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

Good morning, and good afternoon, everyone, and thank you for joining us today. 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 first 9 months 2024 results, and I will be presenting 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 on our IR site at ir.maxstock.co.il. And on Slide #2, you see our standard disclaimer language, which I think you are all familiar with. With that, I'll turn the floor over to Nir to go through the financials. Nir, please.

Thank you, Talia. Starting on Slide 3. We are pleased to share another quarter of very good results as we build upon our strong first half of the year. Third quarter revenue was ILS 373 million, representing growth of more than 18% from the third quarter of 2023. About half of this growth was driven by a 9.2% increase in comparable store sales due largely to volume growth. This was partly offset by the shift of the Jewish New Year holiday into the fourth quarter this year versus falling in the third quarter of 2023. The other half of the growth was driven by 6,000 net square meter of selling space we've added in the past 12 months as part of our store expansion strategy. Gross margin was 41.3%, which was in line with our expectation. The 60 basis point decline versus last year was mostly due to higher logistic cost related to our new distribution center. This temporary pressure on gross margin was more than offset by 120 basis points of expense leverage on higher sales volume. This led to a 25% increase in adjusted EBITDA and 35% increase in adjusted EPS attributed to shareholders. Turning to Slide 4 to look at some of our long-term third quarter trends. Our revenue CAGR from third quarter of 2021 to the third quarter of 2024 is 13.4%, and we expanded gross margin approximately 270 basis points over the same period to 41.3%. Adjusted EBITDA, which excluded the impact of IFRS 16 and stock-based compensation has grown at a CAGR of 15.9%. And the adjusted EPS attributable to shareholders has grown at a CAGR of 15% since the first quarter -- third quarter of 2021. Both adjusted EBITDA and adjusted net income as a percentage of revenue continued to expand and reach new multiyear high. Turning to Slide 5 and our performance for the first 9 months of the year. As you can see, our third quarter added to the strong positive trend we have seen this year. Through September, we have delivered revenue of ILS 1 billion, representing growth of more than 18% from the same period in 2023. Comparable store sales up 9% and up nearly 11% through January to October period, which included a shift in the holiday period from the third quarter to the fourth quarter this year, as I just mentioned. This top line result, combined with 20 basis point gross margin expansion and added expense leverage led to 110 basis point increase in adjusted EBITDA margin and 37.5% increase in adjusted EPS in the first 9 months of 2024 and highlight the progress we have made driven profitable growth, the ILS 0.59 in adjusted EPS we delivered for the first 9 months this year is ahead of our total adjusted EPS for all 2023. Turning to Slide 6. Putting our 9 months results in the context of our long-term trends of a 3-year revenue CAGR from 2021 to 2024 is 11.1% and we expanded gross margin 290 basis points over the same period to 41.7%. Similarly, January to September adjusted EBITDA has grown at a CAGR of 9.6% and adjusted EPS attributable to shareholders has grown at a CAGR of 8.6%. Now I'll turn the call back to Talia.

Thank you, Nir. Slide #7 and 8. When we look at our results over a longer period of time on this Slide 7 and 8, we are very pleased with the more than 2.7x growth we've achieved in revenue and gross profit over the past 7 years, along with more than doubling adjusted EBITDA and adjusted EPS during the same time. Note on Slide #7 that over this period, despite a number of global and local headwinds, our annual gross margins were negative -- were relatively stable and have improved significantly over the past few years, reaching 42% on a trailing 12-month basis. And then on slide -- turning to Slide #9. The business generates very strong operating cash flows, which, along with modest capital expenditures, results in sizable free cash flows that we actively return to our shareholders through annual dividends and share repurchases. Since 2017, the business has generated roughly ILS 537 million in free cash flows at an average cash conversion rate of 53%. As you can see, we've significantly accelerated both the amount of cash generated and the cash conversion rate in 2022 and 2023, with about ILS 128 million and ILS 138 million generated in 2022 and 2023, respectively, at a conversion rate of 94% and 91%, respectively. Both cash generation and the conversion rate have been impacted over the trailing 12 months by our intentional inventory build and increased CapEx related to our new DC. However, we view both of these headwinds to cash flows as temporary, and we're very pleased with the underlying dynamics of the business that continue to drive a significant amount of cash flow for the company. On Slide 11, we provide a mix of private Max-labeled and third-party branded products across 6 core categories, Housewares; Party Supplies, Storage and Consumables; Toys and Baby; Office and School Supplies; Arts and Crafts and Apparel Basics. As you can see, Housewares and Party Supplies, Storage and Consumables represent about 42% of sales year-to-date and grew more than 19% and 22%, respectively, compared to the first 9 months last year. We also saw some of our smaller categories outperform with Toys and Baby growing 17% and Apparel Basics growing nearly 15%. And to complete the picture on Slide #12, you'll see that our other categories, which represent the remaining contribution, approximately 25% of sales year-to-date, that category grew at impressive 23%. The more than 25 smaller subcategories that comprise this segment continue to scale and outpace our more established categories providing us with another growth vehicle for the future. Now turning to Slide #13 to cover some of the relevant KPIs for our store fleet. Starting with comparable store sales growth that Nir mentioned. Year-to-date, we have delivered an impressive 9% increase in comparable store sales, which is well in excess of our long-term target of approximately 3%. This notable acceleration was driven by strong store traffic, along with a return to positive average basket size growth as consumers have responded very favorably to our recent merchandise offering, particularly seasonal items. While we still believe 3% comparable sales growth is the right way to model the business long term, we believe we've been able to outperform this target recently in large part due to the current operating environment in Israel as the Swords of Iron War continues to impact daily life in Israel, our position as Israel's premier extreme value retailer continues to resonate with consumers who are increasingly value sensitive. And like most local businesses, we have benefited from citizens spending more time in the country versus traveling abroad. That said, note that as we disclosed on Q4 call in March, October 2023 same-store sales were down 16% due to closure of our branches at the onset of the Swords of Iron War and as our branches were operating on a reduced time schedule during the month of October last year. On Slide #14, as most of you know, store growth is one of our primary growth drivers. As you can see, store growth has been very robust over the past year with 6 new stores added, expanded or reopened in the past 12 months. Since November 2023, we have increased our net selling space by approximately 10% or 6,000 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 year-to-date has come from these new stores. Moving to Slide #15. As we look at our signed pipeline over the next 2 years, we have 4 additional stores planned, adding a total of approximately 6,000 net square meters. Our target of opening 3 to 5 owned stores each year remains the same, and there are other future new stores that are in various negotiation stages. On Slide 16, you can see how our store expansion strategy has progressed since 2019 and the significant white space opportunities that lies ahead with our longer-term 2030 target. As of the end of September 2024, we have 65,000 net square meters of selling space, representing growth of approximately 60% from 2019. Looking ahead to 2030, we believe we can expand our current footprint at an additional roughly 70% to about 110 square meters. This long-term target would result in 2.7x expansion of Max Stock over an 11-year period, which demonstrates our ability to rapidly and effectively scale as the Max brand continues to resonate and gain share with Israeli consumer. Now turning to Slide #17 for a brief update on our new logistics and distribution center. As we've mentioned a few times in previous quarters, the consolidation of our three distribution centers into one was a strategic decision that will better position us for the next stage of growth. The transition continues to progress well and as planned, we started to operate the new DC in June and one of three legacy logistics centers has already been consolidated. We expect to consolidate one additional legacy DC by the beginning of the new -- the next year by the beginning of 2025. CapEx has also been in line with plan with about ILS 21 million of the anticipated ILS 30 million invested as of September 30. As we said previously, this initiative will support our future growth in Israel, while potentially extracting operational efficiencies, including the elimination of needed TPLs, centralized operations and other logistical streamlining. And then finally, turning to Slide 18 for an update on our Portugal operations. Given the performance of our Portugal operations and in the initial financing phase that was set for 2 years, and as the competitive landscape in Portugal is becoming more intense, we made a strategic decision to seize operations in Portugal. We expect to complete the process by the end of next year. Currently, we're working with our JV partner to sublease the two existing locations, sell current inventory and terminate any existing contracts with suppliers and employees. We estimate that the closure of our Portugal operation will not have a significant impact on our future performance as it hasn't had such impact thus far. Year-to-date, Portugal has negatively impacted adjusted pre-IFRS 16 EBITDA by approximately ILS 3.2 million. And this quarter, we also rolled down ILS 3.6 million of right of use assets of the JV. These expenses were included in other expenses. And then on Slide #19. As I conclude my prepared remarks, I again want to thank the entire Max Stock team for their contribution to another exceptional quarter of performance. We're incredibly proud of what we've accomplished together so far this year, and we look forward to a strong finish to 2024. As we look further ahead, I'm confident that our market-leading position, resilient business model and proven growth strategies will position Max Stock for continued success. Operator, we are now ready to take any questions. Okay. Nothing. I don't see any questions on the chat or Q&A.

Okay. The results are so good. So...

They speak for themselves. Yes. So guys, we will be very happy to speak with you and set up Zoom calls. We will also be in January at the ICR conference, so we'll be more than happy to meet you in person and speak with you. Any questions you have, whatsoever, contact us. We'll be happy to give you more color. Thank you once again, and we look forward to see you in January or even before that.

Thank you.

Thank you.