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

All right. Good morning. Pleased to welcome back Max Stock. Max Stock went public in September of 2020, so kind of at the onset of the pandemic. Like a lot of retailers Max Stock has faced some macro headwinds with inflation, logistics, the impact of COVID. Unfortunately, they've also battled some company -- or, sorry, country-specific issues in Israel, but have managed to really navigate all these different headwinds and put up really good results, particularly this past year. Really strong comps. It trades on the Tel Aviv Stock Exchange under the ticker MAXO, M-A-X-O. Here to tell us more about the story is Talia Sessler, Head of Corporate Development and IR. I'm going to hand it over to Talia.

Thank you, Brendon. Good morning. Hello, everyone, and welcome to Max Stock ICR presentation. I'm very excited to be here at the ICR Conference for the third year in a row. And Brendon and Cody, and the entire ICR team, many thanks for inviting us to participate in this great conference. My name is Talia Sessler. I'm Chief Corporate Development and IR Officer for Max Stock. And today, I will share our recent financial performance, tell you a little bit about our unique story, as Israel's leading extreme value retailer, and share some light about our future strategies, too, that will enable us to continue our success for the years ahead. So this is our standard disclaimer page. I'm sure you are familiar with it. And by the way, the presentation is available on our IR website for your reference. So as Brendon mentioned, we are Israel's leading extreme value retailer. We offer a broad assortment of quality products for everyday needs always at affordable prices. And for those of you who were not physically in our stores in Israel, I wanted to share a video that is more related to our donation and social efforts, but was filmed in one of our stores and can get you the look and feel of a Max Stock store. So let's watch it. [Presentation]

Okay. So let's speak about our recent financial performance. In the third quarter, we had a great, very solid performance. Top line revenue was up almost 19%. About half of our growth, 9.2%, came from same-store sales growth and the other part came from the expansion of our net selling space by around 10%. Gross margins remain robust at 41.3%. It was a contraction of 60 basis points, but this was very much in line with our expectation and was a reflection of the transition we are doing now into a large DC that we have in the south of Israel. Despite the gross margin compression, we were able to more than offset that with 120 basis points expansion coming from operating leverage, resulting in a 25% increase in our adjusted EBITDA and almost 35% increase in our adjusted EPS. When we look at our performance for the first 9 months of the year, you can see that the solid third quarter added to very strong positive trends that were in the first half of the year. And very similar trends also occurred in this period. Revenue was slightly above ILS 1 billion, representing growth that was above 18%. Same-store sales growth of 9%. When we look at the period of January through October, which eliminates the timing of the Jewish holiday season, same-store sales growth was even higher at almost 11%. Gross margins continue to be robust, 41.7%, 20 basis points increase versus the equivalent period a year ago. And then again, EBITDA expanded 110 basis points, and adjusted EPS was up almost 38%. Just to highlight the progress that we've made, the ILS 0.59 that we got for the first 9 months is already above what we had for full year 2023. So on this next slide, Slide #7, let's take a look at the main KPIs of our store fleet. I spoke about same-store sales growth and the 9% that you see on the left-hand side for the 9 months of the year came almost exclusively from volume growth, which we think is a very good message, and a slight increase in our average basket size. Now when we look at our longer-term target, we typically target 3% same-store sales growth. Now we were able to significantly outperform our target for various reasons. Some of them are related to the macro -- to the unique macro environment in Israel, which is coming from the continuation of the Swords of Iron war, with the Israeli consumer being increasingly more price sensitive, and our model continues to resonate really well with our consumers. In addition, in Israel, because many Israelis are not traveling abroad, the demand towards the local market is higher with disposable income directed to the local market and some additional retailers also benefited, like we have. On the next slide, you can see the 6 core categories in which we operate and that our top line growth was across all of our categories. Particularly, if you look at the top 2 largest categories, housewares and then party supplies, storage and consumables, which together contribute about 42% of revenue, they had strong double-digit growth of roughly 19% and 22%, respectively. And even smaller categories like apparel, basics and toys and baby outperformed with 15% and 17%, respectively. Now if you sum all this category up, you will end up with 75%, the remaining 25% come from our other category, which is the aggregation of over 25 subcategories, like outdoor, sports, pet supplies, accessories, confectionery and many more categories. Each one is a growth vehicle for us. We're still small and see potential upside in many of these categories. Now these other categories actually exhibited the strongest growth with over 20% growth year-over-year. Now let's zoom out a bit and take a look at the longer trend of our same-store sales growth. You can see that we had very strong results over the period of almost 8 years. And on average, our same-store sales growth was 5.6%. Again, 3% is, in our view, the right way to model the business in terms of same-store sales growth going forward, but very robust performance in the past can give you assurance that the business work and the model works, and that potentially we can outperform it in the future. Now let's shift gears for a moment and speak a little bit about who we are and how we were able to achieve this really great result. So Max Stock was founded 2 decades ago by Ori Max. And today, we have about ILS 1.3 billion in terms of top line, about 64 locations in Israel, 2,200 employees. And we, as Brendon mentioned, we're publicly listed on the Tel Aviv Stock Exchange in September 2020. Now when you look at our mix of top line, you can see that over -- almost 2/3 of our volume, of our product mix by volume, comes from nondiscretionary everyday-need products. And if you add to that the fact that about 75% of our volume come from products that are priced at $3 or below, you can understand why our business is very resilient and can perform really well in various economic cycles. Now what you see -- the pie chart that you see on the left-hand side, I also spoke a little bit about it in the prior slide, the various categories that we have gives us a lot of flexibility. We can occasionally increase or decrease a certain category depending on the market conditions, and that gives us a lot of flexibility. And at the end of the day, our gross margin is much more stable given that. Now let's speak a little bit about our format. We have a dual format store strategy. The big chunk of our business is generated from Max-owned stores. Max, the format that you see on the left-hand side, is our big box format. This is a format that is typically majority owned and is our main format of expansion. And over 90% of our revenue is generated from 37 owned stores. So that's the heart of our business. On the right-hand side, Mini Max, this is our smaller box format, it's our inner city format and it is 100% franchised. There's also a huge potential for growth with Mini Max, but because it's a smaller chunk of our business, it is still a second priority for us. So when we look at the reasons behind our success, we think about 4 key pillars that drive it. The first one, and I spoke a little about it, is the resilience of our model. The second one is clear top line growth drivers. The third one is superior store unit economics. And the fourth one is, despite the fact that we are a growth story, we generate a lot of cash. And I'll speak about each of these pillars in more details now. The first one is the resilience and the resilient economic model that I already started to highlight. And it was mentioned here before, but when you think about Israel, what haven't we experienced, right? Just all the potential headwinds pretty much occurred. So we dealt with the global pandemic, supply chain disruptions, inflation and specific things to Israel like the legislative process and the continuing Swords of Iron war. Still, we were able to increase our top line at a CAGR of almost 11%; at the CAGR -- increased our EPS at a CAGR of almost 9%; increased the number of our owned stores from 26 to 35, each store is generating more revenue on average, increasing from ILS 27.7 million to ILS 3.5 million; and to expand our gross margins from around 39.6% to 41.8% in 2023. Part of the resilience of our model comes from the very unique environment in Israel. And when I was in the airport yesterday, I found myself in the line in the duty free. And I was asking myself when I waited there for 15 minutes, along with I don't know how many more people, why did I have to do it? And I have not measured it empirically, but I really think that Israelis are probably one of the best consumers globally. We simply like to shop, and we really, really like bargains. And so Israel has a very dynamic and growing population. We have all the holidays pretty much, as you can imagine, Jewish, Muslim, Christian. And there are so many events that generate demand for our product, which really creates a great, great market to work in. And the way we respond to that is we have a model with 12 seasons in a year, which means that, every month, we actually introduce new seasonal favorites and new products, thousands of new products, to meet these very unique and changing demand. And that creates a lot of resilience because if you compare it to the cadence of U.S. retailers, it's way more robust. The second pillar that I was alluding to is top clear -- is clear top line growth drivers. And I spoke about same-store sales growth before. The other part is expanding the number of our owned stores and our owned net square meters. So if you look at our performance since 2019, we were able to grow our net selling space by over 60%. And when we think about our target, by 2030, we are looking to be at 110 net square meters, thousands of course, which will yield another approximately 70% growth. In total, that will result in a 2.7x increase in our owned net selling space over that period of time, which is truly remarkable. To show you that we are actually executing on this strategy. And as I mentioned before, in the LTM period, we added 6,000 net square meter, which is equivalent to a 10% increase. And going forward, our target is to open anywhere between 3 to 5 stores a year. We have a concrete pipeline with stores that we will open and additional stores that are still under various negotiation stages. The third pillar of our business model is superior store-level unit economics. And you can measure us and benchmark us various -- versus various parameters, not just sales efficiency, so you can compare us in terms of gross margins, EBITDA margins, net income margins, growth and many other things, and you will see that we excel in all of them. But there's one parameter in which we truly excel and this is our sales efficiency. So when you compare us to names in our space, in the U.S., in North America, it would be Dollar General, Five Below, Dollar Tree, Dollarama. And in Europe, it would be Action, which is an amazing player, B&M, Pepco and Fix Price, you see that we outperformed all of them in terms of our sales per square meter. And one reason for that, I already spoke about, is a very unique dynamics in Israel. But the other thing is are a very unique model, which combines the element from best-in-class retailers. So we combine some elements from Target and some elements from Five Below and some from Dollarama and some from Action, and create our own unique model. Another point that's worth highlighting is that despite the fact that we're expanding our presence, if you look at the lower chart in this slide, on Slide #20, we were able to increase our net square meter by 2.5x. At the same time, our net -- our sales per net square meter is actually up. And the same-store sales growth, as I mentioned, on average, is 5.6%. So we are not cannibalizing ourselves. Rather, we are actually able to increase our sales per net square meter and to further grow that very strong parameter as well. And the last thing that is part of our unique story is the excellent cash generation that the business has. As I mentioned, we're not just a growth story. We're also generating a lot of cash. And if you look at our dividend and share buyback program, we do not have a dividend policy. But historically, since 2017, we've distributed dividend every year except for 2020, in which we intentionally decided not to distribute dividend because of the uncertainty that was related to COVID. And overall, we were able to return roughly ILS 370 million to our shareholders throughout this period. Now we're not creating net debt because of dividend distribution. Rather, we have net cash on our balance sheet. And as of September 2024, we had net cash of about ILS 73 million. Another way to look at it is to look at our cash conversion ratio over a long period of time. So over almost 8 years, roughly speaking, 50% of our adjusted EBITDA convert into free cash flow. And when you look at 2022 and 2023, we had very high conversion rate, largely because we were decreasing inventory levels. This year, this trend has reversed because we have to rebuild the level of inventory and we also invested in our new distribution center, but these are temporary or onetime things the fundamental trends are still very strong in the business. And that's pretty much it. I hope you like the story. I'm here for a breakout session at 1:00 p.m. and also at 4:30. I will be happy to meet with you for any other questions. So we'll be happy to keep in touch. Thank you.