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

Good morning, and good afternoon, everyone. Hope you had a great Thanksgiving, and thank you very much for joining us so early today. With me on the call today is Nir Dagan, our Chief Financial Officer; and myself, Talia Sessler, Chief Corporate Development Officer and IRO for Max Stock. I will cover the first part of the presentation, and Nir will be presenting a deeper dive on our financials. And before we start, as a reminder, there is a presentation accompanying today's prepared remarks. The slides are viewable through the webcast link located in the events section of our IR site at ir.maxstock.co.il. And this is our standard disclaimer language, which I think you are all familiar with. So Slide #3, we will start with highlights of our third quarter results. As you can see, we performed exceedingly well this quarter. We delivered double-digit revenue growth, along with strong same-store sales and further gross margin expansion compared to the year ago period. We attribute this growth to a couple of factors. First, we saw a very strong back-to-school season this year. We believe a portion of this can be attributed to our continued store expansion year-over-year as well as to orchestrated product selection tailored to the season. But we also believe we are attracting new customers who are looking for value in an increasingly inflationary environment. Secondly, we believe we benefited from a shift in the timing of the holiday spending from Q4 into Q3 compared to last year. We also continue to manage inventory very wisely this quarter. Inventory is a big issue in our sector and for us, it's not an issue at all. We intentionally brought levels down 16% compared to a year ago, which, along with higher net income delivered about ILS 66 million of operating cash flows -- additional operating cash flows compared to the year ago period. This slide also highlights our progress compared to the same period in 2019 prior to the start of the pandemic. Moving to Slide #4. For those of you who are not familiar with Max Stock and our position in our marketplace, we are Israel's leading extreme value retailer. We offer a broad assortment of quality products, always at affordable prices, an increasingly important segment in today's inflationary environment. On Slide #5, today, we have 55 branches in Israel with approximately 2,200 employees, and we provide a mix of private and Max-labeled products, affordable prices across our 6 core categories, with nearly 2/3 of our sale generated from nondiscretionary everyday needs. We are well positioned to thrive even in challenging economic environments. On Page #6, we've established our leading market position in Israel through several competitive advantages, including our strong brand that has grown primarily through word of mouth, our everyday low prices and our exciting treasure hunt experience in our stores. This attribute -- these attributes allow us to attract high-quality traffic made up of different demographics and income ranges. And this is what also makes us have great property lease deals that, at the end of the day, impact our operating expenses. On Slide #7, that you probably know, our secret sauce has always been to provide our consumers with the right price -- right product at the right price and the right shopping experience. Slide #8, you can see that we saw top line expansion across all of our core categories. We were particularly pleased to see very strong double-digit year-over-year growth in 4 of our 6 largest categories: Consumables, Office and School Supplies, Arts and Craft and Apparel Basics. Obviously, with this high growth, we are growing above market and capturing market share. Slide #9. As we've grown over the last 18 years, so has our addressable market. We've expanded our customer base within Israel through continued diversification of our products and the addition of over 25 new categories, such as makeup, pet supplies, electronics, confectionery, outdoor and many others. These additional categories are still nascent for us, and we can grow significantly while broadening the concept appeal and further contributing to our impressive growth and increasing our average basket size. As I said previously, on Slide #10, roughly 60% of our product mix addresses customers' everyday need with quality products at great prices. This is an increasingly important segment in today's environment. The remaining 40% are the products for seasonal shopping, and this is really what makes us unique and what makes us, Max Stock. So on Slide #11, every month, about 40% of our product rotate, and we introduce thousands of new items, whether it's for the Jewish, Muslim, Christian holiday, whether it's for seasonal favorite or to meet our customers' changing demand. These items are featured for limited time only engaging our customers in our exciting treasure hunt experience. On Slide #12. We also strive to save time for our consumers. So first of all, our store layout is easy to navigate. We respect our customers' time and we let them shop around our stores freely. If you are in a rush, you can just pop in, pick up whatever you need and get on with your day. It is also reflected in our 55 stores that are present across all Israel from the northern areas to the center of Israel and to the southeast areas of Israel. And now turning to our growth strategies and opportunities on Slide #14. Our goal is to double our square meter of Israel footprint versus our 2019 figure. Today, we are at approximately 58 square meter. That is an expansion of 44% versus our standing point. There remains a significant white space opportunity for us to continue the penetration in new market as we move towards our 80,000 square meter target over the next 2 to 3 years. And just quantifying this into numbers, we have about 20,000 additional square meter that should come over the next 2 to 3 years. If you apply ILS 15,000 per square meter to that, which is a conservative figure for us based on our KPIs, which we will review soon, you get additional ILS 300 million in our top line, and that's according to our estimate, is a conservative figure. On Slide #15, we continued our expansion plan with the opening of our new flagship store in Kfar Saba at Oshiland Mall last September. This store expanding 4,100 square meter, however, since it is replacing an existing store, a smaller one, the net retail addition is about 3,000 square meters. On Slide #18 and actually also on 16 and 17, you can see an update on our near-term store pipeline. We had previously discussed Be'erot Yitzhak on Slide #16 and DCITY on Slide #17, hence, I will skip this slide. You have all the details on the slides. And on Slide #18, you have all the details on our new store in Gush Etzion. This store is approximately 1,500 gross square meters and is expected to serve an addressable population of over 70,000 people without any similar concept in the area. All these 3 stores are expected to be opened in the first half of 2023. And we have not included one more store in Gedera that we did sign, but is expected to be open in 2024. Next slide, Slide #19. This is just a quick reminder of our dual format store strategy. And while Max, our big box format is our main format for current expansion, we also see plenty of growth in our Mini Max or smaller box format, and we had recently signed 2 franchise agreements with 2 parties in Jerusalem. Next Slide 20 and 21, we previously discussed our growth engine in Portugal, and we wanted to reiterate that we are on plan, and we expect to open our first stores in Portugal in the first half of 2023. With that, I will turn the floor over to Nir to go through our Q3 in first 9 months of 2022, numbers in detail, Nir please.

Thanks, Talia. It's a pleasure to be speaking with you today. Slide 24. Starting with our third quarter results on Slide 24, total revenue was up almost 15% from the third quarter last year. This growth was driven primarily by the successful execution of growth strategy, a strong back-to-school selling season in Israel, and the shift of some holiday sales into the third quarter this year. When compared to pre-pandemic third quarter of 2019, revenue grew up by almost 40%. Gross margin was 40%, up 150 basis point versus last year. Adjusted EBITDA, which excluded the impact of IFRS 16 and stock-based compensation, was up 15.4% compared to the third quarter of '21, at ILS 41.9 million. When compared to pre-pandemic third quarter of 2019, we grew adjusted EBITDA by 41.6%. The adjusted EPS is ILS 0.16, an increase of almost 10% compared to last year and 40% when compared to third quarter of 2019. Slide 25. On Slide 25 is a look at our KPIs. Starting with our footprint, we have grown our physical presence by 17.5% this year to almost 58,500 square meter. Since the end of 2018, we grew net square meters by almost 63%. At the same time, we've grown sales per square meter as well up 20.6% since the end of 2018. Same-store sales grew nearly 4% in the third quarter, bringing year-to-date same-store sales down to a little over 1% as we last 3 years of very solid growth, highlighted by 11.5% increase in 2020. And lastly, strong advances in average basket size across the owned store footprint have continued. We've captured significant gains throughout the pandemic and have held on to and build on the momentum since. On Slide 26 and 27, the bridge, Slide 26, is the bridge to change in revenue that is just described -- that I just described. Growth from new store, same-store sales growth and royalty was offset by lower franchisee fees, leading to almost 15% increase in revenue when compared to a year ago. And on Slide 27, on Slide 27 is a similar bridge for the adjusted EBITDA. Revenue grew and decrease in -- revenue growth and the decrease in logistic costs were partly offset by a slight increase in operating costs and the costs associated with the ramp-up of new stores. Together, those factors led to a 15.4% increase in adjusted EBITDA when compared to the third quarter of '21. Slide 28. Now turning to our first 9 months of 2022 results, total revenue was up by almost 9% from the first 9 months of 2021, driven primarily by the addition of 5 new stores or 2 stores net of closure, partially offset by a 1% decrease in same-store sales. When compared to the pre-pandemic first 9 months of 2019, revenue grew by almost 42%. Gross margin was 39.5%, up 70 basis points versus 2021. Adjusted EBITDA, which is called the impact of IFRS 16 and the onetime bulk sales, was down 5.9% compared to the first 9 months of 2021. When compared to the pre-pandemic first 9 months of 2019, we grew adjusted EBITDA by almost 29%. Our adjusted EPS was ILS 0.39, a decrease of 15% compared to the 9 months of last year, but up 20.6% when compared to the first 9 months of 2019. Slide 29. Next is a look on our liquidity and capital deployment strategy. Our net cash position of ILS 34 million ensured financial flexibility for the possible future. Due to our modest capture capital expenditure and working capital needs, we've been actively returning value to shareholders through annual dividend and our share buyback progress. Since 2017, we've returned ILS 229 million in dividend to shareholders and this year, we've exceeded -- executed, sorry, almost ILS 20 million in share repurchases, yes, which is half of our ILS 40 million authorized buyback plan. I will turn now the call back to Talia.

Thank you very much, Nir. I just wanted to refer also to Slide 29 that Nir just spoke about and emphasize that, we were able to double our sales, gross profit -- more than double our sales, gross profit, almost double EBITDA and EPS, as you will see on the next 2 slides, while still generating a lot of cash and distributing almost ILS 230 million dividends to our shareholders, and this is a very unique combination that we have, that our growth does not require cash flow, in fact, it is generating cash flow. So we have this very unique combination of a strong growth story, along with strong balance sheet, cash-generative business. And on Slide 30 and 31, you can see a historical view of our annual financial performance between 2017 and 2021 and also the 12 months ending with Q3 this year, we're very pleased with more than doubling our revenue and gross profit over the 5 years and almost doubling our adjusted EBITDA and adjusted EPS during the same time period. With the current growth engines that we have, both in Israel and in Portugal, we believe we can do a similar growth. We can increase our top line in a similar way and also our bottom line over the next 5 years. So before we move into the question-and-answer session, I wanted to reiterate that we are very pleased with our execution, both on the top and the bottom line this quarter. Our teams are adeptly managing the current environment and have positioned us well for continued execution should challenge economic factors persist. Longer term, I'm confident that we will continue to execute against our key growth strategies and reach new customers through market share gains and expanding geographic footprint. And now we ready to take questions.

So give us just a moment to collect your questions. I think there are none, but let us double check. Actually, we do have some. Now 1 question. Can you discuss the health of the Israeli consumer? Yes. So that is always a great question, and I'll be happy to address that. In case you have any further questions, feel free to click on the Q&A button and just type your question. So listen, we are part of the global economy. Obviously, we are impacted by the turmoil that is occurring elsewhere. At the same time, in Israel, we are still in a better position. So inflation wise, we are at 5.1% for the last 12 months. Interest rates are currently -- Bank of Israel interest rate is at 3.25%. Market is expecting further interest increases that will obviously depend on the inflation, so we'll see that. But overall, we see strength in our business, whether it is related to some softness in the economy or to our unique merchandise and all of our secret sauce and all the elements that we've discussed. July and August were very strong, and we also benefited from the timing of the holiday season, as Nir discussed but overall, the Israeli consumer is in relatively good shape. And if things will deteriorate a bit, we think we can actually benefit from that. So I see that there are a few more questions. With the shift in some holiday sales in Q3.

Yes. What we said that, we saw a positive same-store sales even in July and August, the only shift is with 4 more days in this September than last year. So that's -- this is the shift that we spoke about.

Right. I think if you -- if we try to normalize the 4% same store, this is probably above what we expect to see in Q4.

Yes, but we have to remind that in the last quarter, we had a positive same-store sale of 3% in the second quarter anyway.

That's right. Yes. So overall, the second half should be positive in terms of same-store sales growth, but not -- but Q4 will not be as strong as we had in Q3. There's another question, color on the decrease in inventory. Is it a strategic decision? And how do you think about a sustainable level? So definitely something that we managed intentionally.

We managed good, I'd say.

We did it very wisely. We were really ahead of the curve with managing our inventory. We actually increased our inventory levels relatively early and started to decrease inventory also relatively early. That has a positive impact on our gross margins as well as it reduces logistic costs. And just take into account that our inventory levels are down despite significantly increasing our…

Square meter.

Exactly, our square meter, which is up by 17.5% for the last 9 months.

I think we are about to reach the right level of inventory that we should have.

What cost do you see remaining as we head into 2023? What do you see awaiting? How should that impact margins? In terms of operating expenses, well, first, maybe gross margins.

Yes, we believe we are in the right position. We think that if all the macroenvironment will stay the same and the freight cost will be the same, I think this is the level of the gross profit that we should be in the next few quarters. And…

And in terms of operating expenses, I think, as a percentage of sales, what would be…

Yes, we are in a good position. I think we -- the labor cost, we did a much better job this quarter than the first 6 months of the year. I think the position in Israel with the labor cost -- the employee cost is much better than in the first 6 months. So I think we are in -- this is the right level.

Yes. One point on stock-based compensation. We adjusted, however, for those of you who don't want to neutralize that it's going to be…

This is the last quarter that we [indiscernible].

Exactly. So Q3, this quarter is going to be the last quarter of having a significant stock-based compensation expense going into Q4 and beyond, this expense is going to almost get eliminated. Same-store sales growth, I think we commented on the shorter term…

Yes, but, on the long term, it's what we said and stated in the IPO, we know this year is a bit tougher to achieve it. But on the long term, what we've stated in the IPO, this is the number that we think we should be in.

Which is around 3%.

3%, yes.

On a longer-term perspective. I think that's it. Yes? Okay.

Any further questions, they can...

Exactly. Guys, we are happy to answer any further questions you have and set up follow-up calls to discuss the earnings of the last quarter and any other questions that you have, feel free to contact myself and Nir, and we'll be happy to speak with you. Thank you all for joining us. And we look forward to speaking with you soon before the next quarter.

Bye.

Thank you.