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

Good morning, and good afternoon, everyone. Thank you for joining us today. I'm Talia Sessler, Chief Corporate Development and IR Officer of Max Stock. With me on the call is Nir Dagan, our Deputy CEO and Head of Finance. Nir will start with a review of our second quarter and first half results, which was fantastic, and I will be presenting the second part of the presentation. Before we start, as a reminder, there is a presentation accompanying today's remarks and the slide is always available on our IR website, website on ir.maxstock.co.il. Then on Slide #2, this is our standard disclaimer language. I think everyone is familiar with it. And with that, I'll turn the floor over to Nir to go through the financials. Nir, please?

Thanks, Talia. Slide 3. Starting on Slide 3, our very strong second quarter results represented an acceleration of growth across a number of key metrics. We delivered second quarter revenue of ILS 316 million, representing growth of more than 25% from the second quarter of 2023. Our top line performance was driven by our continued store expansion that added more than 7,000 net square meter of selling space in the period, combined with an impressive 14.5% increase in comparable store sales. Second quarter comparable store sales benefit from the shift of Passover holiday into the second quarter of 2024, compared to falling in the first quarter of 2023, which drove a more robust increase in the volume and also positively impacted our basket size in the volume. We also delivered 50 basis points of gross margin expansion in the period, as we continue to capture operational efficiency. This factor was the main driver beyond the 220 basis point expansion in adjusted EBITDA margin and the [ 60.3% ] increase in GAAP net income in the second quarter. Slide 4. Turning on Slide 4 where -- to look of our long-term and second quarter trends, our revenue CAGR from the second quarter of 2020 to the second quarter of 2024 is 16.1%, and we expanded gross margin more than 300 basis points over the same period to 41.7%. Adjusted EBITDA, which excluded the impact of IFRS 16 and stock-based compensation and adjusted EPS attributable to shareholders have grown at a CAGR of 11.1% and 14.7% since the second quarter of 2020. Turning to Slide 5, to look at our first half performance, which is a better representation of the underlying health of the business. Given the Passover shift, we deliver a revenue of ILS 630 million, representing a growth of more than 18% from the same period in 2020. Our top line performance was driven by strong volume growth and delivered a nearly 9% increase in comparable store sales along with new store addition in the period. We are quite pleased with the second -- with this strong sales trend we've witnessed so far in 2024. Like the second quarter, our top line results combined with 70 basis points of gross margin expansion fueled a 140 basis point increase in the adjusted EBITDA margin and a 36.8% increase in GAAP net income in the first half of 2024. Turning to Slide 6. Comparing the first half of 2024, we have a long-term trend on Slide 6. Our full year revenue CAGR from 2020 to 2024 is [ 16% ], and we experienced gross margin more than 250 basis points over the same period to 42%. Similarly, first half adjusted EBITDA has grown at a CAGR of 13% and the adjusted EPS attribute to shareholders has grown at a CAGR of 14.7%. Now I'll turn the call back to Talia. Talia?

Thank you, Nir. Slide #7 and Slide #8. Looking at track record over a longer period of time on this slide, we're very pleased with more than 2.5x growth we achieved revenue and gross profit over the past 10 years along with doubling adjusted EBITDA and adjusted EPS during the same time period. Note on Slide 7 that over this period, despite the change in macroeconomic environment and everything that we've experienced, our annual gross margin were relatively stable and have improved significantly from the past few years, as we have recently surpassed 42%. Now turning to Slide #9. Our strategy of rapid growth coupled with moderate capital expenditure, resulting in very strong operating cash flows. That is despite of our strong top line growth. As a result, we have a long history to actively return value to shareholders through annual dividends and share repurchases. And since 2017, we returned approximately ILS 370 million to our shareholders, including ILS 60 million year-to-date this year, with a trailing 12-month dividend yield of about 5%. Now even with our substantial cash deployment this year, we had about ILS 75 million net cash at the end of the second quarter versus net debt of about ILS 12 million as of December 2021. We have ample liquidity and financial flexibility to both reward our shareholders and to continue the strong execution of our growth strategies. Then going to Slide #11 and then to Slide #12. So first, Slide #11. This slide refers to our product categories, and they all delivered strong double-digit growth in the first half of the year. We provide a mix of private, Max-labeled and third-party branded products across 6 core categories that we all know housewares, consumables, toys and baby, arts and crafts, office and school supplies, and apparel basics. And as you can see, the first 2 largest categories, housewares and consumables, which represented together approximately 45% of our revenue from sales in the first half of the year grew more than 15% and 18%, respectively, compared to the first half of 2023. We also saw some of our smaller categories outperform with arts and crafts growing more than 18%, and apparel basics growing nearly 19%. Then on the next slide, Slide #12, I'll also point out that our other category, which represented approximately 27% of revenue from sales in the first half. It grew at an impressive 25.5% when compared to the first half of 2023. More than 25 smaller sub categories that comprise this other category, altogether growing at much more pace than our more established categories as they scale and they provide significant upside to our already impressive growth trajectory. Now moving to Slide #13. This slide covers some of the relevant KPIs of our store fleet, starting with comparable store sales growth. So as Nir mentioned, Q2 strong comparable store sales reflect the shift in the Passover volume. However, comparing the combined first and second quarter of 2024 to the year ago period, comparable store sales grew 8.9%, well in excess of our long-term target of approximately 3%. And this notable acceleration was driven by strong store traffic, along with a return to positive average basket size growth, as you can see in bottom 2 charts. Next on Slide 14. Store growth has been very robust over the past year with 6 new stores added in the last 12 months. Since August 2023, we've increased our net selling space by approximately 13% or 7,700 net square meters. This has had a notable impact on the outsized growth we've been able to deliver in the recent quarters and about half of our top line growth in the first half came from these new stores. Now next on Slide #15. As we look our signed pipeline over the next 3 years, we have 4 additional stores, adding total of approximately 9,000 gross or 6,000 net square meters. However, note that these are only signed contracts within our pipeline, and our target of opening 3 to 5 owned stores each year remains the same. And there are additional potential new stores that are in various negotiating status. Next, Slide #16. You can see how our store expansion strategy has progressed since 2019, a significant whitespace opportunity that still lays ahead with our longer-term 2030 target. As of the end of June 2024, we have roughly 65,000 net square meters of selling space, representing a growth of 60% from 2019. And looking ahead, we believe we can expand our current footprint at additional roughly 70% to 110,000 net square meters and this long-term target would result in 2.7x expansion of our net selling space. Then on Slide #17, as we mentioned last quarter, in the past few quarters, one of our more recent key initiative was moving to a new logistical distribution center to help enable our next stage of growth. And I'm really happy to share that the transition is progressing [ with plan ]. We've started delivery at the new DC on June 1 this year. According to plan in 1 of -- 1 out of our 3 legacy logistic centers has already been consolidated. We expect to consolidate one additional legacy DC by year-end. CapEx has also been in line with plan with ILS 11 million invested as of June 30 and a total of ILS 30 million in CapEx expected in total. As we said previously, this initiative will support our future growth vision while potentially extracting operational efficiency. Lastly, on Slide #18, I want to share that we've recently published our second comprehensive ESG report. This support quantifies and demonstrate the broader impact that we have on our communities. An English version of the report is now available on our Investor Relations website. We're very proud of our efforts and encourage each of you to utilize our report to better understand our ongoing efforts around ESG. So before we proceed with the Q&A session, and as always, I would like to thank the entire Max Stock team for their ongoing effort. Even right now, even during our back to school season, their efforts have been critical to deliver these impressive results. Our strong teams and proven growth strategies are delivering record results, while positioning us for future growth. As we look at the second half of the year, we are confident in the underlying strength of our business and expect our strong momentum to continue, as our leading market position and resilient business model position us to outperform in a variety of economic [ times ]. And we're now ready to take any questions.

Can you please talk about your comparable sales momentum and the drivers of that, how do you see these unfolding ahead? So I think as I mentioned earlier, the vast majority of the same stores was driven by the volume growth as opposed to last year where we had negative change in our average basket size this year. When we look at the first half, the change was slightly above 0. So we were able to capture all of those and translate it into same-store sales growth. This is also reflecting the strength of Israel economy, as also evidenced by high expenses in credit cards and other criteria that is used to measure the strength of the consumer. Going forward, we do not know how to model the same-store sales growth, and hence, we keep our longer-term target of 3%. It is not for the full year of 2024, rather it is from July and going forward or potentially even 2025 and going forward, we can give the 3% threshold. And please talk about the drivers of gross margins, what do you believe is a sustainable level here? Okay. So first, in prior quarters, and I think it's the same quarter too. We think 41% and above is probably the right way to know the gross margins in the next 2 quarters, potentially more. On one hand, we are benefiting from stronger buying power with large suppliers that translated to significant reduction in [ cost of store ]. On the other hand, there are some offsetting elements. One of them is the transition to the new logistics center, which is not apparent so much this quarter, but is expected to have some impact, not a major impact, but some impact in Q3 and potentially in Q4, as we do the transition and consolidate the DC into one consolidated distribution center. Of course, in the longer term, we expect to benefit from this transition and to extract operational efficiency, which will enable us to extend our gross margins potentially to the higher range of our gross margin at a more consistent level.

No more questions.

Okay. So we are available to speak with you, and we'd love to speak to you and give you more color on any question that you have. It was a pleasure to have you again during our earnings conference call and looking forward to see you again.