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 & IR Officer. And with me on the call today is Nir Dagan, our Deputy CEO and Head of Finance. Nir will start, as usual, with a review of our fourth quarter and full year 2024 results, and I will be presenting the second part of the presentation. And 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, as you know, this is our standard disclaimer language and I believe everyone is familiar with. With that, I'll turn the floor over to Nir to go through the financials. Nir?

Thanks, Talia. On Slide 3. We are very pleased with our strong fourth quarter performance. These results contribute to an excellent year for Max Stock highlighted by record annual revenue and earnings. Starting with the fourth quarter on Slide 3. Revenue was ILS 328 million, representing growth of more than 20% from the fourth quarter of 2023. This growth was driven by a 12.6% increase in comparable store sales due largely to higher traffic and increased seasonal sales aided by a shift of the Jewish New Year holiday into the fourth quarter compared to falling in the third quarter last year. Gross margin was 41.9%, down 90 basis points year-over-year, in line with our expectation due largely to temporary elevated costs as we transition to the new distribution center. This combined factor led to an 18.4% increase in adjusted EBITDA and a 28% increase in GAAP net income and a 26.2% in adjusted EPS attributed to shareholders. Turning to Slide 4. You'll see some of our long-term fourth quarter trends. Our CAGR from the fourth quarter of 2021 to the fourth quarter of 2024 is 10%, and our gross profit CAGR was 13% over the same period, with gross margin up 300 basis points compared to the fourth quarter of 2021. Adjusted EBITDA, which excluded the impact of IFRS 16 and stock-based compensation, has grown at a CAGR of 11.7% since the fourth quarter of 2021. And the adjusted EPS attributed to shareholders has grown at a CAGR of 14.4% since the fourth quarter of 2021. Both adjusted EBITDA and adjusted net income as a percentage of revenue continue to remain strong over the 3-year period. Now to Slide 5 and our full year performance of 2024. We delivered an exceptional year with strongest annual results in our corporate history. In 2024, we generated revenue of ILS 1.3 billion, representing growth of nearly 19% compared to 2023. Comparable sales are up nearly 10%, driven largely by volume gain aided by higher store traffic and increased seasonal sales. This top line result combined with stable gross margin led to 26% increase in adjusted EBITDA and 35% increase in adjusted EPS compared to a year ago. Going to Slide 6. Looking at this 2024 result in a longer-term context on Slide 6, you can see that our revenue CAGR from 2021 to 2024 is almost 11% and our gross profit CAGR was 13.6% over the same period with gross margin expansion of 300 basis points since 2021. Adjusted EBITDA, which excluded the impact of IFRS 16 and stock-based compensation, has grown at a CAGR of 10%. And adjusted EPS attributed to shareholders has grown at a CAGR of 10% since 2021. Now I'll turn the call back to Talia.

Thank you, Nir. On Slide #7. Slide #7 covers some of the relevant KPIs for our store fleet, starting with comparable store sales growth. Strong volume growth along with a positive change in basket size as consumers have responded very favorably to our recent merchandise offering were the 2 key drivers of comparable store sales growth in 2024. For the full year, comparable store sales increased nearly 10% compared to 2023, with average basket size increasing 1%. While fourth quarter comparable store sales accelerated more than 12%, a positive shift of the Jewish New Year holiday season from Q3 in 2023 to Q4 in 2024 along with comparability to the Q4 2023 period in which we saw temporary closures and reduced schedule of our branches at the onset of the Swords of Iron War, both acted as notable tailwinds in the fourth quarter of 2024. 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 throughout 2024 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've benefited from citizens spending more time in country versus traveling abroad. Now on Slide 8, zooming out. You can see that we've delivered impressive results over a multiyear time frame. From 2017 to 2023, annual same-store sales growth averaged 6.2%. As I mentioned, we believe 3% comparable sales growth is an appropriate way to model the business over the long term with some years above this target, like we've seen recently, and some years below as we lap tough comparisons and possibly face external headwinds. Slide #9. Looking at some of our other longer-term KPI on Slide #9. Our performance since our IPO in 2019 has been exceptional. In that time, we've delivered a 5-year revenue CAGR of 12.4% and sales per square meter CAGR of 3.1%. We've also expanded adjusted EBITDA margins by 80 basis points and grown adjusted EPS attributable to shareholders nearly 2x for a 5-year CAGR of 13.6%. Turning now to Slide #10. This demonstrates how 2024 stacked up against the long-term targets we outlined. As you can see, we met, and in most cases, meaningfully exceeded the target. Most notably, revenue was up approximately 19% versus our target of low to mid-teens. Same-store sales increased nearly 10% versus 3% and adjusted EPS grew 35%, well in excess of top line growth. Now turning to Slide 11. Our operational strategy of rapid growth, coupled with moderate capital expenditures resulted in -- are we on the right slide? Yes. Okay -- resulted in very strong operating cash flows for Max Stock. As a result, we've been actively returning value to shareholders through annual dividends and share repurchases. Since 2017, we have returned approximately ILS 439 million to our shareholders, including ILS 60 million in 2024, with announced dividends of approximately ILS 70 million this year with a record date of April 14, representing a trailing 12-month dividend yield of approximately 4%. We had net cash at year-end 2024 of approximately ILS 50 million, providing ample liquidity and financial flexibility to execute upon our growth strategies going forward. Now turning to Slide 12. we have a long track record of strong cash conversion. Since 2017, the business has generated roughly ILS 506 million in free cash flows at an average cash conversion rate of 50%. As you can see, we significantly accelerated both the amount of cash generated and the conversion rate in 2022 and 2023 with about ILS 128 million and ILS 137 million generated in 2022 and 2023, respectively, at a conversion rate of 94% and 91%, respectively. Now in 2024, both cash generation and the conversion rate were impacted by our intentional inventory build and an increased CapEx related to our new distribution center. The increase in inventory was due to an intentional build given the low inventory levels in 2023, new branch openings and increased scale and some increase in direct imports versus locally sourced inventory that ships from suppliers directly to our stores. However, we view both of these headwinds to cash flows as temporary and are very pleased with the underlying dynamics of the business that continue to drive a significant amount of cash flow for the company. Now shifting gears to cover the attributes of our business and financial model and the key initiatives we are focused on in the years ahead. So on Slide #14. Thank you. The four major areas of our strategic focus include: first, further enhancing our position as a low-price leader with a strong value proposition and resilient business model that is relevant with consumers across a variety of macroeconomic environments. In 2025, we will look to further enhance our purchasing power and direct sourcing while maintaining our unique extra broad selection of products for customers. Second, we will continue our top line growth led by our consistent owned store expansion strategy, along with opportunities to further increase comparable store sales. Third, I would like to maintain our superior store economics that include best-in-class sales per square meter and quick payback. And lastly, drive new operational efficiencies by capitalizing on our new distribution center investment while maintaining expense discipline across the organization and benefiting from operating scale. I'll now touch on each of these drivers in a little more detail, starting with our focus on scale efficiencies. So Slide #15. You can see how our scale has grown significantly since 2021. In that time, our average annual quarter revenue has grown by more than 36%, allowing us to gain leverage to negotiate better terms with suppliers. Aside from enhanced cost structure, we believe we will be able to create further competitive advantages through pricing. Next, on Slide #16. As we have scaled, we have also taken the opportunity to diversify our sourcing base, which has led to more differentiated products and further pricing advantages. On Slide #16, you can see that at the time of the IPO, we relied equally on direct imports and local suppliers. Today, the split is approximately 60-40, and we anticipate reaching a 75-25 split in the future. Turning to our second business element, clear top line growth drivers. As most of you know, store growth is one of our primary growth drivers. And on Slide #17, you can see the evolution of our store expansion strategy and the significant white space opportunity that lays ahead. As of the end of March 2025, we have about 67,000 net square meters, representing growth of 68% from 2019. Looking ahead to 2030, we believe we can expand our current footprint at additional 64% to 110,000 square meters with 74,000 square meters currently in the pipeline in total. This long-term target would result in a 2.7x expansion of Max Stock over an 11-year period. Now turning to Slide #18. Store growth has been on track over the past year with 3 new stores added in 2024 with another already added this year in 2025. In 2024, we increased our net selling space by approximately 5% or 3,700 net square meters, and our addition in February of this year added another almost 2,000 net square meters. This continued expansion has had a notable impact on the outsized growth we've been able to deliver in recent quarters and will continue to be a significant driver of our success going forward. Now as we look at our signed pipeline over the next 2 years on Slide #19, we have 4 additional stores planned, adding a total of approximately 7,300 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. Turning to Slide #20. As you can see, this is a slide we constantly show on our presentations. And you can see that also during 2024, our six core categories posted very strong growth throughout the year. Now on the next slide, Slide #21, you'll see -- Slide 21, you'll see that our other categories, which represented approximately 26% of sales in 2024, grew at an impressive rate of 24.1%. The more than 25 smaller subcategories that comprise this segment continue to scale and outpace our more established categories, providing us with another top line growth driver for the years ahead. Max Stock does very little advertising, instead focusing on attracting our customers through price, selection and our treasure hunt experience. As we have enhanced our digital presence and engagement with younger consumers, we have seen that positive word of mouth turn into social media engagement. As you can see on Slide #22, in the last 2 years, we have grown our followers across the 3 primary social media channels in Israel with an incredible 720% gain of followers on TikTok for that time period. We believe introducing ourselves to a younger cohort of Israeli consumer on the channels they visit will continue to drive share gains in the year ahead. Turning to Slide #23 and our third area of focus, superior store economics. Max Stock is routinely compared to best-in-class value retailers in the U.S. and Europe, such as Five Below, Dollar General, B&M and Action. In the value retail space, we deliver one of the highest annual sales per square meter of store space and second only to Action in Europe. Now on Slide #24. This excellent sales per square meter metrics have been consistent over time and over a long period of time. And as you can see on Slide #24, you can see that we've been able to maintain our best-in-class annual sales per owned net square meter and comparable store sales metrics as we have also expanded our owned store footprint by 2.7x since the end of 2017. Turning to Slide #25 and our final focus area, operational efficiencies. In 2024, we began the process of moving to a new DC to help enable our next stage of growth and extract further operational efficiencies. We have already consolidated 2 of the 3 existing distribution centers. CapEx has been in line with plan with approximately ILS 25 million of the anticipated ILS 30 million invested as of year-end. And you can see on Slide #26, you can see that the DC transition-related expenses did temporarily elevate logistic costs as a percentage of revenue in 2024, impacting gross margins in the second half of the year. However, on a longer-term look, you can see that this temporarily elevated level is similar to the logistic cost level we've operated in 2021 and 2022, even as gross margins are significantly higher today. Once the transition to our new DC is finalized, we anticipate returning to 2023 levels and driving further improvement from there. Finally, on Slide #27, a word on labor costs. In 2024, our employee costs attributed to retail activities as a percent of revenue was at the lowest level in the last 4 years. We continue to find efficiencies and leverage even as the hourly minimum wage in Israel has increased more than 5% each over the last 2 years. Slide #28. As I conclude my prepared remarks, I want to take a moment to thank our incredible team for their unwavering dedication that drove our impressive results in 2024. Your efforts helped deliver the best year in the history of our company, but more importantly, have positioned us to capitalize on new opportunities in the years ahead. The strong foundation we've built gives me great confidence in our ability to not only continue to deliver incredible value to our customers, but also for our shareholders going forward. With that, we are now ready to take any questions.

Any questions?

If you have a question, post it in the Q&A. If not, then we'll be happy to speak with you after the call as well. No problem. I don't see anything. Okay.

Everything is clear, I guess.

All right, guys.

Thank you.

Thank you very much and speak to you next quarter or before that. Thank you.