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

Good morning and good afternoon, everyone, and thank you all for joining us 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. Nir will start with a review of our second quarter and first half financial results, and I will be presenting the second part of the presentation. Before we start, as a reminder, as always, there is a presentation accompanying today's prepared remarks and the slides are available on our IR site at ir.maxstock.co.il. And on Slide #2, this is our standard disclaimer and with which I'm sure you're all familiar with. And with that, I'll turn the floor over to Nir to go through our financials. Nir, please.

Thanks, Talia. Turning to Slide 4, Q2 2023 financial highlights. We delivered strong second quarter result, highlighted by net income attributable to shareholders that increased by 46.5% to ILS 16.6 million versus last year. Despite the impact of Passover holiday, we shifted demand out of April and into March this year and drove 2.8% decrease in same store sales. Same store sales for the combined May, June '23 period, that had no impact for the timing of the holiday was positive of almost 4%, above our 3% annual target. We continue to see strong gross margin gain in the quarter with an increase of 190 basis points to 41.2%, and gross profit increased 4.9% to ILS 104 million. Adjusted EBITDA increased 2.6% to ILS 30.1 million. And finally, adjusted EPS attributable to shareholders increased 7.2% to ILS 0.11. Slide 5. We also delivered a strong first half result, highlighted by revenue growth of 5.7%, aided by steady same store sales growth of 3%. Gross margin expansion of 220-basis points versus this period last year and the 48% gain in net income attributable to shareholders. On Slide 6, turning now to a more detailed review of our second quarter result. Total revenue was flat compared to Q2 last year. As I mentioned, our top line result reflected a shift in the timing of Passover spending from second quarter of '23 to the first quarter of '22 compared to last year. Same store sales for combined May, June '23 period increased for almost 4%, primarily reflected strong traffic growth. Gross margin was 41.2%, up 190 basis points, which is the highest second quarter gross margin we've delivered in the past 4 years, driven largely by efficient management of inventory and continued moderate of global shipping costs that lower our expenses base. Adjusted EBITDA, which excluded the impact of IFRS 16 and stock-based-compensation was ILS 30.1 million, up 2.6% compared to the second quarter of 2022. With ILS 1.7 million in expenses primarily to support the start-up of our operation in Portugal. Talia will later speak about the 2 new stores in Portugal, but these expenses are largely a result of building our initial presence in the country and our store preopening cost. Net of these expenses, our EBITDA margin was 12.7%, in line in our 13% annual EBITDA margin that we've guided to. Finally, our adjusted EPS, which excluded the impact of share-based-compensation, was ILS 0.11 in the second quarter, representing growth of 72% compared to Q2 of 2022. This was largely driven by an expected reduction in stock-based-compensation expenses that we allowed in the past few quarters. In the second quarter of '23, we had several SBC expenses in the amount of ILS 0.7 million, while in the second quarter of '23, we had share-based-compensation expenses of ILS 3.8 million. And if we neutralize the impact of Portugal that generated a loss of about ILS 2 million attributable to our shareholder, adjusted EPS was ILS 0.12, up 16.5%. Slide 7. Now moving to our first half result. Total revenue was up 5.7% compared to the first half of 2022, with the same store sales growth of 3%, driven by a strong gain in traffic. Our top line growth during the period also reflected the addition of [ 4,500 ] owned new square meters of selling space and 4 franchise stores. Gross margin expanded 220 basis points and gross profit was up 11.6% versus last year as we continue to optimize our inventory position and see global shipping cost moderate compared to the year ago period. Adjusted EBITDA was up 9.3% compared to the first half of 2022 at ILS 66.9 million and reflected an adjusted EBITDA margin of 12.6%. When looking at adjusted EBITDA, excluding costs associated with the operation in Portugal, we grew adjusted EBITDA about 13.6% for the first half to ILS 69.5 million. Finally, adjusted EPS share expanded 14.3% compared to the last year period. Slide 8. On Slide 8, we present a look on our liquidity and capital development strategy. We have a net cash position at the quarter end of ILS 30.8 million. During the second quarter, we paid down about ILS 12 million in debt compared to the period -- prior quarter to reduce interest expenses and distribute ILS 60 million in dividend to our shareholders. As you know, due to our moderate capital expenditure and working capital needs, we've been able to actively return value to shareholders. 2017, we had returned about ILS 309 million to our shareholders through annual dividend and our share buyback program. With that, I will turn the floor to Talia.

Thank you, Nir. I think that our results underscore the positive consumer response we had seen to our product offering, our shopping experience, our growing store footprint and great execution by our teams. Now we first speak a bit about our growth strategy, I wanted to highlight a few key attributes of our business model, so on Slide #10. Like the largest best-in-class dollar store players, we are a pure player, focusing only on value discount. Our business model is simple, yet extremely effective. We combine focus on best price that is driven by our strong supply chain and by our big volume purchases. And at the same time, we're a very nimble operator as our fixed assortment of product is quite limited. Also differentiates us is the breadth of selection of our rotating SKUs, which contribute to our treasure hunt experience, on one hand, and serve as a barrier to entry due to the operational complexity it entails. And finally, we keep overhead as low and as lean as possible with no high street locations and minimal marketing investment as we benefit from word-of-mouth and strong organic social presence to drive awareness of our concept. Next slide, Slide #11. There are a few key drivers behind our continued success, with the first and probably the largest one being a growing demand for discount retail. That is true globally and true for Israel and particularly the current economic environment. Second thing, we know our Israeli consumer very well, and we have expertise in identifying, growing consumer trends while making sure we have good availability of inventory in our stores. And of course, we are able to continuously expand our store base, expanding on the square meter nearly 50% from a starting point at 2019 year-end. And as I always say, there remains a significant white space opportunity for us to further expand our stores in Israel well above our 80,000 square meter target, and we expect to update it by year-end. The next 2 slides, Slide #12 and Slide #13, show you revenue growth by category. As you can see, housewares and party supplies and consumables together represent about 44% of our revenue, and they grew slightly over 4% compared to the first half of last year. Many of our smaller categories continue to grow at a more rapid pace as they scale, with office and school supplies growing almost 15%, apparel basic growing about 8%, and the other category in this segment, which represents largely 26% of our revenue, growing almost 8% when compared to the first half of last year. On Slide #14, you can see a look at our main operational KPIs for the first half and second quarter of this year. Since Nir had already discussed same store sales growth, I only wanted to highlight a few points. First, it is best to look at the cumulative figures. So if we look at the half year results, as they neutralize seasonality. And second, what you see is the decline of 0.8% in our average basket size in the first half is driven by intentional price decreases we had done, and we've spoken about it in the prior quarters, and they contributed to strong transaction growth of over 8% that we had seen on average among our owned stores, i.e., all of our stores, including new stores. And that is despite the gross margin expansion we've experienced. On average, we have not seen any reduction in the number of items in our basket in our own stores. Turning now to Slide #15 to discuss our owned store expansion and number of stores. As of quarter end, we had [ 61,700 ] net square meters, representing growth of 12.5% from the same period last year, and 30% growth from Q2 '21. Note that this number now includes our new stores in Portugal. During this period, during the last 12 months, we've added a net amount of [ 4,500 ] owned net square meters and 4 franchised stores. Now we currently have 59 stores in Israel, 32 stores are owned, 27 are franchised, and we have 2 locations of owned stores in Portugal. We tried to put all the details on the changes in our stores on the slide so you can easily track them and put them in your models. Turning now to Slide #16. Our pipeline includes 4 new owned stores this year. There's one additional new store that we are announcing this quarter. So we have 4 Be'erot Yitzhak [indiscernible], that totaled approximately 10,000 gross square meters that these stores will be adding. Be'erot Yitzhak is expected to be opened in September, hopefully, before [indiscernible]. And there are other 3 stores that are expected to be opened in Q4. We also expect to add one new franchise stores in Jerusalem around December this year. In addition, we have 4 signed agreements for additional new stores with a total of approximately 11,000 core square meters over the next 2 years. Slide #17. Now turning to a quick update on our new business in Portugal. Since our last update, and in line with our plan, we opened our second store in Porto in June. We have plans to add one additional store in the fourth quarter this year. Nir mentioned that Portugal had a slight drag, which is absolutely expected of about ILS 2.6 million on our first half EBITDA. This does not represent the run rate of the stores. Rather, it primarily includes expenses to support the start-up of our operations in the country, both the headquarter and preopening costs before the 2 stores started their operations. So Slide #18. Before we move into the Q&A session, I want to close our prepared remarks by thanking the entire Max Stock team for another quarter of diligent execution that led to our positive results. As we look to the second half of the year, we're very pleased with our momentum and the underlying strength and resilience of our business. The continued execution of our growth strategies, combined with our leading market position in the value retail space, positions us for continued strength for the balance of 2023 and in the years ahead. We're now ready to take questions.

[Operator Instructions] Can you talk about the [indiscernible]? And how has this changed since the first quarter? Okay. Okay. So yes, maybe the first question is regarding the extraordinary general meeting resolution that we also announced earlier today. There's a question here on the arrangement with Ori and the change in these terms. Nir do you want to take...

Go ahead.

So there's a slight increase in Ori who is our CEO and the founder of the company, from ILS 200,000 to ILS 215,000. That's the first thing, and which is completely reasonable. There has been a few years, we know...

From 2017, there was no change.

No increase in his base compensation, and then his bonus will now be linked to the performance of our net income rather than our EBITDA. Now EBITDA is a very common metric that is used by various funds, private equity funds primarily. And now that we are a publicly traded company, there has been a few years since, we've swift or more synchronized our CEO bonus scheme with the way investors price our stock. So we -- as we understand, we're mainly traded on PE, and this is why we wanted to see a more synchronized or alignment between how investor price us and Ori bonus. So that's the first thing. And then the other question relates to the Israeli consumer. Well, there hasn't been any major change in the Israeli consumer since the last -- since the prior quarter. Inflation will be announced today, I believe.

Yes.

We're waiting for the inflation rate. The expectation is that it will slightly decline. We'll see the actual numbers. I don't think there has been any major change, nothing in terms of interest rates or inflation. So pretty much the same situation as it was last quarter. Obviously, the monetary policy now is a little bit more tight, it does have an impact on consumers' pocket. But overall, as we always say, we think we actually benefit from that and we do see that in the traffic in our stores. And Nir, do you like to add?

No.

There is another question. What gross margin impact do you expect to remain for the rest of the year? So I think last quarter, we also said that and we will repeat. With the current exchange rates and the current shipping costs, we think around 41%.

40% and above -- 41%. we believe that we can get that level for the next year.

Yes. So we have the next half of the year.

At least.

Yes, at least 40% and potentially 41%.

Yes.

If there are any other further questions, yes. Can you give us any color around the judicial reform for this impact? We did write something during -- in our financial statements. We did not see any material impact on our operations. We do not know how it will impact us going forward. But so far, we haven't seen anything material on our operations or any aspects of our operations.

Actually in may and June, we had 4% same store sales growth. So I think that's the best...

The best indication.

Yes.

If we are able to deliver almost 4% same store sales growth, when we neutralize seasonality, I think it's an indication of our resilience in our business.

And I think that answered the next question of -- about how are you driving traffic store [indiscernible].

Yes. Yes. I think the strong traffic growth of around 8% that we have seen in the quarter and also in the...

In the 6-month.

In the 6-month period, is an indication of our ability to benefit from a situation where consumers have or see some tightness and see some reduction in their disposable income. I think what also contributed is our ability to reduce prices. It's true that we could have seen higher growth, higher top line growth if we had not reduced our prices downwards. But at a situation where we can maintain and even expand by 220 basis points, our gross margins, while reduced -- while reducing prices and being very attractive in terms of pricing, it was a good decision for us, and it was reflected in the strong traffic growth. Yes, there's a question here whether Ori is not an employee? So from -- this is really technical with employee in essence, from all perspectives...

All perspectives.

But because he has his own company, he gets his compensation to his company, and this is why he gets it via...

An invoice.

An invoice rather than as a salary.

It's very common.

It's very, very common. It has nothing to do in terms of the essence of dedication. He works around the clock...

24/7.

24/7 to make sure that his business is growing and expanding and that we are doing as best as possible.

Any more questions?

I think that's it.

We have covered it though.

All right, guys. Many, many thanks. Please contact us if you have any further questions, we'll be happy to speak with you directly, answer any questions you have, set up a Zoom meeting with you and looking forward to seeing you next quarter as well.

Thank you.

Thank you.