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

Good morning and good afternoon, everyone, and thank you for joining us today. With me on the call is Nir Dagan, our Deputy CEO and Head of Finance, and I will cover the first part of the presentation, and Nir will be presenting the highlights of our fourth quarter and as well as a deeper dive on our financials later on during this presentation. Before we start, and as always, as a reminder, there is a presentation accompanying today's prepared remarks and the slides are available on our IR website at ir.maxstock.co.il. And on Slide #2. As you know, this is our standard disclaimer language, I think everyone is familiar with it. So guys, I believe that everyone that joined is familiar with Max Stock and our position in the marketplace, being Israel's leading extreme value retailer and offering a broad assortment of quality products at affordable prices. On the next slide, an update. We have 58 branches in Israel with approximately 2,000 employees. We provide a mix of private and Max-labeled products, affordable prices across 6 core categories. You know that figure, nearly 2/3 of our sales are generated from nondiscretionary everyday needs that creates really a very stable demand for our products. And this is a new figure, 70% of our revenue is coming from products priced at ILS 10 or less. So the equivalent of $3 and below. And all of these attributes make us really well positioned to succeed also in challenging economic environments. On the next slide, Slide #5, 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, and I'll give you an update on our more recent marketing efforts. Obviously, our everyday low prices on a broad assortment of quality products and our very unique treasure hunt experience in our stores, these attributes allow us to attract high-quality traffic made up of different demographics and income ranges and allowing us to benefit from favorable leasing terms. This also is a driver behind us being or having the highest sales per square meter globally, as far as we know and as compared to our publicly traded peers. So Nir will now review the highlights of our fourth quarter. Nir, please.

Slide -- Thanks Talia, Slide 6. So before we -- moving into the highlights of our fourth quarter, I want to describe a shift in the timing of the Jewish Holiday in 2022 compared to last year. This shift in days that our stores were closed resulted in a 5% decrease in selling days in the fourth quarter this year, which weighed on the fourth quarter same-store sales growth. Accounting for this shift by comparing the combined third and fourth quarter, we saw comparable store sale expanded more than 1% over the 6-month period in -- over a year ago. Slide 7. Turning now, our fourth quarter highlights on Slide 7. Revenue expanded 2.7% compared to the fourth quarter of 2021. Even with this timing shift of the Jewish New Year holiday into the third quarter, I just described. Gross margin was particularly strong, up 230 basis points this quarter driven by the decline in shipping prices and more inventory headwinds. These factors together led to a double-digit gain in both adjusted net income and adjusted EPS this quarter, up 10.7% and 13.1%, respectively. Slide 8. Next is a look at our liquidity and capital deployment strategy. Our net cash position of ILS 33 million at year-end ensured financial flexibility for the foreseeable future. Due to our modest capital expenditure and working capital needs, we've been actively returning value to shareholders through annual dividend and our share buyback program since 2017. And including the dividend we had just announced and share buyback that we had executed to date, we've returned about ILS 309 million to shareholders. Our leverage pro forma for the announced dividend is still very low at 0.2x net debt-to-2022 EBITDA. Now I will turn the call back to Talia.

Thank you, Nir. Turning to Slide #9. As in past year, we also saw top line expansion across all of our core categories, this year, too. We were particularly pleased to see very strong double-digit growth in 3 of our 6 largest categories in Consumables, Office and School Supplies and in Arts and Crafts. On the next slide, Slide #10. As we've grown over nearly 2 decades, so has our addressable market. We've expanded our customer base within Israel through continued diversification of products and the addition of more than 25 new categories such as pet supplies, electronics, confectionery, outdoor. These additional categories are still nascent for us and can grow significantly while broadening the concept still and further contributing to our impressive historical same-store sales growth and increasing our average basket size. On the next slide, Slide #11. One of our main differentiators is that every month about 40% of our SKUs rotate and we introduce thousands, thousands of new items for the holidays as well as for new seasonal favorites to meet our customers' changing demand. And these items are featured only for a short period of time, which creates our known exciting treasure hunt experience. On the next slide, Slide #12, our proven strategy that has led to such exceptional results is driven, first of all, by exceptional individuals across our organization. This includes a passionate founder-led management team that has over 100 years of combined retail experience, along with a tremendous group of store managers and associates that are fully committed to delighting our customers through an immersive high enjoyable shopping experience. On the next slide, Slide #13. This year, we've issued our first comprehensive ESG report and this is a significant milestone in our effort to quantify and demonstrate a broader impact. We will soon have an English version of the report available on our Investor Relations website. We are very proud of our efforts and encourage you to utilize our report to better understand our ongoing efforts and -- around ESG. Next, Slide #14 is look at our strategies and opportunities that will drive growth over the near and long term. So Slide 15. Slide 15 is a reminder of our dual format store strategy for both suburban and urban markets. So we have Max, our Big Box Format that is typically company-owned, is our main format of top line expansion. But we also see plenty of growth in our Mini Max or Small Box Format, that is typically franchise and is inner city format. On the next slide, we show it every quarter, and you can track our progress towards our goal. We expect that by 2025, we will double our square meters of our owned stores, so that doesn't capture our franchise operations in Israel, as compared to our year-end 2019 figure of approximately 40,000 square meters. Now, today, we are approximately at 61,000 square meters, an expansion of 50% from our standing point and with the current pipeline that we will share with you, we are about 70,000 square meters. Just translating this additional 9,000 square meter is additional ILS 135 million in run rate revenue, assuming a very, very conservative assumption that sales per square meter will be at [ ILS 15,000 ]. We are currently at [ ILS 18,000 ]. Turning now to Slide #17. Last December, we opened a new franchise store in Jerusalem, in one of Jerusalem's neighborhood called Romema. And on Slide #18, you can also see a store that we just recently, a few -- like few days ago, 2 weeks ago approximately, opened -- the location is DCITY. It's the industrial part of Ma'ale Adumim and it is addressing a population of almost 40,000 people. The net size of this store is about 1,500 square meters. On Slide #19, another new store, and this is going to be open tomorrow. This store is approximately 1,000 net square meters and is expected to have or to serve an addressable population of more than 70,000 people. On Page 20, we provided you a full outlook of our pipeline over the next 3 years. And we expect to open additional 6 stores with a total of approximately 16,600 gross square meters along with 3 new franchise locations that will be opened this year in 2023. We plan to add 2 of these 6 owned locations this year, in addition to the 3 stores that I just alluded to, totaling additional 5,200 gross square meters. On the next slide, Slide #21. As I mentioned before, some color on our efforts around marketing. Historically, we've never done any material marketing or brand awareness work, it was all through organic unpaid growth and was all driven by word of mouth. In 2022, we launched our first TV campaign during the back-to-school period. And this year, in the first quarter, we had a second TV campaign during Purim, which is the equivalent of Halloween. Both these campaign had very positive results. In addition, if you look at our online social presence, and I really encourage you to visit our Instagram page and also our Facebook page and also to check our LinkedIn account in which we provide a lot of content that is tailored for investors. You can see the growth that we've experienced. So in Facebook -- our Facebook page, since 2018, we've seen over 50% increase in our following. Our Instagram following more than -- increased more than 5x. And we also launched recently a loyalty program that has gained more than 100,000 members. In fact, this is a figure that is as of December 2022. And as of today, we've already passed 120,000 members. So we really look forward to continued expansion of this program and our marketing efforts to continue to build a passionate and repeat customer base. And all of this effort at the end of the day are translating into increased traffic in our stores and increased basket size that eventually translate into same-store sales growth. Next, Page 22. This is a brief update on Portugal expansion plan. In the fourth quarter on the next page, Page 23, we established a joint venture called Max 10. We put a local management team in Portugal to lead our store expansion efforts. We have a team of retail experts, local retail experts there. And also, we've recruited the staff that is required for our first store. As we mentioned in the past, our plan is to have our first 2 stores established in this year. So one will be opened in Braga, it is approximately 2,200 square meters, and one is in Porto, approximately 700 square meters. And both are expected to be open in the second half of this year. Next, on Slide 24, this is just to give you a sense of the look and feel of our Max 10 concept. We are very excited about our first expansion beyond Israel and we look forward to updating you in further calls this year. So I'll provide some additional thoughts on our long-term metric progress, but Nir will now go through the full year 2022 numbers. Nir, go ahead.

Thanks Talia. Slide 26. Looking at the long-term trend of the fourth quarter results on the slide, total revenue was up 40.3% when compared to pre-pandemic fourth quarter of 2019. We also saw, gross profit expanded by 44.9% and adjusted EBITDA, which excluded the impact of IFRS 16 and stock-based compensation was up 64.3% from the pre-pandemic period. Adjusted EPS share ILS 0.14, an increase on 60.9% when compared to the fourth quarter of 2019. On Slide 27. Turning now to highlights of the full year. We are pleased to have delivered a solid year-over-year results even with a difficult comparison to 2021, which benefit from lingering pandemic tailwinds. Revenue grew 7.4% to over ILS 1 billion for the first time in the history of the company, driven by additional of 2 new owned store and 3.2% increase in average basket size. While same store sales were down modestly versus 2021, they were up 19% compared to pre-pandemic 2019. Our recent top line performance underscore our strong and growing position as Israel's leading extreme value retailer. We also saw strong gross margin expansion of 100 basis points, along with operating cash flow that far exceeded those of 2021, and we adeptly managed our inventory level down to pre-pandemic level. While we were very successful in many areas, higher than anticipated SG&A cost pressure, EBITDA margin and EPS grow this year. Even so, we continue to reward shareholders with highly yield of 13% compared -- comprised of both dividend and share buyback. Slide 28. Looking at the longer trends of this full year result on the slide, total revenue was up 41.4% when compared to 2019. We also saw gross profit expanded by 42.5% and adjusted EBITDA, which excluded the impact of IFRS 16 and stock-based compensation was up 36.2% from pre-pandemic period. Adjusted EPS increased 29.1% when compared to 2019. Now I will turn back to Talia.

Thank you, Nir. Turning now to an important slide of ours, regarding our KPIs for -- sorry, for the year. We grew our physical presence by over 17% in 2022 to 58,300 square meters. Since the end of 2018, we've grown net square meters by over 60% and at the same time, we've grown sales per square meter as well, up 15% since the end of 2018. This is an incredible figure when it is taken into account together. So we have not seen any decline in our sales per square meter despite such an increase in our physical presence. Following strong expansion in each of the years 2019, 2020 and 2021, same-store sales contracted modestly this year when compared to the pandemic aided period in 2021, and Nir spoke about it as well. And lastly, average basket size across our own stores has continued to expand, and we captured significant gains through the pandemic and we're able to held on to it and build on to that momentum sales. Lastly, on Slide #30. Turning to our outline of our updated financial targets in the short to medium term. We expect our store opening cadence to remain the same, 3 to 5 Max stores per year. We believe that this expansion, along with expected annual comp sales growth of 3%, we lead to annual revenue growth of low to mid-teens. That is still the same target that we had previously. That is including the benefit of potential growth engines -- additional growth engines, whether it's Portugal or other growth engines that we are evaluating. We believe that this top line expansion will lead to pre-IFRS 16 adjusted EBITDA of approximately at 13% in terms of margins with potential to expand margins by an additional 100 basis points in the longer term. Adjusted EPS growth is expected to grow at a similar pace to revenue. So before Slide 31, before we move into the Q&A session, I wanted to thank the entire Max Stock team for another excellent year. As we move into 2023, we remain very confident in the underlying strength of our business and our strategy. The year is off to a good start with same store trending modestly above our growth rate in the second half of 2022. We are well positioned to continue to reach new customers and grow our presence as lingering inflationary pressures lead the consumer to increasingly look for extreme value in the marketplace, along with our strategy and our value proposition, our team continued to prove themselves adept and resilient. And that gives me confidence in the continued success of Max Stock in the years ahead. Thank you, and we are now ready to take any questions.

Can you provide an update on the health of the Israeli consumer? Are you seeing increased trade downs or any other noticeable changes in shopping behavior? Well, just a few -- first, a few points on the macroeconomics, inflation slightly -- or is trending slightly over 5%. Bank of Israel rate is at 4.25%. I must say that in our stores, we feel that the consumer is continuing to come even more often. We did decrease prices, so that has some potential to impact basket size but we have not seen any material changes.

And it makes more people come to the stores.

Exactly. And we do see traffic going up in our stores. Overall, well, obviously, the Israeli consumers is impacted. But as Nir mentioned, we believe and so far are seeing that this is actually in our favor. And another question, what are the puts and takes to gross margins and SG&A this year? So on gross margins, we've said that in the past quarters, a few levers that are there to support our gross margin expansion. The most important one is shipping costs that significantly went down and have a much more significant impact on our gross margin than...

Any other factor.

Any other factor, exactly. In terms of additional elements, we had the reform regarding customers, which is still in effect. And that also gives a certain -- yes, some benefits. The other elements, I think, is that the shipping costs also translate -- the lower or decline in shipping costs also translates into better or broader flexibility for us in terms of our merchandise selection. And that is actually helping us to expand basket size because if we -- last year refrained from product that had high volume and that typically would also have higher prices, we don't need to have any constraints or similar constraints this year. We also, if you saw in the first slide, increased our percentage of directly imported products to 60% versus 50% last year, that is also a contributor to a higher gross margin. On SG&A, the main element is inflation. There are...

And stock compensation.

Yes. So first, inflation that has an impact on rent that is indexed to inflation and potentially also labor that is not linked, but we do -- we did see some increase and...

Mainly in the first quarter or the other 3 quarter, we -- we were able to manage it much better and the position now in Israel regarding the workers, is much better than the beginning of last year.

And as Nir mentioned, stock-based compensation is a main element in terms of GAAP EBIT. We've neutralized it in our adjusted EBITDA and adjusted EPS. But for those of you who are focused on GAAP figures, we no longer have any material expenses in terms of stock-based compensation. And that's like ILS 3 million to ILS 4 million for the quarter that has no tax shield and that is not going to the minority. So it actually goes one-to-one to net income to the shareholders of the company. Exactly. And I think we have a few more questions under the chat. So let me see. No. That's it. Okay. All right. So thank you very much, everyone, for joining us. Please be in touch in case you have any further questions, we are more than happy to help you with any modeling questions or anything you have in mind and hope to see you again on our next quarterly call. Thank you.

Thank you.