Max Stock Ltd. (MAXO) Earnings Call Transcript & Summary

Thank you for joining us today to discuss MAX Stock's Fourth Quarter and Full Year 2021 Results. On the call today are Uri Max, Founder and CEO, Talia Sessler, Chief Corporate Development and Investor Relations Officer; and Nir Dagan, Chief Financial Officer. [Operator Instructions] It should today's call, management team will present the fourth quarter and full year 2021 results and other information as presented in the investor presentation. And that information includes forward-looking information as defined under the securities laws 57281968. The forward-looking information includes forecasts, projections, estimates and other information, which refer to future events or matter. The eventuation of which is uncertain and/or not within the company's control. The forward-looking information is based on current information held by the company or its current adjustments. With that, I'll turn the floor over to Talia Sessler.

Thank you. And good morning and good afternoon, everyone. And thank you for joining us today. As you know, Ori is with us on the call, Ori has always been our CEO and the founder of this company. And earlier today, we had an earnings call with our Israeli investors and Ori presented a meaningful amount of the call. Here -- I'm getting a notice that we are not heard well. So I hope you can hear us correct -- okay. I do hope so. One second. Okay. I hope you can hear me better this way, and I will continue. So continuing from where I left and apologies. Due to language barriers, I will be doing the first part of the presentation, but Ori is with us and Nir will be, as usual, presenting the financial part. And before we start, as a reminder, there is a presentation accompanying today's prepared remarks. The slides are viewable through our -- through the webcast link located in the Events section of our IR site at ir.maxstock.co.in. On Slide #2, this is our standard disclaimer language. And I think I hope everyone is familiar with it. On Slide #3. For those of you who do not know Mac stock, for we are Israel's leading extreme value retailer just like Dollar General is in the U.S. and B&M is in the U.K. On Slide 4, we always speak about our secret sauce and it has always been 3 things: the right product at the right price, along with great customer service and a highly enjoyable shopping experience. On Slide 5, we offer a broad assortment of quality products for customers' everyday needs at affordable prices. Roughly 60% of our products are basic clients, which we call Essential and roughly 40% are nonessential. This year, we continue to broaden our selection of merchandise and expanded and strengthened new categories such as lighting, personal care, confectionery and apparel basics. They all contributed to our double-digit top line growth. On Slide #6, you can see our top line -- that our top line growth was across all of our core categories, except for arts and crafts. Arts and crafts was a category that had an exceptionally high growth last year. As you may recall, we were -- in Israel, we were in several lockdowns. We were all with our kids trying to make them do some art work rather than watch screens and this category really benefited from a very high growth last year. We see it slightly declining, but apart from this category, all other core categories are presenting very strong growth, and we see double-digit growth in toys and baby, also in consumables and apparel basics and household, which represented nearly 1/3 of Max sales in 2021. We were very pleased to see that it had almost 10% year-over-year growth being our largest category. On Slide #7, we've built a strong brand that is really one of Israel's favorite and well-known brands. We're not an agent of any brand, and we are not subject to any franchise agreement that may have a contractual expiration date. And up to now, we've never done any material marketing or brand awareness work. Our brand awareness has been growing all the time, almost exclusively by word of mouth as people really like shopping in our stores and then share it with others. And we intend to continue building the strength of our brands and our brand awareness across Israel. On Slide #8, you see our management team. And this year, we spoke intensively and extensively about the departure of Evan Neumann that had stepped down from his position. But as you know, his role was primarily around IR with you, with the U.S. and foreign investors. And as you can see, we've assembled a passionate founder-led management. We have over 100 years of combined retail experience to execute on our growth strategy. And since we've IPO-ed the business, we've had a few new officers that join given the expansion of the company's operations and since we are now a publicly traded company. On Page 9, we have 55 stores across the country now. 39 stores are big box stores under the Max brand name. They have full assortment of merchandise and our destination stores, will be normally located in suburban areas where there's plenty of parking, and 31 of these stores are owned. In addition, we have 16 inner city, smaller stores. Our customers come with no car and that are currently priced below ILS 20 or about $6 if we convert it to U.S. dollars. On the next page, you can see our KPIs. And in addition to storage expansions, which we've discussed very extensively, our focus is also contributing and continuing to drive comparable store sales, sales per square meter and to increase our average basket size. So since 2018, we were able to increase our net square meter by almost 40%. And you can see that there was no cannibalization as a result of this increase. Rather, our sales per square meter were up by over 20%. We've also made great progress with other key performance indicators. And this is on top of exceptional performance we've done in 2020. So in 2020, we had same-store sales growth of 11.5%, 21% growth in our average basket size, an increase of over 10% in our sales per square meter. And this is why our sales per square meter were only modestly up this year by 1.1% and compared to 2020, which was again a record year of sales per square meter as COVID-19 measures really created outsized gains. Still, even with this record year in 2020, our same-store sales growth this year were 6.5% and above our target of 3%, which Nir will discuss later in more detail. Our basket was further up 9% as we expanded into new categories and deepened our offerings of existing categories. These are truly remarkable KPIs, and we are incredibly proud of. On Slide #11, we still see a significant white space opportunity in Israel and the KPI that I discussed on the prior slide really support our target to more than double our footprint in Israel over the next 2 to 3 years. And as you can see, we've made great progress on our expansion plans since 2019 despite the pandemic and the global supply chain challenges. We're currently at 55,000 square meters, and we expect to end this year with roughly 60,000. On the next slide, Slide 19, I'm really pleased to share that yesterday, the company executed a non-binding memorandum of understanding with a local partner in Portugal regarding a joint venture that would be controlled by us. The objective is to establish and manage the Max store chain in Portugal and Spain. International expansion is one of our long-term growth objectives, and we are excited about this initial development. We are working relentlessly towards signing a binding agreement and building the business palette and building the business plan, and we believe we would open the first store in Portugal in the next 12 months. The forecasted financing for this 3 years of the venture is up to EUR 5 million, which will be extended to the joint venture by us, by the company in accordance with milestones established in the business plan that we are still building. The sources of financing may be from our internal sources and/or from external sources. And with that, I'll turn the floor over to Nir to go through full years 2021 and Q4 numbers in detail. Nir?

Thanks, Talia. It's a pleasure to be speaking with you today. Slide 13. When we IPO-ed the company, we refer to several long-term targets that you see on Slide #13. As you can see, we met or exceeded all of those targets. We said we would open 3 to 5 new stores per year. In 2021, we've opened 4 stores that are owned and 1 franchise store. We said that we expect top line to grow at low to mid-teens. Our top line CAGR in the past 2 years is 14.7%. Our target for same-store sales was 3%. And by far, we exceeded it over 10% same-store sale CAGR. We said EBITDA would expand 200 basis points. And so far, we already delivered half of this increase despite headwinds from shipping costs. And we said we expect our adjusted EPS to grow at 18% to 20%, which we have delivered with CAGR of 19.2% in the past 2 years. Slide 20 -- Slide 15, sorry. Starting with our full year results, excluding onetime sale of COVID-related goods in the past year, total revenue for 2021 increased by 10% and over 2020, driven primarily by 6.5% increase in comparable store sales and 4 more stores that we opened. This was on top of historic 19.4% growth in revenue and 11.5% expansion in same-store sales in 2020. Excluding onetime sales of COVID-19-related goods, gross margin was 38.8% despite the distribution of global supply chain and increase in freight costs. Adjusted EBITDA, which excludes the impact of IFRS 16 and the onetime sales we flat -- was relatively flat to 2020 at ILS 14.9 million, and adjusted EPS increased 7% to ILS 0.59. It is important to note that the year ago period, expenses were lower than the due to onetime COVID savings, while this year, they have returned to more normal levels and also conclude expenses associated with new stores and higher logistic costs. Slide 16. Next is the bridge that the changes in the revenue that I just described. In addition to new stores and comparable store sales growth, revenue was also higher on growth in sales to franchise and higher on royalties. Slide 17. On slide 17 is a similar bridge for adjusted EBITDA. Revenue growth was significant in 2021 through temporary headwinds such as COVID-related expenses, costs associated with ramp up new stores, public company expenses and increased logistic costs left adjusted EBITDA relatively flat compared to 2020. But when we compare to a more normal operating environment in 2019, we grew adjusted EBITDA by 42.1% with 100 basis points of margin expansion. And some of the temporary headwinds of 2021 subside, we are very confident in our ability to deliver future margin expansion. Slide 18. With respect to our fourth quarter 2021 performance, growth period was positive impact by Israeli regulation, which allowed Max to keep some stores open during lockdown, while many competitors were required to temporarily close. For this reason, I will focus on the comparison to Q4 2019, which is more indicative. Here you can see the highlights of another strong quarter. We were able to deliver expansional same-store sale revenue growth, gross margin expansion, adjusted EBITDA expansion and EPS growth versus the normalized Q4 2019 despite increased logistic in the current quarter. Slide 19. The revenue for the fourth quarter of 2021 increased 36.6% over Q4 2019 driven primarily by 22% increase in comparable store sales and more stores than the same period of 2019. The increase in comparable store sales for the quarter was driven by a larger basket size and increase in store traffic versus the same period in 2019. Gross margin was on 38.9%. Adjusted EBITDA in the quarter was up 61.8% versus Q4 at ILS 33.4 million and adjusted EPS increased 44.2% to ILS 0.12. It is important to note that this include higher expenses associated with new stores and higher logistic costs compared to the previous 2 years. Now I will turn the call back to Talia.

Thank you, Nir. On Slide #20, the final note on the impact of COVID-19 on our stores over the last 9 quarters. As you can see, during the first lockdown in Q1 and Q2 of 2020 where Max stores were closed, revenues were negatively impacted. And then moving into Q3 and Q4 of 2020, some Max stores remained open and were deemed essential, which accelerated revenues to historical -- versus historical levels. It's important to note that while revenues have subsided from those historic levels, we have been able to retain much of the elevated revenues and show significant growth from where we were prior to the pandemic. And while the pandemic has been disruptive from a cost perspective, we are confident that as year-over-year comparisons begin to normalize, will also drive further margin expansion. Lastly, on Slide 21. Before we move into the question-and-answer session, I want to leave you with some final thoughts on our execution of our long-term annual revenue and comparable sales target we outlined at the time of our IPO. We've made significant headway compared to the normalized 2019 period with comparable store sales growth of 21.%, and square meter expansion of 22.7% and adjusted EPS growth of 42.1%. And while logistical costs will continue to be a headwind in the near term, we remain confident we can deliver on our long-term goal of 200 basis points of EBITDA margin expansion as well. We're pleased with the underlying strength of our business, our teams, our teams are successfully executing our growth strategies, including expanding our footprint, both in Israel and hopefully, also internationally, and we're proud with what we were able to accomplish in 2021. Our amazing team members are the key to our results, and we look forward to creating even greater value for our customers and our shareholders in the months and years ahead. Operator, we are now ready to take questions. Thank you.

[Operator Instructions] Our first question is from Corey Tarlowe with Jefferies.

Great. Can you provide a little bit more color about why you're looking to expand into Portugal and Spain specifically? What is it about those markets in particular that makes them attractive? And how significant of an opportunity do you believe these countries could be over time?

Hi, Corey, and thank you. Thank you for joining us today, and good morning. So that's a great question. And we spoke about expanding internationally, and we're evaluating various countries in Europe. We saw several elements in Portugal that made us think this is -- this could be an attractive market for us. So the first thing, population-wise, it's a large market. There are about 11 million people in Portugal, on one hand. On the other hand, when you look at the discount market, the competitive landscape, it's a relatively still immature market. Particularly when you compare it to the U.K. or to Germany or to the Netherlands that are much more advanced on the discount part. And if you add the fact that in terms of average wage, it's very low for Europe. So it makes it attractive from a cost perspective. And on the other hand, from a consumer perspective, people are price sensitive and are really, really -- and are really looking to find good promotions and discount offering, which is not mature enough as we think. So we think we can provide a lot of added value there in Portugal. Now since Portugal and Spain can be using the same supply chain. On the same supply chain, we can add another 47 million in terms of population that comes from Spain. And when you also look about -- when you also think about the number of tourists that visit these countries, that's another 100 million of tourists that visit this area on an annual basis. So all of that made us think it could be attractive for us. And then when you augment that with a partner that we found in Portugal, that we know well, not from today. And that can really help us reduce time to market, and the fact that logistics costs are very low in Portugal, it's actually a very advanced country in terms of logistics centers. And that's another advantage for us, having a strong supply chain from China. All of that makes a feel that it's going to be -- it could be an attractive market for us. And as I said, we're working tirelessly on building a full business plan and on signing a binding contract with our partners.

That's great. As a follow-up, are you seeing any material changes in consumer buying behavior in Israel, particularly with regard to the lower income consumer, given recent inflationary pressures?

So as of now, we have not seen any impact. I know that from a macro perspective, there are many concerns inflation and potentially higher interest rates, the oil prices, various elements, various macro elements that could potentially -- there are concerns for retailers across the world, not just in Israel. However, for us, we have not seen it in Israel and I would say when oil prices go up, people have to drive to our store, then they would maybe think twice before they do that. But once they decide to drive, they will select us because we will offer them the best price and the best offer. And so the compensating element is that we're very defensive. And when inflation pressures are increasing, our share of the market will go up.

Understood. And then lastly, what are you witnessing currently from a supply chain perspective? Has there been any material improvements in freight, shipping times or production lead times? And then how does this inform your decisions about inventory and the outlook for this line as we move throughout this upcoming fiscal year?

Thank you, Corey. So our expectations versus the challenges that started a while ago, the situation is quite similar. But because we have very strong connections in China, we have very strong people in procurement, we are able to get the inventory that we need. As you know, we already stocked our inventory significantly a while ago, and we are able to maintain this level of inventory. So unfortunately, there is no improvement in this area, but we don't see any new issues. We've opened 2 new stores earlier this year in February and in March, and you should have been at the opening of these branches, 2,000 square meters that were full of all type of inventory, nothing was missing, all assortment that you can think of, beautiful stores. So we don't see any issues now. But that said, obviously, it's a different story versus what we had prior to COVID.

[Operator Instructions] Our next question is from Brian Nagel with Oppenheimer.

Good afternoon. So I have a few. Let's kind of go through them quickly. One, just with respect to this, consumer demand runs broadly. So I guess from a bigger picture perspective, now that I think Israel and other parts of the world are pulling away from the COVID crisis, how would you characterize just the underlying demand trends on the consumer? And I guess what I'm really asking is you're watching your consumers shop your stores, have you -- do you think we're back now to a normalized underlying dynamic?

Yes. So first of all, Brian, and thank you for joining us. Thank you for your question. Yes, I think you are correct. We do see demand normalizing. I think we -- or our new normal is higher than the old normal because what happens during the more heavily impacted COVID time was that new people came to our stores, they got to know us and they are coming back. So we do see increased demand, but not at the same levels that we had seen while other stores were closed. So we do see the demand normalizing but at a higher level than it used to be prior to the pandemic.

That's helpful. My second question, I guess, somewhat of a follow-up to the prior question. But with regard to the move -- the move out of Israel now to Spain, Portugal. I guess just to understand better the first off, the timing, when should we expect these stores to start to launch? And then from an economic standpoint, how will the economic model there, given that you're working with a partner to look for Max Stock?

Sure. So in terms of timing, our intention is to open the first store within 12 months from today. So I would say the first quarter of next year is probably likely to have the first store, at least one store in Portugal. In terms of the economics, I would be happy to share all the color once we are done with our business plan. We are still building it. So I do not want to share something that is still immature. But once we sign a binding agreement and at the same time, we'll conclude our analysis and business plan for Portugal, we'll be able to share more color on this initiative.

And then my final question, just with the management, how should we think about the ongoing management shifts in Max Stock? The timing of any more permanent announcements?

So the change in management is complete. We had Evan step down, both as a co-CEO and as a director. That happened earlier this year. And again, as you know, his main role was not operational role. He was mostly with U.S. investors and foreign investors. So his departure was quite smooth. And in addition, we had augmented our management. So we added a chief HR officer. We added a marketing director. I joined as the Chief Corporate Development and I -- and also, there's a new -- I mean, a new role, we have achieved, Overseas Officer, who used to be our trade -- our Chief Trade Officer and now shifted there to a new role. So we have management in place. And obviously, Ori who is the founder and the CEO of the company, he was there in 2004 when we founded the company. He always used to be the CEO and he's driving the business along with the management forward.

This concludes our question-and-answer session. I would like to turn the conference back over to management for closing comments.

Okay. So thank you, everyone, again, for joining us. We're very proud of our achievement during this year, and we look forward to continuing working with you all the time and particularly to see you again during our next quarter earnings release. Thank you, everyone, and have a great day.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.