. So this is the slide showing our transformation journey since I joined the company. We are now entering a Phase 2 of our transformation journey, a phase of profound evolution in our customer experience. In April this year, we renovated the Berry Gre store, which now features a new format, the new brand identity, everything we envision for the Riachuelo of the future. And we're now preparing for the second half of the year. Starting in August, we'll carry out 7 renovations and open 14 stores with the new format. So the Riachuelo we'll see going forward with over 20 stores in this new format is a new Riachuelo with a new format and a new experience. This quarter was also important because we evolved our org structure. The Fashion Executive Board has now been split into 2 to provide more focus and seniority. We split the Board into two. We created a men's Board and also a women's and children's fashion Board. And now let's see our results. Again, as I said earlier, a very robust and consistent quarter with very good results across all lines. We continue to sustain same-store sales growth in apparel of nearly 8%, and we achieved this while also delivering very significant margin growth. Our margin -- gross margin reached 59.2%, up 190 basis points year-over-year. This combination is always very powerful for improving our EBITDA result. Our retail EBITDA reached a historic level of 17%, the strongest retail result in Riachuelo's history for a second quarter, and it achieved 15% growth in absolute terms year-over-year. We continue to evolve the operations of Midway Financiera with very consistent and solid results. So Midway had yet another quarter of progress with its EBITDA growing 7% year-over-year. And combining both EBITDA streams, we have the company's consolidated EBITDA, which reached BRL 461 million, a growth of nearly 13% and a consolidated EBITDA margin of 17%. So a very significant step forward. This is an improvement of 140 basis points versus the same quarter last year, and we also aim to grow EBITDA and net income. So our conversion of EBITDA into net income has been very strong, while our EBITDA grew 13%, our net income grew 36%, also a historic record for the second quarter of the company, reaching BRL 168 million. So let me give you more details on some of these numbers. Apparel same-store sales, 12 consecutive quarters of growth. Looking at the last quarter, we grew almost 8%, as I said earlier, but looking at the historical numbers, when we look at the second quarter of '25, the combination of 15.8% and 7.8% represents 25% growth over 2 years. Now looking back to '24, the growth of those 3 years is 35%. So this is the result of all the work we have been doing, making our fashion better, our experience better and our processes better. And the results are here for you to see. We're very proud of this. We have been achieving margin growth, also hitting a record level of 59%. I believe Riachuelo has never reached this apparel margin level in the second quarter before. We're very proud. So 1.9 basis points -- 190 basis points increase versus the second quarter last year. And we're making improvements like a Swiss watch. We improved 190 basis points in the second quarter of '25, and we also had an improvement of 190 basis points in the second quarter of '24. So when we look over this 3-year process, it's an apparel margin improvement of almost 6%, actually 5.7%. And this makes us stronger. We can now invest more in the brand, in stores, in our business, making it stronger and creating a virtuous cycle. A very powerful combination, growth for 12 consecutive quarters, along with margin expansion over these 3 years, which has made our business increasingly stronger. So next slide. Let's go back to our strategy. As I said at the beginning, there is no sharp turn here. This might seem like a repetitive slide, but I want you to understand our vision that we continue to pursue improvements within the pillars that have already been established. Our first strategic pillar is experience, brand evolution, product evolution, store evolution and customer journey evolution. And a very important point is the evolution of our footprint. This includes store renovation and new store openings. As I said earlier, this new phase of our transformation journey includes new renovations and new store openings that will transform Riachuelo's experience and drive more revenue. Fashion efficiency, which is about optimizing our operations, integrating with the factory, better pricing and more robust models has brought us the margin expansions we've been seeing historically and will continue to bring margin improvements over the next quarters. Our fourth pillar is the continued evolution of Midway Financiera. Midway is launching new products and enhancing existing products. So we are very happy about it. And the fifth pillar is our capital structure. Over time, we have reduced our debt. We sold Midway Mall and the success of our strategy is measured by our ambition, which is made up of these 6 indicators. Since our Investor Day in December last year, we've been showing you this slide. So yes, it's a bit repetitive, but it shows how consistent we are. So write it down, we'll continue to strive for this evolution and to reach better numbers. This will deliver much more value to Riachuelo over time. And we are now entering this new phase, evolving customer experience. And yesterday was a special day for us. We opened our store with the renovation of the Bargui Mall store with the new format. In April this year, we had renovated the upper part of the store in the men's section. And now we have completed the second part of the renovation with the women's section. So I'd like to turn the floor over to Miguel to tell you more about the numbers. But before he speaks, I'd like to show you a video of our new store. [Presentation]

Thank you, Andre. Good afternoon, everyone. It's a pleasure to be here with you. I'd like to start by talking to you about our retail performance, and I'd like to provide more clarity and transparency on where this consistent gain is coming from. So this quarter, we delivered a historic margin of over 59%. Half of this expansion, almost 2 percentage points continues coming from operating our model better, seeking efficiency, capturing efficiencies in the supply chain and in our factory. And we have these other 2 verticals, strong initiatives we are undertaking in product, focusing on core products, which is performing better. And our winter collection also performed really well, and it added about 0.5 percentage point of margin to our business and another 0.4 percentage points of margin comes from better execution of our pricing strategy, improved supply chain management and our markdown levels. Now retail EBITDA, we reached a historic level with over BRL 340 million in EBITDA for the quarter. If we go back a few quarters, we see a very consistent sequential evolution with an EBITDA margin of 17%, almost 2 percentage points of EBITDA margin expansion in the quarter. And the quarter grew 15%. So we remain very strong in our core retail segment, largely driven by what we mentioned, top line consistency, gross margin expansion, good expense control and a good response of our EBITDA. Now let's move on to our financial services, starting with the credit portfolio. In the quarter, we reached BRL 6.2 billion in the portfolio, and we continue to perform very efficiently. This percentage shows how much revenue we extract from the portfolio, and we remain at a very solid level. The strongest growth comes from products we've been investing in and accelerating portfolio growth with better ROI. Basically, the loan book reached BRL 1.1 billion, surpassing the BRL 1 billion mark this quarter. Now let's talk about our delinquency rates. I'll talk about FPD later, but delinquency for cards and loans remains very controlled. We are very diligent and responsible in our portfolio management. We are increasingly refining our models, increasing the team seniority and strengthening our midway teams. We are also operating at historical levels. Looking at short-term card delinquency, the 2 gray lines in the loan book, which is the portfolio that is growing as well as long-term loans and cards, they are all within a normal seasonal pattern, comparing periods, we also see very controlled and responsible levels. And in our opinion, the next slide is what reinforces this point the most, which refers to FPD. And we remain very responsible, diligent in operating the way we do within our financial terms. We bring -- we always bring you the behavior of our new FPD index. This strongly reflects the quality and maturity of our credit models. And for cards, over the quarters, we can see an all-time best historical performance in this indicator of FPD at 13.5%. When we look at the track record, again, we see a very good and consistent behavior in this indicator. Similarly, the loan portfolio is growing, but within our risk appetite and our refined credit models also showing consistent behavior. Now let's look at our consolidated performance, looking at the group as a whole once again. Starting with the company's consolidated EBITDA, a very powerful number here, over BRL 460 million in EBITDA for the quarter with growth in both segments, 15% in retail and 7.2% in financial services, a record of consolidated EBITDA margin of over 17%, an expansion of almost 1.5 percentage points in EBITDA margin. And when we look back to the very beginning of the transformation, we see that our EBITDA was less than half of this figure. So this is very strong growth, and we continue on this transformation journey, breaking records and delivering results very responsibly, and we continue on this path. Now let's look at our income statement. We're very proud of how our net income is ramping up. As Andre mentioned, we are increasingly working on initiatives to convert EBITDA into net income. This quarter, EBITDA grew close to 13%, while net income grew 36%, reaching almost BRL 170 million in the quarter. So looking at the track record over the last 3 years, it's a very strong and positive evolution. Now we can see our LTM net income for all second quarters of recent years. An important message here is that the LTM for the second quarter broke the BRL 500 million barrier with an LTM net income of BRL 530 million as of the second quarter. This is a higher net income than for all last year. So we're very proud of this. We are working at a new level of profitability and return, and we are very confident that we'll continue strong on this journey. Now let's talk about cash flow. It was a quarter of cash generation, another quarter with significant operating cash generation for the company. We generated over BRL 130 million in operating cash flow. And as we've been reinforcing with you since our Investor Day, we are emphasizing the resumption of investments that are important for the long-term health of the business. This quarter, we directed a large portion of the operating cash flow towards the new automation of our DC and we are confident that we are investing in areas that will provide us with an increasingly healthier and more consistent long-term business going forward. Now we can see that we remain stable and controlled with the leverage targets that we set for ourselves. When we adjust our leverage here for interest on shareholders' equity, which was paid in Q3 last year, we have leverage that is very well controlled and stable, about 0.5 turn net debt has been consistent, impacted by the acceleration of investments we're making. So at the debt level, we show a profitable income-generating company with controlled debt, which gives us the foundation to continue investing and reaping long-term benefits for our business. With that, I'll conclude, and I will join Andre, Isa and Fran for our Q&A session.

[Interpreted] Let's get started with our question-and-answer session. The first question is from Danny with XP.

[Interpreted] I have 2 questions here on my side. First of all, congratulations on your excellent results. The journey you're building is amazing. My first question is about the evolution of product mix, not only talking about apparel because you've been talking about the evolution of the value proposition in apparel, but also looking at the company as a whole. We see consolidated numbers with impact of the reduction in some categories. So what are you preparing for the future? And up until when will the assortment adjustment be impacting the numbers, although the profitability offsets that. But I just want to understand what you are envisioning here? And my second question is about working capital. Can you tell us about how this is going to evolve going forward? You talked about inventory and being prepared for the winter, but what can we expect in terms of evolution in the coming quarters for working capital?

Would you like to talk about working capital, and then I'll talk about assortment.

Sure. Thank you, Dennis, for your question. I thought you were going to answer the question. Anyway, Dennis, thank you for your question about working capital. From the beginning of our transformation journey, we've been very diligent in seeking working capital efficiency. And we track an important percentage, which is capital demand over revenue. And this percentage has evolved 5 to 6 points, going from 19 to 13. And this quarter, if we exclude some effects, we can see apparel and merchandise generating capital and demand for Midway products with very healthy ROI. So we expect this level to continue, and we are seeking efficiency and aiming for quality, doing things in the right way. Our inventory has higher quality. Our mix has been very precise recently, and we should keep the sequence of evolution. One quarter or another, this can be a bit more positive or more neutral, but that's what we expect going forward, not as much as we did in recent years, but because we have changed a lot, but we still see room to evolve here as well. Now about the category mix. When you look at our strategy, we've been talking about focus and discipline and being fashion obsessed and product obsessed. So the first thing that we changed in categories was deinvesting from the technology business. When the process started 1.5 years ago, technology accounted for much more at the company, but with low margins. And this has decreased quite a lot. We also saw that the house products, the homeware at Riachuelo is not so good. The stand-alone stores are actually doing quite well, performing well. So we'll continue to invest in the stand-alone houses. But at Riachuelo, we decided that our focus should be on fashion. So we adjusted the mix, giving more space to fashion products rather than homeware. And fashion has much better margins than homeware and technology. So the combined retail margin grew 3.1%. So that's how powerful this strategic change is. We are now focusing on the fashion category, which brings better margins and our EBITDA grew. So the process will continue for some time until we complete the whole transition. It will take another 1 to 2 years with some transition in technology and homeware to be done. But we believe that the numbers will continue just like they are right now, improving the combined results of the company.

[Interpreted] Our next question is from Eric with Santander.

[Interpreted] Congratulations on your results. In your earnings release, you mentioned the evolution of apparel gross margins. But can you give us a breakdown about the levers that were more significant in this expansion? And can you help us connect that to the ambitions that you mentioned in your Investors Day of expanding gross margins in apparel. This quarter, you had relevant expansion. So does that change the potential you see within your ambitions or considering the competitive landscape, do you think that a part of this can be used to focus more on prices, considering the level of expansion that you have been able to deliver? And now about Midway, what do you have in mind for other products, not focused on in-house sales, but you had some consigned credit this quarter. So can you tell us about the growth opportunity for Midway as well? These are my 2 questions.

[Interpreted] Eric, thank you for your question. I will answer the first one about gross margins and the breakdown of the levers, and then Fran can talk about Midway. About gross margins. So once again, we showed you a slide showing clearly where this margin expansion is coming from in the last 11 quarters. Half of the growth we had this quarter came from the evolution in our operational model and the strengthening of our integrated supply chain with the make or buy project, making this a leaner business, a more agile business. You choose the product well to position it in stores and also with efficiency in our factories with a healthy share of what is selling well. We had another 2 important effects this quarter. First was the product mix. We prepared better this winter than last winter and the collection was very precise and well priced and well developed. The product team did really well, and this was something that brought us margin growth and also the FX rate that was more favorable this quarter. And our fashion is increasingly higher quality and connected to consumers. So of the 1.9 half came from these effects. And the third effect is the advancing the use of intelligence and data in our pricing strategy. We have an in-season markdown strategy. We're being very smart and careful in these processes. We think that some of the levers are already closer to a 6 or score of 6 or 8 in a scale of 0 to 10, but we are confident that we'll continue expanding margins. And of course, in one quarter or another, the numbers may go a bit up or down, but we continue disciplined to extract the most of each lever. This discipline makes us look ahead into the future. We're not looking only at the here and now. We're strengthening our brand and our channels. And this has been given us a sequential same-store evolution. So we'll continue capturing the margin levers for some cycles to come.

[Interpreted] Eric, thank you for your question. So about midway, when we talk about the adjacent products, you can see an intentional growth in the loan operations. Loan is doing really well. The new waves have had a very good FPD levels. Delinquency is very well controlled and revenue is growing slightly below the portfolio, and that's because of the better profile of customers we've been attracting. We relinquish yield, but that is replaced by quality. So we are very happy with that, and we expect to see that continuing looking forward. Now about consigned credit, like you mentioned, this is the initial phase of the product. It still accounts for a small share of our portfolio. We are still working on refining the model and the operation. But the first results are positive, and we're happy with what we are seeing. We see great potential here, but the ramp-up should be gradual. We will adjust risk and return, but the first signs are indeed positive, and we see potential in this product. Thank you for your question.

[Interpreted] Our next question is by Gastim with Itaú.

I have 2 questions here on my side. So the first is about gross margin, which has been a highlight in your results in recent quarters. Miguel, you talked about the levers, and that was quite clear. But I'd like to understand the state of achieving the full potential of those levers. We try to talk about that every quarter, but you keep on evolving. So can you tell us from 0 to 100, where are you? Is there a lot to come? When it comes to gross margin? That's my first question. My second question, you talked about the winter, Andre. So I just want to connect the dots. A year ago, you were 100% transparent, and you said that you did not have a good winter in 2025. And so you prepared for a better winter season this year. So the comparison is better for you this year because of that baseline. And I feel like you have invested more in winter products this year. So my question is, now that the winter is virtually over, but you still had some sales in Q3. Was that a positive highlight? The revenue of winter products, was it relevant also in Q3?

[Interpreted] These are great questions, and it can -- they can help us explain our business. Last year, our winter season was not very good. And this year, yes, we prepared better. Part of the growth we see this year is related to that. But we still have some cold weather to come. So I think that we'll still see some results in the coming months. But this year, we had different effects, the World Cup effects. We estimate losing 3 percentage points in Q2 because of the World Cup effect. So what we made in the winter season was offset by the World Cup effect. And then, of course, there are always other effects coming, and this question helps us give more color on how we manage the business. There is always something new coming up, and we have to prepare. And I think that the key word here is to be quicker and have a more integrated fashion with a factory that participates quite a lot. So that's our third pillar, fashion efficiency. And we always see opportunities to improve. So yes. About margin, if Miguel wants to add anything after me, please do so. But yes, for many quarters, we've been delivering margin growth, and this is the result of many actions, many activities. Of course, there's no silver bullet. That's actually the result of many different actions coming together. And then people ask, is it over? Or do you see more potential to growth? Well, we grew 1.9% 3 years in a row, 5.7% in 3 years, but we still see opportunity to grow there. As Miguel said, some of the opportunities have already been explored, but we always see something new coming up. And I think that Riachuelo's margin still has some room to grow. It's hard to say how much we're going to grow, 1.9% would be great, but we cannot promise that. But yes, there's a lot of work to do. We have not reached the full potential yet.

Now our next question is by João with Citi.

[Interpreted] Congratulations, everyone, on yet another quarter of robust growth. I have a few questions on my side. The first is to you, Andre. I'd like to understand what you're thinking. I know that your focus here is on Riachuelo and not the competitive landscape, but we had relevant changes in May with the exemption of the federal taxes for cross-border players. And in the past, we realized -- I mean, we noticed that many companies in the industry were facing this challenge to compete with these players. So how will you differentiate your value proposition here and make sure that this tax exemption will not affect your path that has been very consistent in apparel. Now a second point, I think that the cost issue is clear, Miguel. But what other low-hanging fruits can we find at the factory or elsewhere? I don't know whether there is anything related to dynamic pricing that you can comment on and that can help in retail gross margin. We know that the FX is favorable now, but I'd like to hear about the moving parts for gross margin and what are the opportunities that you still see that might not be low-hanging fruits, but that are still existent.

[Interpreted] Thank you, Joao. So okay, you're asking about what we have in mind, me and the Board. Well, Riachuelo is 79 years of age. We'll celebrate 80 next year. And we always look at the future in with optimistic eyes, and we want to keep on investing in our evolution. The economy has changed, but we are always investing to be better. We are always investing in the future and in our teams, in people development, in stores, our product portfolio, our factory, technology, DC. So we continue believing that this growth mindset is what makes us stronger. Regardless of what happens, we want to be prepared, and we want to be stronger and stronger. On the other hand, we know that we have to be prepared for possible economic changes that may come. And the best way to be prepared for them is strengthening our muscles and having greater margins. So we have a long-term view, but we also have flexibility in the short term, and that's how our mind works. And if we need to adapt, we're ready to do so. We have an agile structure, but always looking at the future with optimistic eyes. Now about the tax exemption for cross-border players, we've been growing for 12 consecutive quarters. In August '24, they changed the rules, but we had already been growing and we continue growing. So we think that we have this tax asymmetry in Brazil that should not be happening in the long run. But even with these asymmetries in we've been seeing growth in 5 or 6 of the last 12 quarters. So although we have this competitive disadvantage, so to speak, we continue to strengthen our model, and we have become more relevant to consumers, and that has sustained growth. So that's what we see, and there is no other option. We cannot stop. And so that's what we'll continue to do. But hoping that this asymmetry can end someday because it's simply not fair. And now Miguel can talk a bit more about costs.

[Interpreted] Thank you, João, for your question. We don't see low-hanging fruits now, and we haven't seen them for some time. I see strong dynamics here at the company, focusing on agenda, methodology, discipline and execution. We are currently challenging ourselves. Whenever a lever comes to a better level, we start thinking about the new wave and how to achieve the full potential of each opportunity. This makes us confident. We have over 2 dozens of initiatives of groups focused on extracting the most of our factory and of the chain as a whole. Of course, we have a verticalized chain. So we focus a lot on our factory, but what doesn't come from our factory, we can focus on pricing and markdown. And since last year, we've been testing some different methodologies and algorithm, data, AI to perform better pricing, looking at sell-through and specific windows of markdowns rather than doing them very aggressively by SKU throughout the period. So we are confident that we'll continue extracting sequential margin gains looking forward maybe not as much, but considering our ambitions, we continue disciplined and confident that there is still margin expansion to be achieved with pricing, markdown levers and factory efficiency and productivity, strengthening our value proposition in products like the Ultra, which I'm wearing right now and Andre as well. But we are disciplined and responsible, and we think that we can improve gross margins in the future.

[Interpreted] Yes. I'm sorry, Miguel, low-hanging fruit was not the right term. I'm sorry. But this quarter, you had almost 1 percentage point in gross margin gain from internal captures. So maybe not low-hanging fruit, but internal opportunities, opportunities in-house. So almost half of the gross margin gains came from internal opportunities. And do you still see opportunities in-house? That was my question. But I think that your answer was clear. But if you allow me, one thing that people have been asking is about the short term. We had a good discussion with you about July and the World Cup effect, but do you see any changes? Or should we expect a one-off effect in the beginning of the third quarter?