Lulu Retail Holdings PLC (LULU) Q2 FY2025 Earnings Call Transcript & Summary

Good afternoon, and welcome to Lulu Retail's second quarter earnings call. Joining the call today are the CEO, Mr. Saifee Rupawala; the CFO, Mr. Prasad KK; and myself, Sam Hart, Head of Investor Relations. Before we begin, I would draw your attention to the disclaimer slide in the presentation, which contains important information regarding forward-looking statements. We're pleased to share our performance in the second quarter of 2025, reflecting the resilience of our retail operations. Our revenue reached $2 billion, up 4.6% year-on-year, driven by strong demand in fresh food as well as electrical goods. This included healthy contribution from our private label business, which now accounts for almost 30% of total sales. E-commerce continues to scale, reaching 5.6% of total sales this quarter. EBITDA came in at $203.9 million, marking a solid 7.6% increase year-on-year with broadly flat margins of 10.1%, underlining the operational efficiencies we have underway across the business. Net income stood at $57.3 million, a 1.8% year-on-year increase with margins at 2.8%. In line with the dividend policy stated at IPO, we have declared a $98.4 million interim dividend, equating to 3.5 fils per share. This represents 78% of net income, delivering on our IPO commitment of at least 75%. Our retail footprint now totals 256 stores. During the quarter, we opened 1 hypermarket and 1 express store in the UAE, while 1 small express store in the UAE was closed. The net increase of 9,000 square meters takes our total selling area to 1.35 million square meters. We continue to serve a growing customer base with an additional 26,000 shoppers year-on-year, taking the daily total to over 690,000 daily shoppers. Our loyalty program also maintained its enormous momentum, 1 million new members joined us during the quarter, taking the total to 7.3 million members. Mr. Prasad will now run through the financial highlights for the quarter.

Thank you, Sam. Good afternoon, everybody. Let us now take a closer look at our financial performance for Q2 and the first half of 2025. We continue to deliver resilient growth with Q2 revenue increasing by 4.6% and H1 revenue up 5.9% year-on-year. It's worth highlighting this was achieved despite the full rundown period falling in Q1 unlike last year. This growth was led by strong double-digit performance in our fresh food and electrical goods departments, alongside an uptick in average order value for the first half. On profitability, gross profit rose 6.5% in Q2, translating into a 40 basis point improvement in gross margin due to margin enhancement across key categories as well as contribution from private label. H1 gross profit grew 5.2%, reflecting our continued focus on category optimization and pricing discipline. EBITDA increased by 7.6% in Q2 with margin expansion driven by higher gross margins and stable operating expenses. For the first half, EBITDA was up 7% with a 9 basis point improvement in margin, supported by a higher supplier income and ongoing operational efficiency gains from scale and better cost control. Profit before tax grown by 4.5% in Q2 and 13.2% for H1. Net profit for Q2 grew 1.8% despite higher interest costs due to increased lease liability on account of new store openings and tax. That said, H1 net income was up 9.1%, demonstrating the underlying strength of our operations. Reflecting our solid performance and continued confidence in the business, we have declared an interim dividend of $98.4 million, equating to 3.5 fils per share. We also made further progress on our balance sheet, reducing our leverage ratio by 0.2x versus December 2024, both including and excluding these liabilities. Lastly, we generated a strong free cash flow of approximately $364 million in H1, up 9.1% year-on-year, a testament to our capital discipline and robust cash generation model. Moving to details on our revenue performance. Q2 reflected broad-based growth across our retail formats and channels. Revenue for the quarter grew 4.6%, taking H1 growth to 5.9% year-on-year. This was driven by a 2.1% increase in like-for-like sales, supported by growth in both price and volumes. We also saw an increase of $37 million in contribution from new store sales. We continue to activate targeted in-store initiatives to boost customer footfall with a strong focus on aligning our product mix to evolving shopper preferences. Our e-commerce business maintained its strong trajectory with Q2 sales up 43.4% year-on-year, now contributing 5.6% of total revenue. This reflects the growing relevance of our digital channels supported by faster delivery and expanded reach. Our private label portfolio also delivered steady growth, rising 3.5% year-on-year in Q2 and contributing 29.7% to retail revenue. This category continues to play a total role in enhancing margins and driving value-led differentiation in our offering. Let us now take a closer look at our Q2 performance across key geographies. Starting with the UAE, revenue grew a strong 9.4% year-on-year, led by a robust like-for-like growth. This was driven by sustained demand for fresh food, which we are well positioned to capture through our omnichannel presence. On profitability, EBITDA margins expanded, benefiting from operating leverage and improved cost efficiency, particularly in managing operating expenses. Moving to KSA. Revenue increased by 3.8% year-on-year, supported by a rise in LFL sales and continued store ramp-up from openings in 2024. Electrical goods performed well this quarter as well. Despite higher operating expenses tied to store expansion, we successfully maintained our margin levels. In Oman, revenue was marginally impacted mainly on account of flat supermarket sales. This was driven by a price decline despite support from increased volumes. However, margin improved supported by stronger performance in lifestyle categories and higher other operating income. In Qatar, revenue grew slightly year-on-year. Growth in the fresh food segment was partially offset by softer performance in department store sales. Profitability remained stable with cost controls helping to mitigate margin pressure. Kuwait delivered 4.9% revenue growth in Q2 2025, driven by strong momentum in supermarket sales and a notable uplift in e-commerce volumes, especially through aggregator platforms. However, EBITDA margin slightly declined largely due to operating expenses from new stores. This was partially offset by rent reductions. In our other segment, which includes Bahrain and outsourcing centers, we saw revenue growth of 3.5%. EBITDA margin contracted primarily due to a slight decline in gross margins. Across the markets, we remain focused on balancing growth with margin expansion, optimizing operations and leveraging efficiencies as we scale. Moving on to profitability. Our Q2 performance highlights steady momentum across all key earning metrics, supported by a healthy top line growth and a continued focus on margin progression. Gross profit increased by 6.5% year-on-year with gross margin improving from 22.8% to 23.2%, a 40 basis point accretion. This was driven by positive contributions from both volume and pricing, along with the benefit of increased mix of higher-margin private label products. At the EBITDA level, we recorded a growth of 7.6%, translating into a 28 basis point margin improvement. This was underpinned by gross margin expansion and further supported by stable operating expenses. On the bottom line, net income for the quarter came in at $57.3 million, a 1.8% increase year-on-year. Margins were maintained despite higher interest costs due to increased lease liability on account of new stores and higher tax expense during the period. Overall, these results demonstrate our ability to protect and grow profitability through a balanced approach to pricing mix and cost discipline. Our focus on capital discipline continues to deliver results, enabling us to balance growth investments with a financial prudence. In the first half of 2025, we recorded CapEx of $54 million, representing 1.3% of sales, with the majority directed towards new store rollouts. Within this, maintenance CapEx stood at 0.5%, down from 0.6% last year, reflecting our continued efficiency in capital spending. In Q2, free cash flow rose 13.4% to $176 million, underpinned by consistent EBITDA growth and efficient capital allocation. This contributed to a notable improvement in cash conversion, which increased to 86.2%, up from 81.7% in the prior period. Turning to leverage, bank debt reduced as we utilized more internal cash to fund working capital requirements, reflecting disciplined liquidity management. On the other hand, these liabilities increased as expected, in line with our expanding store footprint through new openings. That concludes financials. Our CEO, Mr. Saifee, will now summarize our strategic and operational progress for the quarter.

Thank you, Prasad, and good afternoon to everyone. As we reflect on our performance in the first half, our growth momentum remains anchored and form well-established pillars that continue to drive our business forward. This includes organic growth from our existing stores; the strategic rollout of new stores and tapping into new markets; efficiency gains and scale benefit and additional upside from private label expansion; and our fast-scaling e-commerce platform, each of these focused in delivering results today by building a structural foundation for long-term sustainable growth. In the coming slides, we will walk you through this strategic pillar and show you how they are contributing our momentum this year. Starting with our efforts towards our existing store portfolio. We have continued to strengthen the performance through the range of strategic initiatives. First, on revenue enhancement. We are actively increasing our presence on digital platform, expanding the number of category listed to capture a large share of e-commerce demand. We also launched our Q-commerce offering, enabling faster delivery and tapping into new sensitive customer demand. Another initiative to support is repurposing of select area to be our existing store into LOT, store-in-store concept. This concept allows us to better serve the growing value-conscious segment by offering them an expanding range of value-focused home and lifestyle products within our current retail [ footprint ]. On the cost side, we have made a strong progress in optimizing store areas, outsourcing noncore function and renegotiating lease term with the landlords. These actions are helping us with greater cost flexibility and improving store-level profitability. Finally, we are driving operational efficiency through more strategic assortment planning for our customers seeking premium products. Together, these efforts are enhancing performance of our store by ensuring our portfolio remains competitive, efficient and customer focused. Moving on to our expansion road map for our store rollout plan remains firmly on track, both for FY '25 and over the medium term. In the first half of the year, we have opened 7 new stores, 3 hypermarkets and 4 express format. Building on this momentum, we have already opened 4 additional stores in the month of July. We remain on course to meet our full year target of 20 new stores. Importantly, lease have been signed for all remaining stores and over 1/3 are already near completion, giving us strong execution visibility for the rest of the year. Looking further ahead, our medium-term expansion pipeline includes 16 new stores strategically distributed across key markets and format. By country, the largest proportion will be from KSA, which remains a key market offering for long-term growth potential. This is followed by UAE, our largest market, which continues to offer further opportunity with the balance coming from our GCC market. By format, the focus remains agility and proximity, with the specifics of the local population in mind. 60% to 65% of our stores will be express format with 35% to 40% of our as hypermarket. The average size of each format will be optimized in line with evolving customer preference and previous guidance. This balanced approach allows us to expand our presence into new locality, deepen customer access and drive sustained growth across both urban and suburban. Moving on to our key enablers of growth. Our private label and e-commerce strategy continues to scale effectively, in line with evolving customer expansion. In Q2, private label sales reached USD 575 million, growing at 3.5% year-on-year. We continue to invest in building distinctive high-value offering, new product launch, enhance our in-store branding and exclusive GCC-wide promotions. These initiatives are not only improving visibility but also supporting overall margin enhancement. On the digital platform, e-commerce sales has reached to USD 108 million, delivering 43.4% year-on-year growth with 45.4% increase in customer count. To support this momentum, we are focused on expanding our delivery footprint and continuously improving our [ speed-to-door ] method, enabling us by growing network of e-commerce-enabling store. We also successfully rolled out and revamped Quick Commerce as a pilot project in Abu Dhabi, which has meaningfully stepped into our strategy to offer faster, more flexible delivery and enable broader store-level fulfillment going forward. Together, these levers are driving strong customer engagement and reinforcing our position as a modern multichannel retailer. To summarize our Q2 performance 2025, revenue grew by 5.9% year-on-year in H1 and 4.6% in Q2 2025. As we continue to build on our position as the largest pan-GCC full-line retailer, we continue to target margin expansion driven by operational leverage and disciplined cost management. Our commitment to shareholder return is remaining strong, with H1 dividend of USD 98.4 million dividend, equating to 3.5 fils per share. We continue to welcome a diverse and growing customer base, now exceeding to 690,000 daily shoppers from over 130 nationalities. Finally, our 2025 and medium-term expansion plans remain firmly on track, positioning us well for sustained growth and quarters ahead. Thank you all for your time and your continued support. That concludes my remarks for today. I will now hand over to Mr. Sam, our Head of Investor Relations, to take us into Q&A session. Thank you all.

Thank you, Mr. Saifee. With that, we conclude the presentation and would like to open the floor for questions.

[Operator Instructions] We have our first voice question from Ibrahim from Artal Capital. Okay. We will move on to the next question then since we cannot hear Ibrahim. And our next question comes from Muhammad Usman from SICO Bank.

I have two questions. First one is on the -- if you could shed some more light on the operations in KSA. I mean when we look at the results, there's a strong performance, strong growth in UAE, both in terms of revenue, EBITDA and net profitability. But in KSA, even the revenue growth is not that strong. And on the bottom line, there was a decline almost in net profit, almost half versus last year second quarter. So if you could -- I mean, how is [ revenue ] there? What are the headwinds? Most of the store openings in the past running a headwind in KSA -- I mean the store expansion plan is not really working there. If you could shed some light on that, KSA. And my second question is also...

Sorry, can you -- apologies, can you move a little closer to the microphone? Your voice is a little bit low.

All right. All right. And my second question is on the LOT store format. I mean can you please elaborate a bit about it? Is it a way to compete against the value retailers or the discounters that have opened up recently in Saudi Arabia that is causing the competition? Can you shed some more light on this? And my last question, if I may, is on the growth of e-commerce. I mean there's a strong growth in e-commerce sales. So can you quantify if this is done through Lulu's own platform? Or is it through third-party aggregators? And if it is done through third party, how much of the margin difference it is when you do it with a third-party aggregator versus if it's done within the Lulu store or online platform?

I think there's three question there, so we'll maybe take them in reverse order. In terms of e-commerce, the split is roughly 2/3 through aggregators and 1/3 through our own platform. That's been broadly consistent for a period of time now. We don't disclose the specific margin impact in terms of our relationship with aggregators because there's commercial sensitivity around that. In terms of the LOT concept...

So when we are talking about LOT, as I mentioned earlier also, LOT, this concept is a shop-in-shop concept. And it's a thoughtful extension for a multi-format retail approach. Rather than a store and having a separate store, this is what is going to happen, it's store within the store. And this is going to serve my value customer retention for value customer in many of the areas into demography and all, where we see there is a potential for value customers are there. So we give them this particular facility, this particular facility to come and shop at Lulu. Nevertheless, we remain very strong with over 220,000 SKUs into our stores, depending on the demography of the population, density of the population. That continues to grow. So this is another avenue. I'm giving it to my customers who are looking for this sort of thing, they are looking for a value proposition. So it's available for them now, and which is doing good and we are going to have our presence into many countries or most of my countries over there.

And then in terms of KSA LOT?

In KSA, we grew 3.8% within Q2. But if you see at H1 2025 level, we grew at 7.1%. This is because of seasonality in Q2 because rundown was full-fledged in the first quarter. So when we are talking about our EBITDA margin when comparing H1 to '25 and '24, EBITDA margin stood stable. But EBITDA level I mean before interest and tax level is a little bit less because of our new store opening and the interest cost.

So is it fair to say that the new store openings that were -- I mean, 2 or 3 are open were opened in Madinah, the rents of those stores are very high and still those stores are not able to generate the target revenue per store that [indiscernible].

If I may answer, that's a good observation. So if you look at these stores, these stores have been recently opened and, of course, are in ramp phase. When you look at the rent for areas with higher footfall are, of course, higher. And hence, our -- and they are well within our feasibility. So we aim to generate higher sales productivity in these stores as well. So of course, these are newer stores, and they will -- they're ramping up and they will ramp up as per our expectations. When we see their current performance, we -- they are in line with our expectations, and we expect them to be [indiscernible].

[Operator Instructions] Our next voice question comes from Vijay from Al Tayer Group.

Just to confirm, I'm audible, right? You can hear me?

Yes, yes, we can hear you.

Your voice is a bit patchy, Vijay.

Sorry, I'll try to be loud, see if that's better. So I'm looking at EBITDA margin, right? How does EBITDA margin in Saudi compare versus EBITDA margin UAE, right? What are the differences in basket composition and also the average order value? If you could please comment on that.

The margin in KSA is slightly below the overall group average. And that is simply a function of having a higher proportion of stores there, which are new and in ramp-up phase. Overall, we don't see any of our markets, including KSA, is having a sort of structurally higher or lower margin to any of our other markets.

From a basket composition, I think the second half of the question was basket composition. We see similar baskets. We see fresh being strong in KSA and UAE as well. However, we see electrical goods slightly better in KSA compared to UAE.

And once the store rollout is stabilized, do we expect the margins in alignment with UAE?

Yes, once all these stores are mature, we expect a better EBITDA margin in KSA, then it will be in line with our yearly patterns.

[Operator Instructions] Perhaps in the meantime, we'll double check with Ibrahim, Artal, if his line would be working now. [Operator Instructions] Yes, it looks like we cannot hear Ibrahim. Okay. It looks like we are having no further questions, so we would like to thank every participant for joining us today for this presentation. We are looking forward to connect with you again on our next calls. This concludes today's call. Thank you, and goodbye.