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

So good morning and good afternoon, everyone, and thank you for joining us today. In particular, we welcome our U.S. investors who are joining us early after the Thanksgiving weekend, which we hope was joyful. I'm Talia Sessler, Chief Corporate Development and IR Officer; and with me on the call today is Nir Dagan, our Deputy CEO and Head of Finance. Nir will start with a review of our third quarter and September year-to-date financials, and I will address the Swords or Iron War and the impact on our business since October 7 as well as present the second part of the presentation. Before we start, as a reminder, there is a presentation accompanying today's prepared remarks. The slides are available as always on our IR site at ir.maxstock.co.il. And Slide #2 is our standard disclaimer language, which I'm sure you are all familiar with. And with that, I'll turn the floor over to Nir to go through the financials. Nir, please.

Thanks, Talia. Slide 4. Starting with our operational highlights on Slide 4, we are very pleased with our results in the third quarter. We delivered record revenue of ILS 314.5 million, representing growth of 7.1% for the third quarter of 2022. This strong revenue growth was driven by 2 primary factors; strong store traffic and the addition of approximately 1.3 net square meters of selling space compared to the year period ago. We also delivered same-store sales growth of 1.5% in the third quarter, driven by strong volume growth that was partly offset by the lower average price per item. Despite the lower average item price, we delivered strong growth margin expansion of 180 basis points or 12% versus the period year ago -- the prior year ago. The combination of stronger top line and gross margin were the main driver behind the almost 18% increase in GAAP net income attributed to shareholders in the third quarter. Going to Slide 5. Our strong third quarter added to the momentum that we've built throughout the year. For the first 9 months period of 2023, steady store traffic, store expansion and a 2.4% increase in same-store sale drove a 6.2% increase in the revenue compared to the first 3 quarter of 2022. Similarly, through the first 9 months of 2023, we've seen strong gross margin gains, with margin up 200 basis points to 41.5%. As a result, for the 9-month period, we delivered a 35% increase in GAAP net income and adjusted net income to shareholders increased by 7.4% to almost ILS 60 million. The reason for the difference in our stock-based compensation that is the only item included in our EPS adjustment, in the first 9 months of 2022, the expansion was ILS 11.1 million, while the period -- while this period with -- as we guided in the past, there was an insignificant demand. Still, in the first 9 months of 2023, adjusted EPS attributed to shareholders was ILS 0.43, up almost 10% compared to the prior year period. Now I'll turn the call back to Talia.

Thank you, Nir. Turning to Slide #6. I want to address this Swords of Iron War and the impact on our business since October 7. About 2 months ago, our country was brutally attacked by Hamas terror organization, and now finds itself at war to protect itself and its citizens. The unspeakable acts committed by known terrorists and the resulting unrest in the region have brought significant change to Israel and its people. Our hearts go out to all those directly and indirectly impacted, including some members of our team. The turmoil has also brought about unforeseen headwinds for Israel's business community. And given the extreme nature of recent event, we feel that we have navigated the situation adequately and that we have positioned Max Stock for the best outcome. From a business perspective, the company's stores were closed at the outbreak of the war. And as of October 9, two days after the start of the war and over the duration of approximately 2 weeks, the branches gradually reopened with a reduced scope of operations. Comparable store sales for the period July 1, '23 until October 31, which includes the impact of the Jewish holiday period, decreased 2.1%, primarily reflecting the temporary store closure and subsequent reduced operating schedule during the month of October during -- due to the war. From the end of October and as of today, 60 of the company's 60 stores in Israel are fully open and operating as usual. While these reduced hours did impact sales in the month of October, store productivity, while stores were open, was robust. And in November, we see revenue in line with our budget and tracking to our original plan. More importantly, we haven't experienced any long-term impact to our business to date. And as of November -- as of the end of November, we had no material supply chain issues and employee staffing remained at prewar capacity. Additionally, the NIS depreciation experienced in October has rebounded, with the current exchange rate even below that of October -- that on October 6. Given the limited disruption, we still plan to move forward with our current store expansion strategy, including 1 additional store by year-end. Since October 7, we have donated thousands of products to our defense forces and Israeli residents that have been evacuated from their homes. And as we look ahead, we will continue to support our fellow Israelis by also remaining focused on our long-term plans. With that, I'll turn the call back to you, Nir.

Thanks, Talia. Turning to Slide 7. Our operational strategy of profit growth, coupled with moderate capital expenditure resulted in a very strong operating cash flow for Max Stock. 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. From 2017 to 2022, we generated ILS 596 million in cash flow from operating activities at the CAGR of 31.1% compared to CapEx of ILS 140 million at a CAGR of 16.8%. This outsized cash flow relative to our CapEx allowed us to return ILS 248.9 million to shareholders through our dividend and buyback over the same period. Slide 8. On slide 8 is a more detailed look at how we deploy excess capital and retain our financial flexibility. Since 2017, we've returned approximately ILS 309 million to our shareholders, including ILS 60 million this year-to-date. We have a net cash position at quarter end of almost ILS 90 million, a very strong position that provides us with ample liquidity and financial flexibility. On Slide 9 and 10, you can see additional detail of our financial performance over the past 4 years. Now I'll turn the call back to Talia.

Thank you, Nir. Next, let's take a look at the strategies and opportunities that will drive growth as we move forward. On Slide #12, some very pleasant recent development. We are happy to share that yesterday we signed a lease agreement with a new distribution center partner, a JV jointly held by Mega Or and Kibbutz Shomria. This new 31,000 square meter location will allow us to consolidate our 3 distribution centers into 1 at roughly the same logistics costs. While this will initially require an estimated ILS 30 million CapEx investment, this action will support our future growth in Israel, while potentially extracting operational efficiencies, including the elimination of needed TPLs, centralized operations and other logistical streamlining. The 25-year rental agreement is expected to commence in May of next year, with monthly base rent of approximately ILS 1 million. And subject to the lessor completing the necessary construction and other terms in the agreement, the site will further increase by about another 10,000 square meters to a total of 41,000 net square meters, allowing us to more than double the capacity of our distribution centers versus what we currently have. On Slide #13, I wanted to emphasize several characteristics of our business model, which have helped us remain relevant, certainly during this time, in times of war. Well, first, we focus -- as you know, we focus on providing our customers with the best retail prices and our ticket prices are low. You may recall that approximately 70% of our product by volume are sold at ILS 10 or less. It's about, I would say, $3 roughly, $2.5, $3 or less. Second, we focus on nondiscretionary basic products that are also necessary during times of war. You may recall also that approximately 60% of our products are basics. Our third unique characteristic is our high level of product flexibility in terms of range and section due to the fact that our fixed product selection is relatively limited, and our product range is very diverse and constantly changing. This allows us to respond very quickly when we see a change in demand, and it allows us to offer our customers what we always say, the right product at the right time and obviously, at the right price. Now since the onset of the war, we have sold a large volume of basic apparel for soldiers and for evacuees; batteries, transistors, emergency lighting, battery chargers, laundry drying racks, which, for example, was the most in-demand product in Eilat due to the fact that evacuees needed to dry their laundry and more and more. On the next slide, Slide #14, along with its strong business model, the continued expansion of our store base, which has grown nearly 50% in the last 4 years, is the key driver of our success. This expansion has come in 2 formats, Max and Mini Max. Max, our big-box format, is our main format of current expansion. And our small-box format, Mini Max, also offers a strong growth profile through a franchise concept. On Slide #15, you can see the evolution of our own store expansion. And as of quarter end, we had 62,300 net square meters representing growth of 6.5% from the same period last year and 26.7% growth from Q3 2021. As we continue to expand our own store footprint, we have also expanded our number of franchised stores. Since Q3 last year, we have added 3 owned stores, 1 in Israel and 2 in Portugal, but have also transitioned 1 owned Mini Max store into a franchise store, while adding 3 additional franchise locations. Bringing that figure current to the end of November, we have added 2 additional owned stores and 1 additional franchise location. This brings our total store count to 65, including Portugal, as of the end of November. That is comprised of 28 franchise stores and 37 owned locations. Of those 65 stores, 18 are Mini Max or small box, while Max, our big-box format, represents 44 locations and our Portugal locations, branded as Max10, comprise the remaining 3 locations. So now you have all the details for your model with all format sizes and numbers. Slide #16, turning now to our KPIs for both the third quarter and 9-month period 2023. As Nir mentioned, the driver behind our lower same-store sales growth this year is a reduction in the average item price, that was partially offset by increasing both the number of items per basket and the number of transactions. Through this process, we were able to single-handedly expand the company's gross margin while driving an increasing volume across our store feet. As we lap these price reductions in Q3 2024, we expect to return to our normal level of same-store sales growth and basket size expansion. On the next 3 slides, 17, 18 and 19, you see our 3 new stores that we have opened since the beginning of the third quarter, Be’erot Yitzhak, Bat Yam and the franchise location in Jerusalem. The Be’erot Yitzhak and Bat Yam locations are company-owned and total approximately 2,900 net square meters and serve a combined addressable population of nearly 200,000 people. On Slide #20, looking at our store pipeline. We have signed agreements for 6 new stores with a total of approximately 16,700 gross square meters over the next 2 years, including 1 final location before year-end 2023. Lastly, turning to an update on our new business in Portugal on Slide #22. And by the way, on 21, you can see pictures from our new store in Matosinhos. So on Slide #22, in line with our plan, we expect -- we opened our first Max10 store in Portugal in May of this year. A second store in Porto was opened in June, and have since we also opened our third location in Matosinhos in November. As you may remember, Max10 offers a wide selection of products in categories like our Israeli business, but with a cap of EUR 10 per item. The new store in Matosinhos is about 700 net square meter of selling space. We're very pleased with the progression of Max10, while still a small portion of our business and a slight drag on our EBITDA in the near term, we are excited about this expansion beyond our home country and the longer-term impact for the company. And so before we move into the question-and-answer session, I wanted to close our prepared remarks by thanking all of our Max Stock team members for another quarter of strong delivery and financial results. As we look to the final quarters -- as we look to the final quarter of what has been a very strong year, we remain encouraged by the near-term trends in our business even as the operating environment in Israel poses a near-term headwind. Despite these near-term challenges, we maintain our long-term optimism about our growth trajectory and remain focused on the execution of our growth strategies and delivering long-term value for our shareholders. Now we are ready to take your questions.

Let us look at the queue. [Foreign Language]

No question.

[Foreign Language] Okay.

Are there any questions?

I guess, it's too early in the U.S.

The results are very good. So there's nothing to ask.

Yes. And the results are really good, but we are -- Yes. There's one. Health of the Israeli consumer in Israel today? Yes, a great question. So listen, we are -- we do hear other retailers, primarily in fashion, home fashion, they do state that even before the war started, they did feel some softness in the Israeli consumer as they also feel some softness in consumers in Europe and in other parts of the globe where interest rates increased and consumer feel some pressure on their pockets. However, as we always say, our consumer is behaving slightly different, and we do see, as Nir mentioned, in November, and I also mentioned throughout the update on the war, that November was very positive. And so because we are really focusing on low-ticket items and very basic items, it is -- the Israeli consumer behave differently in our case, and we do see consumers' volume and transactions and the number of items in the basket are behaving well, definitely according to our plans. Anything else? How are you thinking about logistics and freight costs in the fourth quarter and moving through 2024? Will this continue to be tailwinds to gross margins? Okay. So freight costs have been relatively comfortable. I would say that the cost of a container of our type coming from China to Israel is around -- slightly above $2,000 per container, where in the spike during COVID, it could have been even $20,000. So the rates are still very attractive. There is some risk premium to Israel at this point, but that is minor. And we also have some hedge. If we do see some spike in short-term freight rates, we will be able to absorb it through our hedging position. In terms of gross margin, we had excellent gross margins this year. And we do think that given the current rates in terms of exchange rate, dollar-NIS, and the freight cost, 41% of gross margin is achievable in the fourth quarter. Yes. Let's see if there's anything else.

And how was the shifting in the Israeli holiday schedule for '24 versus '23? So this year Purim and Passover was in the first quarter, while next year, it's going to be in the first and the second quarter. I think this is something that will have an effect between the first and second quarter. But as we did this year, we will give a look after -- in the first quarter of the result until April.

Yes. And what is the expansion forecast for Portugal, and Continental Europe in general? So first, we have to, I would say, test case our pilot in Portugal. We still have at least a year to go before we will think about any other country in Europe. And once we have more, I would say, clear targets for Portugal for the next year, we may decide to share them with you. But so far, we are in line with our plan, and very likely, we'll continue our expansion in the next year. We have 3 stores in Portugal so far. The first one, Braga, is breakeven. They have months that are actually with positive EBIT and EBITDA and months that are slightly below. But overall, on a stand-alone level, they are profitable. Porto is being examined, and we will determine our next steps within a few months. And the last one is, obviously, Matosinhos. It's obviously too early to say anything, just a few days of operations so far. Yes. All right. I think we've answered everything.

Covered everything, yes.

All right. Guys, many thanks. Do give us a call, send us an e-mail. If you have any further questions, we'll be happy to set up any Zoom calls with you and answer any further questions you may have. Have a good morning or afternoon.

Bye.