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

Good morning and good afternoon, everyone. Thank you for joining us again today. With me on the call is Nir Dagan, our Deputy CEO and Head of Finance; and myself, Talia Sessler, Chief Corporate Development and IR Officer. I will cover the first part of the presentation, and Nir will be presenting the most important part of the presentation, which is a review of our first quarter results. And before we start, as a reminder, there is a presentation accompanying today's prepared remarks. As always, the slides are available on our IR website. And on Page 2, you have our standard disclaimer language, which I'm sure you are all familiar with. So turning to Slide #3. I'll start with highlights of our first quarter results. As you can see, we had a very strong start to 2023, with top line growing 11.5% and net income attributable to shareholders increasing 50%. We attribute our strong performance in this quarter to a couple of factors. First, our top line growth reflected the addition of 3 new owned stores that were opened over the last 12 months. Additionally, we benefited from a timing -- from a shift in the timing of Passover spending from Q2 into Q1 compared to last year, also from higher store traffic and from strong sales in Purim, which is the equivalent of Halloween. All of that helped us fuel our same-store sales growth to 8.6%. Looking at the period from January till the end of April, which eliminates the Passover timing impact, same-store sales were up 2.5%. Second, our gross margins expanded 240 basis points versus the prior year period to 41.4%, driven by moderation of global shipping costs that we have been alluding to for a few quarters already, along with further efficiencies in inventory management. These factors were the main drivers behind our adjusted net income growth of more than 17% and adjusted EPS growth of more than 20% in the quarter. And our GAAP net income attributable to shareholders was up 50%, and that is reflecting everything I've just discussed plus almost no stock-based compensation expense this quarter versus almost ILS 4 million in the prior year period. We expect to see modest stock-based compensation going forward as much of this prior stock-based compensation amount was related to the IPO and the main reason we adjusted for it in the past. Overall, we're very pleased with our start to 2023. And we look to carry this momentum into full year 2023. Slide #4. You all know Max Stock by now, so we can skip and go straight to Slide #5. We have 59 branches in Israel and now also one store in Portugal. Together, they make up more than 60,000 net square meters of selling space, with approximately 2,000 employees. Now turning to Slide #6. We saw top line expansion in all of our -- in 5 of our 6 core categories, including very strong double-digit growth in housewares, which is our largest categories, also in consumables and in office and school supplies. Also, a note for you in case you try to model our financials. Note that this quarter, we added a disclosure in footnote #3 in our financial statements that split sales into -- split revenues into sales from owned stores, sales to franchisees and revenue from commissions and fees. On the next slide, Slide #7, and I apologize that this is in Hebrew. Unfortunately, this was only available in Hebrew. As I mentioned, we had a very strong Purim season. We also backed the season by a short TV campaign. And what you see on this slide is a screenshot from an independent presentation done by a consulting firm in Israel called Czamanski & Ben Shahar. This is publicly available on their website. And the slide refers really to the revolution that Max Stock had done this Purim in the prices of costumes. So we used to sell costumes for ILS 59.90, and we reduced the price to ILS 49.90, and we created a massive demand for these products that were already discounted even last year and ended up seeing massive demand for these products in our store. This consulting firm also added a statement saying that according to their estimates, this phenomenon is here to stay and is also expected to expand to other categories. On Slide #8, We always take a look at our strategies and opportunities. So on Slide 9, this is a slide that we always review during our quarterly conference calls just to show you how we progress towards our target of 80,000 square meters by the end of 2025. So today, we are at approximately 61,000 net square meters of owned stores, an expansion of about 50% from our starting point at the end of 2019. And if we add our current pipeline, we're at about 79,000 (sic) [ 72,000 ] square meters. It really positions us well to hit our goal of 80,000 square meters in the medium term. And if you think that 80,000 net square meter is the end, it's not. We remain -- we believe that Israel remains a significant white space opportunity that there is way more growth above this 80,000 square meters target. On Slide #10, we spoke about this store last time. We actually opened it a day after our earnings release in the last quarter. So this store was opened on March 21 in Harim Mall, and its size is 1,570 gross square meters and 1,000 net square meters. It is serving an addressable population of about 70,000 people, and we look forward to seeing good results from this store. And on Slides #11 and 12, you can see some pictures and some data from our new franchised stores, our new Mini Max stores. As you remember, this is our smaller inner city format, and we recently opened 2 such stores: one in Tel Aviv and one in Akko. This is the local terminology or Acre as well. That's the formal name. We see plenty of growth in our Mini Max format, also in addition to our growth in owned stores. And on Slide #13. Looking at our store pipeline. We've signed agreement for 6 additional owned stores, with a total of approximately 17,000 gross square meters, of which 3 are expected to be opened this year in 2023. So the next 3 stores will be Be'erot Yitzhak. This is a 3,300 gross, 2,200 net square meter that is expected to be opened around August this year. Next is Kiryat Gat, expected to be open towards the end of the year, 1,900 gross, 1,200 net. And Bat Yam, which is a new signed store, that one is also expected to be open towards the end of the year, about 1,250 gross, about 1,000 net square meter. So all of these 3 stores together are expected to add approximately 6,400 gross square meters to our owned stores. And now turning now to an update on our new business in Portugal. So last week, and in line with our plan, we opened our first Max10 store in Portugal. We spoke about Portugal in the past. And I believe I mentioned that the chain Max10 will offer a wide selection of products in categories like our Israeli business but with a cap of EUR 10 per item, and the store that was just opened in Braga is 2,200 gross square meters and about 2,000 net square meters selling space. And we're very pleased with the initial launch and have plans to add 2 additional stores actually that are in our pipeline. In Portugal, it's also going to be in the North area of Portugal. And while this is still a very small portion of our business, actually even negatively contributing to our EBITDA, Nir will talk about it. We are still very excited about our first expansion beyond our home country. And now I'll turn the floor over to Nir to go through the most important part, the first quarter results. Nir, please.

Thank you, Talia. Slide 17. Starting with our first quarter results on Slide 17. Total revenue was up 11.5% from first quarter last year. As Talia mentioned at the beginning of the call, our top line growth reflected the addition of 3 new owned stores that were opened over the last 12 months. Additionally, we benefited from a shift in timing of Passover spending from third quarter in '23 into the first quarter of '23 compared to last year, higher store traffic and strong sales in Purim, which all helped fuel our same-store growth to almost 8.6%. Looking at the period from January till the end of April, which eliminate the Passover timing impact, same-store sales were up almost 3%. Gross margin was 41.4%, up 200 basis points or 18.4% versus last year as we continued to optimize our inventory position and saw global shipping cost moderate compared to a year ago. Going forward, we believe that we can remain at similar gross margin if shipping costs and the U.S. dollar exchange rate remain at the current level. These factors were the main drivers beyond our adjusted EBITDA and adjusted net income growth. Adjusted EBITDA, which excluded the impact of IFRS 16 and stock-based compensation, was up 15.5% compared to the first quarter of '22 at ILS 36.7 million, with margin expansion expanding 40 basis points, and adjusted EPS attributed to shareholders grew over 20% in the quarter. Again, I will highlight that our GAAP net income attributed to shareholders was up 50%, reflecting everything I described plus the conclusion of our stock-based compensation expenses that was ILS 3.9 million in the prior year period and almost 0 this quarter. As you can see, our adjusted and GAAP EPS for this quarter are the same. And the only item that we adjusted for EPS stock compensation was almost 0 this quarter and is expected to remain low. Also, keep in mind that our adjusted EBITDA includes a loss of ILS 0.9 million that primarily reflected salaries and consulting expenses for the establishment of our overseas operation. Turning to Slide 18. On Slide 18 is a look at our main operation at quarterly KPI. We already spoke about our physical presence and our same-store sales growth. So I just -- so just few things to highlight here. Same-store sales grew almost 9% in the first quarter, as I mentioned, following a 9.7% decline last year as we lapped massive growth of 37.5% in the first quarter of '21, a period in which we saw increased demand for our product during the pandemic lockdown. And similarly, we again returned to growth in average basket size across our owned store footprint in the first quarter of '23 after a quarter contraction in the first quarter of '22 following a 32% increase in our basket size in the first quarter of '21. Now I will turn back the call to Talia.

Thank you, Nir. On Slide #19, we present a look at our liquidity and capital deployment strategy. We have a net cash position at quarter end of about ILS 71 million. And pro forma for the dividend distribution that we made in April, we have a net cash position of about ILS 11 million. And as you know, we have very modest capital expenditures and working capital needs. And as a result, we've been actively returning value to shareholders through annual dividends and our share buyback program. And since 2017, we had returned about ILS 309 million to our shareholders. Slide #20. Before we move into the question-and-answer session, I want to thank the entire Max Stock team for their hard work that resulted in our strong start to 2023. The dedication of our team, coupled with the underlying strength of our business and our long-term growth strategy, have put us in an excellent position for continued expansion in the year ahead. As Israel premier extreme value retailer, we offer significant value to our customers, particularly during economic environments like the one we face today. That strategic position provides a degree of resiliency in our business and has us poised for growth again in 2023, even as the economic environment remains less than optimal. We look forward to continued execution against our long-term growth strategies and updating you on our progress in the quarters ahead. And we are now ready to take questions. So one moment as we collect the questions, please.

How is the health of the consumer in Israel? I'll take that. Okay. So yesterday, actually, the Bank of Israel has increased interest rate by 0.25% -- an additional 0.25%. We're now at 4.75%. Overall, the consumer in Israel is still in a relatively good position. GDP growth, in annual terms, is now 2.5%. Labor market is still in a good position. Unemployment is below 4%. Inflation rate is at 5%, now above what is in the U.S. but still relatively moderate. And we know that at the end of the day, we saw that in this quarter and we believe we will continue to see that going forward, when the cycles are softer and there is some slowdown in economic activity, more people come to our stores, and most of our growth this quarter came from volume growth as we reduced prices, and most -- and again, most of the growth was volume-based. We believe we will see that going forward as well. There is, as Nir mentioned, some shift from the holiday season in April. We knew it's going to be soft and it was soft. But overall, we are still confident. We are in a very good position to deliver 3% same-store sales growth for the entire year as we guided at the beginning of the year. Anything to add?

No.

Okay. Another question...

The early reception in...

Okay. The reception to the store in Portugal...

Make all of us smile. Okay.

Yes. I wish we could actually share with you, and you can look via at our LinkedIn, but we had various videos from the opening of the store with a very long line of people waiting to enter the store, very good reception. We think that Portugal could be a significant growth engine for us. But again, this is very early stages, and we have to wait and see how this evolves. Another question. How did comp sales trend progress as you move through this quarter? I believe we referred to it, right? So...

Yes. How should we think about the same-store sales growth in the second half, I think you mentioned...

Yes. We discussed that. So 9% for the quarter, 3% for the 4 months and 3% for the entire year. That's a target. And we think we're in a good position to deliver that. How should we think about same-store sales? I say, same thing. So yes, overall, 3% for the entire year. That's the main -- and is there anything else? No.

One in the chat.

Okay.

That one.

So I should open that. One moment. Please, could you give us a bit more color around the gross profit margin expansion drivers, especially around what you mean by inventory management improvement and how sustainable this level is especially versus your intention to reinvest savings into price above 40%? Okay. That's a great question. Yes. Okay. So actually one very important point, I think, to mention is that the 41.4% gross margins that we've seen this quarter and also in the prior one, which was quite robust, if we stay with current shipping rates and the current -- or similar exchange rate between the U.S. dollar and the Israeli shekels, we believe 41% is sustainable even if we reduce prices. So this quarter, we had reduced prices, and we still were able to deliver the 41%. So this is possible for the next few quarters, again, subject to having same shipping rates and no major changes in the foreign exchange.

The current.

Exactly. Now in terms of the driver, the first one, I think the most important one is shipping cost moderation. That is the most meaningful driver on our gross profit. Also, the actual prices of our products in China are actually now lower. And because we are able to physically buy products in China, we're able to do better negotiations and to get better products and better prices. So that is on top of the shipping cost. And inventory management had benefited -- we benefited from that. However, I think we are -- at the moment, we've probably materialized most of the efficiencies. I don't think we will not be able to reduce the inventory significantly beyond the level that we're currently at. With time, I'm sure that further efficiencies will -- we'll be able to materialize further efficiencies, but we will have to invest for that. Anything else?

No.

How are we progressing on the mix of goods from import? What can we expect and what -- with what impact? So the 60%, 40% impact that we saw -- that we've seen in the annual result is pretty much the composition for the quarter. There's nothing material there. Okay. And that's it. All right. Thank you, guys, and hope to see you join us again next quarter. If you have any questions, please contact us. We'll be happy to answer any questions that you have. Thank you.

Thank you.