Lulu Retail Holdings PLC (LULU) Q3 FY2025 Earnings Call Transcript & Summary

[Audio Gap] Samuel, please go ahead.

Good afternoon, and welcome to Lulu Retail's Third Quarter Earnings Call. Joining the call today are the CEO, Mr. Saifee Rupawala; the CFO, Mr. Prasad KK; and myself, Samuel 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. Starting with a snapshot, Q3 revenue stood at $1.9 billion, representing a 2% year-on-year increase. Key growth drivers continue to include private label products, which totaled over 30% of sales and e-commerce, which rose to almost 6.5% of sales. Gross profit, EBITDA and net income all increased by 2% to 3% year-on-year. Our retail footprint expanded to 260 stores following 6 new openings during the quarter, alongside selective closures. Customer engagement continued to strengthen with average daily shoppers rising to 668,000, a net addition of 37,000 compared to the same period last year. Our Happiness loyalty program also maintained strong momentum, adding 0.5 million new members in Q3 to reach a total of almost 8 million. Loyalty link sales increased to 72% of total sales, reflecting the growing relevance of our ecosystem to our customers. Mr. Prasad will now run through the financial highlights for the quarter.

Thank you, Sam. Good afternoon, everyone. Let us now review our financial performance for the first 9 months of 2025. We continue to demonstrate steady and resilient growth with the revenue for the first 9 months reaching $6 billion, up 4.7% year-on-year. This performance was driven by both price and volume growth, with fresh food and electronics delivering strong gains, further supported by uptick in the CPG segment. Gross profit grew 4.5% year-on-year to $1.38 billion with margins stable at 23.1%, reflecting effective category management and sustained contribution from our private label portfolio. EBITDA increased by 5.5% to $598.3 million, maintaining a 9.5% margin, underscoring the operational efficiencies achieved through scale. Profit before tax rose 9.9%, demonstrating continued improvement in underlying profitability. Net profit for the period stood at $163 million, up 7.5% year-on-year with the margin stable at 1.9% supported by stronger operating performance despite higher costs linked to new store additions. On the balance sheet, leverage, excluding leases, increased slightly to 1.4x, primarily due to lower cash following dividend payments, while leverage including leases remained flat. Operating cash flow increased to $515 million, up 9.9% year-on-year, reflecting continued capital discipline and strong cash generation from operations. Taking a closer look at our revenue performance. Q3 reflected steady momentum across key markets, supported by continued network expansion and growing customer engagements. Revenue for the quarter increased 2% year-on-year, driven by a solid performance in the UAE and Kuwait, while like-for-like sales declined 1%, mainly due to softer demand in consumer packaged goods and lifestyle categories. New store contributed an additional $44 million to revenue during the quarter as our store rollout program continues to progress in line with plan. Our e-commerce division maintained strong double-digit growth with sales up 32.4% year-on-year, now accounting for 6.4% of total retail revenue. This reflects the ongoing strength of our digital capabilities and growing adoption of online shopping across our customer base. The private label portfolio also delivered another strong quarter, growing 6.2% year-on-year and contributing 30.6% of retail revenue. This continued growth underscores the success of our value-led assortment and its role in enhancing both customer loyalty and margin resilience. For the first 9 months of 2025, our basket value remained stable year-on-year, while customer count continued to rise, supported by new store openings and targeted promotional campaigns that successfully drove footfall and engagement through the period. Let us now take a closer look at our performance across key markets. Revenue in the UAE grew 5.1% year-on-year in Q3, supported by strong like-for-like growth. This was led by sustained demand in fresh fruit and electrical goods, reflecting our ability to capture consumer momentum through an integrated omnichannel offering. EBITDA grew by 3.6% for the quarter. Growth was impacted by lower other income, which was partly offset by a reduction in OpEx. In Saudi Arabia, revenue declined 1% year-on-year in Q3 2025, primarily due to softer sales in consumer packaged goods and fresh food. While customer count increased, average basket value fell leading to a decline in overall sales volume as shoppers lifted to smaller baskets. We recorded $10 million in EBITDA, which was lower year-on-year quarter as our gross margin dipped because of promotional activity. Further, our operating expense increased on account of new store openings. Also, newer store ramp-up are progressing slowly than planned. This had an overall impact. Revenue in Oman declined 0.8% year-on-year in Q3 '25 as lower sales in consumer packaged goods and fresh food reduced average basket values. Although customer count and sales quantities improved, the average price fell marginally as consumers traded down to value offerings. EBITDA increased to $32 million despite marginal decline in revenue growth. The EBITDA increase was primarily driven by a circa 200 basis point reduction in operating expenses driven by lower utility and miscellaneous expenses. In Qatar, revenue grew by 1.4% driven by strong demand in fresh food segment and higher sales volumes. This was partly offset by weaker sales in electrical goods. EBITDA declined 2.5% mainly because of decline in gross profit. In Kuwait, revenue rose 3.3% year-on-year, led by continued strength in supermarket sales. E-commerce sales also expanded largely driven by aggregator platforms. EBITDA grew to $24 million, driven by higher contribution from the total income, partly offset by the increased OpEx costs. For our other segments, which includes Bahrain and sourcing operations, revenue increased modestly by 0.6%. EBITDA margins contracted slightly, mainly due to some pressure on gross margins. Overall, these results reflect steady performance across our key markets with growth in core categories, partially offset by soft trends in specific segments. Moving to profitability. Our performance in Q3 and the first 9 months of 2025 reflects continued stability across all key earnings metrics, supported by disciplined cost management and a resilient gross margin performance. Gross profit increased 3.1% year-on-year with margins improving 26 basis points to 23.7% driven by stronger margins in fresh food and supermarket categories, as well as the higher contribution from private label products. EBITDA grew 2.2% year-on-year, maintaining a stable margin of 9.5%. The steady margin performance was supported by gross margin expansion and controlled operating expenses. At the profit before tax level, margins saw a slight dilution, primarily due to higher finance costs and operation associated with new store openings. Net profit margin estimated remains stable at 1.9% supported by lower tax expense, underscoring the business ability to sustain profitability despite a challenging cost environment. Overall, these results highlight our ability to maintain profitability through disciplined execution, optimized product mix and continued operational efficiency. Our focus on capital discipline continues to deliver strong results, allowing us to balance investment in growth with prudent financial management. For the first 9 months of 2025, CapEx stood at $83 million, down $16 million from the previous year, representing 1.4% of sales compared to 1.7% in the same period last year. This reduction reflects efficiency in both maintenance spending and growth-related investments as we progress towards a more capital-light model. Free cash flow generation remained robust, reaching $151 million in Q3, up 11.9% year-on-year with a cash conversion ratio of 84%, improving from 77% a year ago. Our balance sheet remains stable with a marginal increase in lease liabilities due to new store openings. Net debt-to-EBITDA remains steady at 3.2x, underscoring our commitment to maintaining financial strength while funding disciplined growth. That concludes the financial review. I will now hand over to our CEO, Mr. Saifee, to share strategic update and business outlook.

Thank you, Prasad. Good afternoon, everyone. I'll start with doing a deep dive on KSA. The retail landscape in Saudi Arabia continues to evolve rapidly, presenting both challenges and opportunity. We are seeing shifting consumer behavior with the customer making more frequent shopping trip, however, with similar baskets with smaller basket size and displaying higher price sensitivity. At the same time, online and quick commerce platforms are scaling quickly and value-focused players are expanding their footprint, intensifying competition across the channels. In response to our strategic focus remains clear, we are expanding our store network in high potential catchment while stabilizing -- building our own e-commerce platform to strengthen our digital presence so our customer remains ours. We are also implementing smarter promotional mechanics and driving operational excellence across store and supply chain supported by a broader omnichannel offering to serve customers seamless across the touch points. On profitability and growth, we continue to execute key levers, including reducing wastage in our fresh food category, deepening supply partnership and driving inventory and cost optimization across the network. Additionally, we are expanding partnership with aggregators to widen our reach to enhance customers' convenience. Overall, we remain confident in our strategy to strengthen our market position, enhance efficiency and build more agile and customer-focused retail model in KSA, which we firmly believe will be a growth driver in medium-term. Moving on to e-commerce. Our e-commerce journey continues and since January has seen a strong momentum and steady growth. E-commerce sales increased quarter-on-quarter, now representing 6.4% on total sales in Q3, up from 4.9% year-on-year. Orders have risen from close to 70% in September versus January, reflecting growing consumer adoption and engagement. By the end of September, 102 stores are omnichannel enabled, including 60 express offering 30- to 45-minute delivery, strengthening our fast e-commerce capabilities. Talking a bit about our strategic levers that will drive growth, we are working towards expanding our position and offering, revamping users interface to reduce friction and improve conversion. We aim to enable store-to-door delivery in minutes and expand omnichannel-enabled store to 150 plus. We continue to onboard best talent across the market while continued focus on fostering an ownership culture with P&L aligned accountability. For growth and adoption, we are -- we will be scaling in-store online brand awareness, activating campaign and leveraging CRM journey for almost 8 million Happiness loyalty members. This initiative positioned us to accelerate e-commerce adoption, enhance customer experience and drive profitability through growth across the digital channel. Moving on to expansion road map. Our stores rollout plan remains on track for FY '25. As of September, we have opened 13 new stores with additional 3 stores opened in October, keeping us aligned with our full year target. Looking ahead to the next 3 years, we are revising our medium-term store guidance to 50 stores, down from 60 stores as we continue to optimize capital deployment while focusing on high potential locations. By market, KSA and UAE will each account for approximately 30% to 35% of our new opening, which is a remainder distributor across Oman, Qatar, Kuwait. In terms of format, in line with evolving customer preference and capital-light approach, we will prioritize express stores over hypermarket, maintaining a small average store size to better service [ local cash ]. This approach ensures we continue to expand presence strategically, deepen our customer access and drive sustainability growth across both urban and suburban markets. Looking ahead, as we approach the end of the year, we are in position to provide our lending estimate for the year 2025 as well as guidance for the year 2026. For the full year of 2025, we expect a revenue growth of around 4%, reflecting resilient performance across the key markets. The estimate takes into account the underperformance in KSA market. For the year 2026, we anticipate growth in the range of 4% to 5%, supported by new opening like-for-like sales, higher contribution from our e-commerce business, which continues to gain traction and capture market share. We are revising our margin expectation largely due to the growing contribution of e-commerce, which has slightly lower margin and the current underperformance in KSA market. On EBITDA, we expect to close in the year 2025 at around 9.8%, and we anticipate margin to remain broadly flat in the year 2026. At the net income level, we are expecting margin of 2.5% in the year 2025 and project approximately 10% growth in net income for next year, reflecting the combined impact of top line growth and disciplined cost management. Regarding our store expansion, we remain on track to open 20 stores this year. And for the year '26, we expect to open 18 to 20 stores, focusing on the format and location that balance customer reach and capital efficiency. In summary, we are navigating a challenging environment in some region. We remain confident of our strategic priority, omnichannel expansion, operational efficiency, selective store growth, which will underpin sustainable growth and value creation for our shareholders. That concludes my remarks for today. Thank you for your time and continued support. I will now hand over to Mr. Sam, our Head of Investor Relations, to take us into Q&A session. Thank you.

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

[Operator Instructions] Okay. Our first question comes from Ali Sherif from [ Al Ramz ] Capital.

We understand that because of the seasonality, the Q3 results, especially in Saudi were impacted. However, we would like, if possible, that you shed more light on the details of the drop of EBITDA and how you plan on dealing with that going forward, especially in Saudi Arabia with the competition that's happening there.

Thanks for the question. If we take revenue to start with, there was a particularly big swing in KSA owing to the strong growth last year. If you look in the prior period, Q3 '24, revenue growth in KSA was almost 6%. So there was quite a tough comp year-on-year. In terms of profitability, you were asking about KSA and what we saw there was margins dipping mainly because of promotional activity. In addition, we had operating expenses increase, which was largely attributable to new stores. One thing that we are seeing is that, some new store ramp-ups have been progressing a little more slowly than planned. But we are very focused on the business there, and we're taking all the necessary steps to boost sustainable profitability.

Our next question comes from Nishit from [indiscernible]. [Operator Instructions] In the meantime, we're going to move to the next voice question that comes from Akshit from ABI Analytics.

So could you please explain me the reason for the 9% decrease in revenue in the UAE region in 3Q '25 against 2Q '25 [indiscernible]?

Sorry, Akshit, your line is -- could you try to repeat -- your line was breaking, and we couldn't understand your question.

Sure. Could you explain me the reason for the decline in revenue [indiscernible] seems like the decline is almost 9% in 3Q '25 against 2Q '25? While I see [indiscernible] in 3Q '24 against 2Q '24. So I can see there is a major decline in the UAE revenue compared to 2Q '24.

Akshit, the line was breaking up, so we didn't get the question very clear. But I think you were talking about why revenue was lower in -- or revenue growth was lower in Q3 this year compared to last year. Is that the genesis of the question?

Yes, especially in the UAE region, yes.

So the UAE region continued to perform very strongly. Revenue grew by over 5% in Q3 and by 6.6% in the first 9 months of the year. And so, the growth in Q3 was slightly below that of the first half, but not particularly in a pronounced way. And I think given the slight seasonality that we see in the first half compared to the holiday season in the third quarter, I think that probably explains the slight difference in revenue growth in the UAE.

[Operator Instructions] So now we will move to the next voice question that comes from Muhammad Usman from SICO Bank.

My name is Muhammad from SICO Bank Bahrain. I just wanted to get some clarity on the guidance that you have showed for 2025, especially. You showed a 4% revenue growth for the full year and the net profit at 2.5% margin. This, if I'm not wrong, implies a very sharp decline in the fourth quarter net profitability. Am I reading it right? Like the fourth quarter, you're expecting a revenue growth by around 2% and net profit decline by around 40%, 45%, if I use your numbers?

Yes. No, I think that's a fair and accurate triangulation of the guidance. For clarity, we are expecting revenue growth in Q4, perhaps to be slightly ahead of the revenue growth that we saw in Q3. And in addition, we see gross margin to be aligned to this quarter. The reason that we are expecting a decline in profitability in the fourth quarter relates to increased costs, which we are expecting. And when we break down the higher costs that we're expecting around half is attributable to higher staff costs. And the biggest 2 components of that are some wage inflation pressure and also new stores. The majority of new stores which opened in the last quarter of last year opened towards the end of the quarter. And we have, as we say in our materials already opened 4 stores in the first month of the first -- the last quarter of this year. And so, in terms of new stores, there's almost kind of 2 quarters' worth of new store staff costs that will be going into the fourth quarter. The other factors for higher costs in the fourth quarter are higher aggregator payments, and we also have some slightly higher rent costs in some markets, notably Qatar.

All right. And also to touch base on the 2% revenue growth or slightly ahead of it. I mean 2% revenue growth, are you expecting -- I mean, the similar trends that what we have seen in third quarter, like KSA continues to witness a negative growth?

Yes. Look, the biggest driver or component of the swing in top line is KSA. And we think the recovery there is in progress, is expected to continue in Q4. But we are seeing other factors at play, particularly in KSA. So some pressure in the nonfood segment, but we're also seeing the phenomenon of downtrading, which we talk about in our materials where we see volumes rising, but revenues perhaps not rising as much because of customers downtrading. So we see some improvements in Q4, but we don't expect sort of fuller recovery and improvement until next year, which is why the guidance for next year is a little ahead of the -- at the revenue line is a little ahead of the revenue for the fourth quarter.

All right. And you recently introduced a lot concept, which was basically a low-value shopping experience across your different geographies. So how successful has it been in order to bring in more [ prep ] to -- I mean, to offset the impact of consumer downtrading and were you able to capture more consumers with that concept?

Yes. Look, it's still a relatively new concept. So we are evaluating the data that there have been some encouraging signs. The number of lot stores as a proportion of our overall portfolio remains low. And so, to the extent that there is traction and that's tapping into downtrading consumer preference, then we'll obviously look to expand. But to the extent that the data doesn't support it, we'll sort of hold firm. So it's early days, and I think probably next year, we'll be in a better position to talk more about that.

All right. One last question, if I may. I mean, in KSA, I think during the year, you have opened some store in Madinah and Makkah as well. So how has the performance for those stores been in terms of yields? Has it helped, I mean, the yields because we have one comparable who operates in the [ Harmah ] region where the profitability and other yields per store are much better than the overall average. So how your experience had been in those regions?

So I think it's fair to say, and you will infer from the numbers that one of the biggest challenges has been that the ramp-up in new stores has taken slightly longer than we have historically experienced, and therefore, perhaps expected. But in response to that, there's various things that we are doing. There is targeted measures underway in a number of KSA stores, which include space optimization, some shrinkage in terms of format and a number of cost-saving initiatives. We're also evaluating our new openings based on our latest data, which has led to some selective adjustments in a refined pipeline. And where the ramp-ups are below expectations, there are measures such as we can reconfigure space and we can look again at whether the costs are appropriate for the given store.

We'll now move to again to Nishit from [indiscernible].

Am I audible now?

Yes, we can hear you now.

Okay. Sorry for the previous one. I don't know what went wrong. But I just have 2 questions. One more towards the strategy on the Saudi. I know we've spoken quite a bit right now on the Saudi operations. But in terms of the pressure in the market and the struggle generally with the larger format grocery operators, what's the end -- I mean, when do you see this changing? Or you think the retailers have to adopt to the new normal in Saudi in terms of the market pressure may continue, the discounters would continue to eat into possible the hypermarkets and supermarkets, and they have a different model? They focus on lesser SKUs and -- but they're really thriving in this market. So do you think that this can be -- you have to reset your entire KSA strategy? Or you think the market is coming back to what it was possibly a year back when you had much more aggressive projections in Saudi? So a bit more on a strategic point of view of how you're looking at Saudi Arabia. Second, in general, do you think that smaller format stores are now more a logical way of expansion than the hypermarket and supermarket? Or it is just more of market-specific change in strategy? So what's the future of hypermarket and supermarket in terms of expansion versus lower formats? Because we are seeing a lot of your other competitors also opting to grow with smaller formats than the larger formats given the changes in -- with e-commerce and dark stores and other consumer behavior.

Sure. Let's talk first about KSA, which I think it was your first question. And what we were attempting to make clear in the slides is that, fundamentally, our strategy in KSA is not changing. I would describe it as slowly evolving for a changing landscape. And so, we'll continue to expand our store network in high potential catchments to capture new growth opportunities, although you'll have seen from the materials today that we are now anticipating fewer stores in KSA than previously. We're building our own e-commerce platform there to strengthen digital presence and retain direct customer relationships. And we are evolving some of our existing stores and the pipeline into generally smaller formats. Now, alongside that those sort of big picture points, we're also working on other things specifically in the region to drive profitability. That includes smarter promotions, operational excellence across stores, waste reductions, drive partnerships, inventory optimization, more partnerships with aggregators and so on. And so, there's a sort of a multifaceted approach, if you like, where the big picture strategy is slightly changing, but in the background to drive profitability, we have a number of other measures underway. Does that answer the question on KSA?

Partly, but I just also wanted to understand in terms of how you're reading KSA market? I mean, do you think that the current status of market is what's going to remain in 2026 and 2027 or you are more bullish about that spending and less discounting and all things might change back? So what's your reading being on ground on how the KSA market is expected to evolve over the next 1 to 2 years?

Talking about as far as Mr. Sam mentioned, what we continue our expansion. As far as Saudi is concerned, we continue our expansion. We are optimistic about the market. We will be growing in that market. As Mr. Sam mentioned, format will change according to the areas, the requirement of the area. And of course, as he also mentioned about deeper penetration into e-commerce and all, all these things is going to help us to grow out in Saudi Arabia. Nevertheless, Saudi remains our focus market. It's a focus market for us, and we will continue to grow out over there. And format will be going according to the density and demographic of that particular area -- every area we open the population of those area -- in those areas.

The second question you asked was around format size, and you will have seen that we updated our guidance around new stores and our planned rollout. We do still maintain a number of hypermarkets, a number of them continue to see footfall growth and very high profitability. That said, we are trending towards smaller sizes, both in terms of the formats themselves. So the hypermarkets and the express stores going forward are likely to be smaller than they have been historically. But you'll also see in our guidance that the weight of our openings will be express format 70% to 80% over the hypermarket format. So we do still see potential for hypermarkets in certain locations where we feel that they can be justified and support.

Okay. [Operator Instructions] Okay. It looks like we have no further questions at this point in time. So we would like to thank you, everyone, for participating in our call today, and we are looking forward to seeing you on our next one. This concludes the call for today. So we are now be closing all the lines. Thank you, and goodbye.