Lojas Renner S.A. (LREN3) Earnings Call Transcript & Summary

Good morning, everyone. Let us begin the Lojas Renner S.A. Video Conference Call. With me today are: Fabio Faccio, our CEO; and Daniel Santos, CFO. Before giving them the floor, I'd like to make some announcements. This video conference call is being recorded and translated simultaneously into English. We will show the presentation in Portuguese, so for those following the call in English, the English version can be downloaded from the chat and from our IR website. Questions from journalists can be directed to our press office through (11) 3165-9586. Before proceeding, let me mention that forward-looking statements relative to the company's business perspectives, projections, and operating and financial targets are based on beliefs and assumptions and on information currently available. They are not a guarantee of performance, as they depend on circumstances that may or may not occur. During the Q&A, questions may be asked live. With that, I'll turn the floor to Fabio.

Good morning. Thank you all for joining us. Our sales performance in Q2 fell short of our expectations. In addition to the strong comparable basis that we had mentioned in Q2 2025, the FIFA World Cup had a more significant impact on foot traffic. It drove a reduction in foot traffic at our brick-and-mortar stores more than we had anticipated. Our performance prior to the World Cup was in line with our expectations. However, since the start of the event in mid-June, the decline in foot traffic at our stores has been much greater than we anticipated. Historically, the impact on foot traffic at our brick-and-mortar stores during World Cup periods has never been as intense and sustained as it was during this year's tournament. However, once the event ended, foot traffic returned to previous levels. We were disappointed with our sales performance during this period. We thought we had potential for more. But we were pleased with our ability to stay the course with our strategy. We expanded our gross margin, maintained disciplined inventory management, and exercised strict control over expenses, thereby preserving our business profitability and value creation. Our net revenue grew 1.1% during the quarter, with a 2.5% increase in apparel sales. But we talk about our cumulative growth because we had a strong second quarter in 2025, so we have to see our cumulative growth over the past 2 years, which was the highest in the sector, 19.8% for retail and 23.1% in apparel. We continue our structural growth, closing yet another quarter with record gross margins for retail and apparel, 57.5% and 58.7%, respectively. Furthermore, for yet another quarter, we saw sequential growth in last 12 months' ROIC of 15.1%, representing an increase of 1.9 percentage point on a comparable basis. And please keep in mind that our ROIC calculation takes into account the entire capital allocation. Net income increased by 8% on a like-for-like basis, while earnings per share rose 11.7%. Among the highlights of the quarter were record sales on Mother's Day, as well as the collections developed for the World Cup, such as collaborations with Guarana Antarctica and Ronaldinho Gaucho, a former soccer player. These collabs played a significant role in strengthening the presence of the Renner brand with significant media coverage. During this quarter, we also launched our first Alchemia fragrance line, expanding our portfolio of private label brands into the beauty segment, thereby strengthening our ability to innovate and differentiate ourselves in that market. Our digital channel has maintained a consistent growth trajectory. During a period marked by lower foot traffic in our brick-and-mortar stores during the World Cup, the digital environment proved even more critical for capturing customer demand. We also achieved 17% share of the digital channel. And this was driven by targeted marketing campaigns, themed activations, and gamification initiatives. CRM initiatives, personalization, and the growth of our Favoritas Renner, our brand influencers, also contributed to increasing customer engagement in an omnichannel way. This performance reinforces the relevance of our omnichannel approach and its importance, and also our ability to connect with our shoppers at different stages of their shopping journey. We continue to make progress with our physical expansion. We have opened so far 19 new stores this year, 5 Renner, 10 Youcom, and 4 Camicado. In the last 12 months, we opened 44 stores. And more importantly, we are pleased with the performance of the new stores opened in 2026, already opened, as well as the 2025 stores, which are already showing on average better-than-expected results. And also 2024, that was the first year when we had a greater concentration of new stores in new cities, and they are giving us average results that continue to be above the average for the company. That gives us confidence to continue with our expansion plan. For this year, we continue with our plan to open another 50 to 60 stores, 20 to 30 Renner stores, 23 to 25 Youcom stores, and approximately 5 Camicado stores. I'd like to remind you that most of the Renner store openings are concentrated now in the second half of the year. This year, in addition to opening new stores, another important investment line item is the store renovations. We will carry out 23 store renovations this year. 9 stores have already been reopened recently, and 14 are being renovated and will be reopened over the coming months. Store renovations, remodelings enhance customer experience, increase efficiency, and drive our business results even more. We remain focused on improving efficiency and creating value for our shareholders. Our business model has proven to be resilient and flexible across different scenarios, even the most challenging ones. I'll now turn the floor over to Daniel, who will provide details on the quarter's results.

Thank you, Fabio. Good morning, everyone. In Q2 '26, we achieved a 1.1% growth in retail sales and 2.5% in apparel sales, a performance below our initial expectations, in a way reflecting a more challenging consumer environment. In the period leading up to the start of the World Cup, sales performance was in line with our expectations, with strong performance and good acceptance of the winter collection. However, during the World Cup matches, foot traffic at our stores was impacted much more intensely than historical averages. In an environment of lower foot traffic at the stores in June due to the World Cup, shoppers were more inclined to shop online. Our digital channel grew 13.1% in the quarter and reached a record share of 16.9% in Q2 '25. In conjunction with the World Cup, the quarter was also marked by greater consumer engagement with sports betting platforms and by increased activity on international cross-border platforms. Even so, we achieved a 2-year compound growth rate of 9.4% in retail. We ended Q2 with a 0.4 percentage point increase in retail gross margin, which reached 57.5%, and a 58.7% in apparel, up plus 0.3 percentage points, both record highs for the second quarter. This increase was driven by commercial performance, notably the higher share of full price sales and gains resulting from greater supply chain responsiveness, in addition to a favorable exchange rate. Youcom reported a gross margin of 63.7%, stable compared to the previous year, and healthy gross margin. Meanwhile, Camicado reported a gross margin of 57.9%, up 2 percentage points year-over-year, resulting from consistent sales execution and a higher share of home and style private label items. We continue to manage inventory efficiently with a 6.5% increase. We maintained inventory quality with a proportion of items in stock for more than 16 weeks, falling 11.9% compared to the same period last year. As a result, inventory remains aligned with expected future demand, with both quantity and age reduced -- both quantity and age profile reduced even amid a more challenging sales environment observed in June. During the quarter, operating expenses increased by 1.5%, despite a 2.2% increase in selling area, despite inflation for the period, and despite the fact that stores were in some preopening phases. As Fabio mentioned, the company maintained discipline in expense management throughout the quarter, already reflecting our efficiency and productivity initiatives. Of particular note are general and administrative expenses, which grew by only 1.2% during the period. We have completed the review of our expense structure. We revised our initial assumptions, regaining efficiency gains, which we had raised in the end of 2025, and we identified new opportunities. The plan execution is already underway and will be rolled out over the next 12 months, delivering benefits for this year, 2026, and for the years ahead. This way, we reaffirm the projection disclosed at the 2025 Investor Day to reduce operating expenses ex IFRS 16 as a percentage of retail net revenue by 2.5 to 3.5 percentage points versus 2025 by 2030. Net income for Realize totals BRL 53.5 million, down 21.9% compared to Q2 '25 when we adjust on comparable basis, excluding the effect of Resolution 4966. And this decrease was the result of 2 factors. First, revenue for the quarter was 2% lower year-on-year, reflecting our selective credit policy, which resulted in a higher quality portfolio, higher quality credit portfolio with lower delinquency rate and impacted revenue from late payment interest, particularly short-term interest. Second, high expenses resulting from the timing of expenses, as well as costs related to the deployment of the new processing system. The total adjusted portfolio saw a marginal decrease of 1%, reflecting a selective credit granting strategy. The over 90 ratio of Stage 3 remains stable and at healthy levels. As regards short-term delinquency, here I would like to confirm that it remains at healthy levels. Here, we see a chart that shows evolution since Q1 '24 until Q2 '26. And what we see is that, short-term delinquency levels remain at healthy levels, not showing any kind of deterioration in our portfolio. And this talks to what I had mentioned before. A short-term interest income that has impacted Realize's results. Next slide. Earnings per share in Q2 were up 3.5% compared to Q2 '25 as a result of the execution of our share buyback plan. On a comparable basis, excluding extraordinary effects, net income was BRL 397 million, up 8% over Q2 '25, and earnings per share grew by 12%. Once again, the company shortened its cash conversion cycle, reaching 105 days, a reduction of 3 days. As for capital allocation, the company is moving ahead with its store expansion plan, under which we opened 16 stores in the first half, 3 Renner, 10 Youcom, and 3 Camicado stores. This capital allocation is in line with our strategic plan for growth and value creation. As an example, the 2024 wave of new stores, which marked the start of Renner's expansion, but more focused on new markets, is already showing operating margins slightly above the company's average. Once again, showing that this capital allocation is the right one in terms of the expected results for the company. This quarter, the company distributed BRL 433 million between interest on capital and share buybacks. And for the first half of 2026, the total was BRL 751 million in distribution, 113% of net income for '26 first half. The company maintains its capital distribution forecast of 50% to 80% of annual net income for the 2026-2030 period, as we had shared with you in the end of last year. I'll turn the floor over to Fabio to comment on the material fact we published yesterday.

Thank you, Daniel. As regards the material fact, I'd like to remind you that in December last year, on December 8, we had our assumptions and projections for the 2026-2030 for several indicators. The assumptions we used to project our sales growth for the coming years led us to an estimate of growth between 9% and 13% for the entire period from 2026 to 2030. However, in these estimates, our projections, and we have mentioned this, our projections indicated in this first year, 2026, and for the whole period, we were focusing on the lower end of the range, close to 9%. Now, with 6 months gone by in 2026, we revised our projections. Like I said, we had greater expectations for the first half of 2026. And now, with 6 months gone by, we see that some of these assumptions we used in December of 2025 are different from what we see today. For example, interest rate cuts are taking place at a slower pace than what we expected back then. Higher household debt, we expected household debt to decrease when it's actually increasing. And households are being more indebted. At the time, the tax benefit for cross-border transactions was lower. In May of this year, it was changed. And another impact for us was the projection of the impact of the World Cup itself. In our history, we had never seen such a great impact from that event as we saw this year. It was much greater than we expected. And we also had a tax replacement in the state of Sao Paulo, which particularly regarding the beauty segment, removed from 0.5% to 0.7% in a year of our net revenue. It doesn't change the impact, but it reduces the net revenue. Now, you put it all together, all of these changes to our assumptions, we revisited our growth projection, our net revenue growth projection, exclusively for the year 2026. We were expecting to be close to 9%. We are now revising it to between 4% and 8% for the year 2026. This is also part of our commitment to transparency with the market, giving you visibility of our projections and forecasts. Now we remain confident that growth will accelerate in the second half of '26. This confidence is driven by a more favorable comparable basis, by the expansion of our selling area. This will become more important now in the second half of the year, by the reopening of some key stores. Some were being renovated in Q1, and they are reopening now, by the progress on commercial and product innovation initiatives. Our omnichannel approach strengthens our connectivity -- our connection with our shoppers and enhances convenience and agility throughout the shopping journey, reinforcing the appeal of our value proposition. The revision of the revenue growth forecast for 2026 reflects an update of our short-term expectations without altering the priorities established for the long-term strategy or the structural initiatives which underpin all of our expectations from now through 2030. All the other metrics remain unchanged, supported by our drivers, margin, efficiency, store expansion, growth in digital, and growth of our existing stores. Well then thank you very much, and I'll give the floor to Fabi so we can start the Q&A session.

[Operator Instructions] First question from Luiz Guanais with BTG.

I'd like to start understanding, Fabio, perhaps you can help us quantify this effect of the World Cup. There was an effect on foot traffic at the stores, in addition to cross-border competition. So that would be a first point, if you could help us quantify that and to what extent that extended to July, because the FIFA continued almost until the third week of July. And my second question is kind of more basic, about the dividend policy and buyback. Does anything change in what you're thinking with the change in the guidance for 2026?

Thank you for the questions, Guanais. To quantify the World Cup is always a difficult task. We do have some metrics, but it's not an exact science. I would say that for the quarter, this might have affected our performance between 3 and 4 percentage points. And you asked how much of that effect extended to July. Well, we're talking about the FIFA World Cup effect from the beginning to the end of the tournament. Historically, we saw a reduction of foot traffic in the brick-and-mortar stores that was more impactful during the days of the Brazilian matches. This year it was different, of course, when Brazil was playing, we saw fewer people at the stores. But also in the more important matches involving many other countries. This was a World Cup with more teams, more matches. There was free of charge streaming for everyone, and people were placing bets. And you put it all together, we felt that the interest in the World Cup was greater, and that led to a further reduction of foot traffic in the physical stores, not just in the Brazilian matches, throughout the event, from mid-June to mid-July. And like I said, before and after, foot traffic normalized. But during the event, the effect was quite impacting. And as for the competition, with that, we saw digital growing perhaps more than normal. Even our own digital grew. We hit a record mark of digital sales, almost 17%, and particularly during the period of the World Cup. Digital really gained more relevance. And with this, the competition of players that are 100% digital was also more important during that period.

And as for capital allocation, as regards to dividend and buyback policies, this remains unchanged. I'd like to remind you that our distribution policy includes payment of IoC, Interest on Capital, and we have been executing this policy continuously over the last 20 to 30 years. So there's no reason for it to change. There is a tax benefit. We'll continue to execute it. And what we have been doing is, any additional reserve, we are using for share buybacks. We've done it about 30%. It practically consumes the available reserve. Now, with the current earnings, we'll replenish the reserves. And our goal is to continue with our share buyback plan, making use of the available reserves. When we look at cash generation in this accumulated period, it's at a similar level than what we had in the prior quarter. We ended with a cash position of BRL 1.9 billion, net BRL 1.2 billion, similar to the position we had in June last year. I'd like to remind you that between June '25 and now, the company has distributed almost BRL 1.6 billion, BRL 1.7 billion. So with all of the expansion plan, we continue with a solid cash position, just like last year. But this does not prevent us from moving forward with our interest on capital distribution and share buyback. And within that range of projections of 50% to 80%, that continues to apply. 80% is not the cap. As much as we generate cash and have available reserves, we will be able to advance in this range of 50% to 80%.

I will ask just 1 question in the interest of time. It becomes very evident that there are many challenges, macro challenges, for the sector. There were onetime effects that were also mentioned by other competitors. But one thing that caught my attention is, if we look at the track record of Renner, you were always very consistent in being able to cope with these challenges, and sometimes doing it much better than the competition and the sector as a whole. And this has not happened for a while. Of course, there are some quarters when this happens. But if we look at not the snapshot, but the film, the whole movie, this has not been that consistent. And even the FIFA World Cup effect was greater than what was mentioned by other players. So my question is, you talked about maintaining the guidance. You explained the macro side of the equation, but I'd like to understand in-house. In terms of diagnosis, what do you think can change in-house? How can you evolve, perhaps to cope with the new market reality, sector reality, and competition landscape? I'd like to understand your reflections in-house to understand what you can change, considering what is within your control.

Thank you for the question, Danni. I think that there are always -- there is always room for improvement. We continue to evolve with our products, our commercial initiatives. We have a number of actions planned to be even more competitive and more relevant for our shoppers, always being the best option for them, both in the brick-and-mortar stores and in digital. I think that this integrated experience counts. Our digital share is more than the double of comparable players, so that sets us aside already. And even growth, and I'll use your question to explain, because sometimes I think that there is some confusion on a comparable basis. The growth of net revenue. When we look at the market, indeed, we had a very strong comparable basis last year. We posted a performance which was an outlier last year. We had a very strong autumn, or fall, and our projection for this year was to have an autumn/winter collection that would not match because we had a much higher comparable basis. And one way to look at this, one easier way, is when we look at net revenues, net sales of the goods, all same-store sales of all players. Considering all data disclosed, if we consider the last 2 years, considering average growth, ours continues to be the greatest growth over the last 2 years. But our comparable basis was higher last year. We had a 19.8% growth. And the other players, they are in around 8% of CAGR. Of course, there are some players that are changing their assortment, and perhaps 1 category of their assortment stands out, but that's not comparable. We've done that in the past. Of course, same-store sales is not an indicator that captures this kind of change in assortment. When you change the assortment, you prioritize one over another. The one being prioritized gains space and grows more. We have a more comparable basis. We've done this move in the past. Actually, we did this movement in 2003, 23 years ago. Let's give you an idea. Back then, our total growth was 13.1% and our apparel growth was 20.5%. It's not comparable. You gain more selling area. And in our case, our growth, total and apparel, and same-store sales is comparable. Total growth is the highest. And apparel growth, we know that what we did 23 years ago, some players are doing this year. If you look at just apparel, it's not comparable. You have to compare net revenue growth. Ours was the highest in the last 2 years. Slightly lower this quarter. But I agree, we expected more as well, and we expected more because we have potential for more, and that's what we are working on with our team to continue to post the highest growth among all players. Now the upside, the positive point, which I highlighted also. When you expect higher growth and you don't have it, this can impact your inventory margin or expenses. And we were able, and we have flexibility in our model to, even growing less than we expected, adjust our inventory. We had a 13% reduction in our active inventory. So our inventory is new. It is prepared for the growth that is coming in the coming months. We have good performance, both in the new stores, physical stores, and digital. But yes, we understand that we do have some internal opportunities to realize all of our potential. But I can guarantee that we will grow, and we will grow in a profitable way.

Next question from Pedro Pinto with Bradesco.

I'll limit myself to just 1 question, exploring the sales front. We got the impression, Fabio, Daniel, that the beauty segment had an important impact in this consolidated same-store sales and apparel sales. In our calculations, we saw a drop between 15% and 20% year-over-year, and the penetration dropping from 7% to 6% year-on-year. Of course, at the end of the day, these are movements which are not neglectable for the sales dynamic of companies. Is this the right direction? Perhaps you could comment on what happened in the category. Is there any initiative that you're adopting so that the consolidated and apparel sales delta will change? And exploring the sales front, we spoke a lot about the World Cup impact. Apparently, in the last week of July onward, this normalized. So I would like to know if there is any other indication regarding sales so that we can think better what will be reversed. For example, in the south, different from other regions, middle-income households versus higher-income households. This kind of indicator, this could be very helpful.

Thank you, Pedro. Let's start with the last, talking about dispersion of shoppers and regions. Well, regarding that, we haven't felt any relevant dispersion or scattering. I think the behavior has been very similar among the different regions and income brackets. What we did see was a different performance during the World Cup. As for the beauty segment, I think that you interpreted it right. Beauty has 2 effects. One, we mentioned the tax replacement, which reduces net revenue a bit, not impacting the result. There's an expected effect between 0.5% and 0.7% in terms of total net revenue. And this is more impacting on beauty because it's geared to beauty, so it impacts beauty net revenue. In addition, what we have seen is a greater number of players and more competitiveness in the beauty sector. To address that, what we have been doing, kind of mentioned the Alchemia fragrance line. It's not the only action. We have other actions on the way. Just like in fashion, just like we set ourselves with our own development goods, just like in Camicado, we had excellent margin improvement with our own products developed by us in beauty. We believe we have room to expand our own development and get away from this direct competition and have a differential there that we also have in fashion and in Camicado.

Next question from Eric Huang with Santander.

My question is more linked with the guidance. Please help us understand the weights of the factors that you mentioned and that drove a revision of the guidance specifically for this year. And how should we see some of these effects extending to 2027? Will these make you rethink the numbers for 2027? I'm not questioning the long-term of the guidance. I'm just trying to understand what factors, what things could continue next year and could impact the results more than expected.

Thank you, Eric. I think that when we reviewed the expectation from the beginning, we spoke about 9% to 13%. But we said that in 2026, we would be in the lower part of the range and growing as we went by. And I would say that our expectation for 2026 was closer to 9%. When we now bring you a 4% to 8% range, I mentioned many assumptions that changed. The most impacting one was the World Cup foot traffic, and why was it the most relevant? Because it was the one that changed the most compared to our forecast. I know it's a short period, just mid-June to mid-July, but indeed, we had not expected such a great drop in foot traffic as happened. So that's the main reason. But that's a context-based change. It will not carry on for next year -- growth in the following years will not be affected by this. Expense dilution. Despite everything, we've been able to dilute expenses. We have a number of actions underway to adapt expenses to our sales level. So we are focused on expense reduction. We might accelerate some actions in that regard. And other factors. For example, I mentioned tax replacement for the beauty segment in the state of Sao Paulo. We have an estimate of reduction of net revenue. That's the guidance, 0.5% to 0.7%. So that is the second factor. And our range is because there are different scenarios. A more likely scenario is more or less right in the middle of the range. But there are different scenarios, more optimistic or more pessimistic scenarios, and that is what would explain this range from 4% to 8%. I would say that all of the other projections are slightly more challenging than what we had projected back in December. But the 2 most striking ones are: one, the World Cup effect, which is behind this; and the other one is the tax replacement with a weight of 0.5% to 0.7%, which is relevant.

Next question from Joseph Giordano with JPMorgan.

I'd like to speak a little about the gross margin. It has helped a lot when we look at the industry as a whole. This has been a strong theme. All players with a lot of margin. So I'd like to understand, Fabio, when we look at pricing, in the beginning, you mentioned competition of digital, and I imagine that the tax on low-cost imported goods plays in this dynamic. So how do you see this price competition, online and offline? And what can you gain from this new fulfillment model that the company has?

Thank you, Joe. Well, competition, we're talking about the World Cup. But when we had the World Cup, since the foot traffic and brick-and-mortar stores dropped a lot, competition became more intense in digital. In digital, there is greater price competition. But still, we posted robust growth in digital with a relevant share and with margin increase, which shows that we have the right conditions to compete, to have specific promotions, and with the gain of our model of selling more new products, reducing markdowns. All of that allows us to have commercial actions and use part of this margin increase to be more competitive during specific events, and still growing our margin. It is important to note and highlight something that I mentioned in the previous quarter. Now, we're reaching record marks again. First quarter, second quarter of this year, interim quarters last year, we already have a very high level of gross margin. We understand that it is a sustainable level, even in a more competitive environment. With our positioning and our value proposition, we continue to grow, sustaining a good level of margins. But I think that the growth we've seen in prior quarters, that will stabilize. We might post a slight increase, but I guess that we are at a very healthy level of margins, and at record levels, too.

Next question from Vinicius Strano with UBS.

My question is about price positions. Does it make sense to invest more in price, enjoying the free cash flow position of the company? And would you consider using a stronger balance sheet and use Realize as a sales driver? I'm thinking about private label sales, brand name sales to drive sales. And a follow-up question on post the World Cup. You mentioned an impact of 3% to 4% on sales. And was this reversed after the World Cup was over? Did you see vis-a-vis your baseline, have you seen resumption or recovery of these 3 to 4 points that Fabio mentioned?