OVS S.p.A. (0OV1.MU) Earnings Call Transcript & Summary

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the OVS Full Year 2020 Results Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Stefano Beraldo, CEO of OVS. Please go ahead, sir.

Thank you, and good morning to everyone. Thank you for being with us for this year-end presentation, results presentation. I think it was -- I go a bit faster on the numbers, and probably better, we dedicate some time to understand where the company is given the tax here that has been passed and the challenges and the opportunities we have in front of us in an environment which is changing and not necessarily negatively for the perspective of our business because I think that we have identified several aspects that can be leveraged in order to increase our penetration and our performance and our profitability. The year has been obviously incredible. So with many months, many weeks of store closures, more than 30% of the trading hour slot and physical apparel market which declined by 36% with only the online growing, it's important to underline that our physical stores performed much better than the market, 27% decline versus 36% decline of the physical apparel market. And at the same time, we want to underline that the performance has been even stronger in the online, where we achieved a 63% growth while the online market grew something more than 30%. The result of these 2 aspects generates a market share increase, as you can see, from 8.1% to 8.4%. And I'm happy to inform you that we just received the last Sita Nielsen figure updated at end of March, which are informing us that our market share grew to 8.7%. This is happening, as we outlined, without any increase in services. This is the first year after many years in a row where our market share increase, which continues to happen, is not happening because of physical space growth but just because of sales density increase. This means, in my opinion, that in a super challenging market and an environment which is changing that much in terms of customer habits, which are looking for more sustainable choices, for more normal requirements, our brand is being preferred compared to the others because we represent a real solution to real family needs. The -- another aspect which is in line with this conclusion is that the base of our loyal customer increased by 12%, achieving 4.5 million, and the unique visitors in our website totaled 12 million with a 43% increase versus last year. So all these aspects didn't prevent our company from a decline in our turnover, unfortunately, and this was not -- it was not possible to do differently. But I think that it was pointing out that we have been able to reduce our cost base drastically, becoming more and more flexible, reducing rent and reducing labor cost in a way that allowed us to compensate the gross margin decrease, which has been generated by the sales decline, in a material way. Ending up with EUR 73 million EBITDA is something which obviously is disappointing from a -- in an absolute term compared to the size and the potential of our company. But being a retail company, there are some costs that you cannot reduce over a certain level, and moving more than EUR 300 million in sales should have generated more than EUR 200 million loss -- decline in EBITDA. So we should have ended up by negative -- with negative EBITDA. So I think that posting EUR 73 million means that the company is extremely flexible and able to reduce the cost base in an efficient way. The cash absorption has been higher than the EBITDA reduction, and this is only because of the working capital, which obviously has been impacted by a mix of suppliers -- of the reduction in the suppliers, in the payables as a result of a lower volume, as we can see better later on. But I think that the number has been very well understood by most of the ones of you who had the time to read the -- our press release. Basically, I would skip Page 3, which you received and which I think is very clear, basically demonstrating that the adjusted EBITDA positive of EUR 73 million has been basically generated during the 2 months of regular operation and even during the fourth quarter. Most of the decrease in EBITDA has been suffered in the first quarter when the lockdown was massive and even the ability to act in cost reduction has been lower compared to the measures, which we could put in place in the forthcoming quarters. Worthwhile noticing that in the second and third quarter, sales and EBITDA has been more or less in line with the year before, which means that once people can come back to normal, the profitability of our business model remain unchanged. And even in the last quarter, when the lockdown was totally unexpected, we suffered much less than we expected in the beginning. And we posted, I think, a more than decent EUR 32 million EBITDA. I suggest to have a look to Page 4, where we can see that with a market a decline of 36% and sales down by 27%, we have been able to activate some measures, which are the milestone of the reactivity of our company. One is the reduction of merchandise intake. In May, we had all our spring/summer already acquired. And normally, at that point in time, you have your orders already placed irrevocably for autumn/winter where the first delivery started in July. In spite of this, we have been able to -- also thanks to the long-term relation with our main vendors, we have been able to agree on frozening (sic) [ freezing ], cancellation, posticipation (sic) [ postponement ], so managing orders in order to reduce about EUR 100 million of intake compared to the already planned and ordered ones, meaning that there is a lot of flexibility in the company today. Store personnel could benefit from the Cassa Integrazione, but also EUR 6 million reduction in headquarter personnel cost has been achieved. And this is not only because of Cassa Integrazione, but this has been generated by a strong management of holiday period, the provision for holiday smart working and also some reduction and some lack of replacement in the normal churn rate of the employees. And finally -- and this generated a minus 21% cost of labor reduction. And this 29% of reduction in rent has been achieved not with provocative or harder behaviors in front of the landlord. We need to work in this environment. We need to be respected by our landlord, and we need to respect our landlord. And we activated hundreds of telephone call and meetings. So we didn't send the letters by pretending rent reduction as some of our competitors did. We preferred a smooth dialogue with landlords. Our goal was to achieve about a 25%, 26% rent reduction in the full year, and we achieved a 2% or 3% more. And today, the relations with the landlords are excellent, and they are appreciating that we are credible, open to dialogue and even that we are still growing so -- and they consider OVS today much more interesting for their plans compared to 5 years ago. Even because in the same time as some other international competitors is having a different strategy, is reducing heavily the number of stores, things that we are doing as well but not with the aim of reducing totally the footprint but simply to improving the quality of our footprint, by exercising our right of early withdrawal, whatever is necessary in order to better negotiate. And as we described in our press release, the result of it, it has been that most of the renegotiation that we started with the threat, if you want to say, of an early termination clause to be exercised has been concluded, about 80% of them, with a reduction of rent of about 30%, 35%. I would skip to Page 6 because in Page 5, we are letting you know that, as I told, the most of the EBITDA decline has been suffered in the first Q. Second and third Q, in spite of the sales dynamic slightly lower compared to last year, EBITDA has been similar. And in Q4, where the quality of sales normally is very high because it is not impacted by markdown, we suffered a bit compared to what we might have done if in this period, the quality of sales should be lower, but the fourth quarter is the most important of the year. So losing another 20%, 25% of sales in the quarter impacted the EBITDA, as you can see. In Page 6, I want to show has Upim suffered less than OVS during the full year, and this is basically only because of 2 reasons. On one side, Upim locations are mostly not in the shopping mall and the shopping mall as being the locations most impacted by the lockdown period and particularly in the second part of the year with the weekend closures that were originally unexpected, and also because Upim is more exposed to small formats, mostly kids and penetration in smaller geographic catchment areas. I'm sure that some of you might remember our strategy to penetrate Italy also in the smaller catchment areas, which is one of the pillar of our strategy even today. And with the change in the mobility attitude of the population with more people preferring to remain closer to their home with smart working, these locations benefited from this structural trend. So this is why OVS performance has been a minus 27% in sales; and Upim, minus 19%. In Page 7, I want to underline that the increase in trade receivables is something which I consider absolutely normal. We decided in spite of not suffering material issues with our franchisees. And this is also because they benefited of their nature of being located in smaller catchment areas, mostly kids. So they suffered less than OVS, but they suffered in this moment. And we preferred to offer them some credit payment extension other than pretending in a very rigid way to receive from them on a timely basis all the payments, while in the same period, we were a bit postponing our payments to our supplier during 2020. So this is why we had an increase, which is not a concern for us. And today, situation is already improving. And we expect that by the end of the year, we will come back to normal repayment terms. Inventory has been the most responsible for the working capital negative effect. In spite of the reduced intake, we couldn't avoid to end up with an inventory which is more or less in line with last year, a bit higher, in absence of the EUR 100 million stopper to the already planned and placed order. And I underline not only planned but also placed orders. We should have ended up with EUR 100 million more here. So I think that we obtained a decent result in managing inventory. And also, we could benefit from the possibility to sell part of the spring/summer inventory in the beginning of autumn/winter. When we had to decide, and this is another example of flexible management, we had to decide to put in the store again some spring item that originally we decided to postpone to 2021. And that's why during the pandemic in the month of May, June, some supply from the Paris market was suffering because of the pandemic in that countries. So we passed suddenly from an excess of inventory of spring/summer to the risk of having a lack of inventory for autumn/winter because of the late deliveries from Bangladesh and India and China. So what we did was to utilize our merchandising -- part of our merchandising to be sold as autumn/winter seasonal goods. And we sold about EUR 30 million, EUR 40 million more than expected of this merchandising. So this is a demonstration that also the nature of our items is less and less seasonal sensitive. Obviously, there is a seasonal sensibility. I cannot sell down jackets in summer. But we are using kind of a no season merchandising more and more in order to be more flexible in managing our inventory. Obviously, trade payables didn't at this time because by reducing EUR 100 million our intake, we had payable as a free cash flow source. The result of it has been this EUR 79 million of increase in working capital, which we consider to be just a temporary number. And during the present year, this working capital will become a source instead than an absorption. In Page 8, a snapshot of our CapEx. As you can see, we decided to drastically reduce our CapEx in 2020 because -- as a reaction to the situation and the focus on liquidity. I would say that we didn't suffer any radical problem here by reducing the CapEx. Obviously, we had to postpone some of them through the next coming year. And then in Page 9, I think that all the comments related to cash flow has been already covered by what I said regarding the working capital. When we move in Page 10, regarding the net debt and leverage. I don't like this chart. So I would like to skip because I don't think we will remain a lot of time with this number. We are deleveraging the company now. And we are convinced that looking at the normal perspective for 2021, with sales increase compared to 2020, even being aware that the first quarter suffered because of another lockdown, but we know that in our numbers, there will be a huge deleverage during 2021. And this will happen independently from a next evolution of the pandemic because now the population has started learning to know that our stores are open also in the red zone with the kids, with the underwear. So we didn't see in the first part of the year the same negative number that we have seen during the first quarter. Maybe a couple of words about the strategy. We wrote that we are changing partially our approach to the business in response to what we believe are cyclical new trend, which are emerging. There is clearly a movement in favor of digital sales. And there is clearly an attention to sustainability and ESG issues, even from the customer perspective. And there is clearly another trend which is more to pay attention to garments that you can use at home or in a more relaxed environment other than a party or office dress. And I believe that OVS is well positioned with reference to all these trends. And another aspect that is clearly emerging is that we are attracting new customers. With the introduction of Piombo in OVS, we have been able to attract a customer which normally was more demanding in terms of price positioning. But with the trading down, which is interesting, a portion of population is finding in OVS what I believe to be an incredible compromise between price and quality and style. So we believe that the new strategy will try to emphasize the nature of OVS as a place where different lifestyles can find an answer. So not OVS as a pure brand. OVS is not Nike. OVS is not, looking at Italian brand, [indiscernible]. OVS is a mix of different customer preferences, which has in common high quality, high sensitivity to environmental, sustainability issues. So the way that we make our product is clean, and we are transparent in the way we communicate our product. And this is a trend that every customer profile like. But we have young guys, so that the young guys, they can find Grand & Hills. Grand & Hills has been conceived by a genius, which is Davide De Giglio, that worked with us, with me and my team, for 5 years before deciding to create what we created, which is Off-White and Marcelo Burlon and then selling all this activity to Farfetch. But Grand & Hills has been invented by this guy that was worked with us for 5 years. Then Piombo, which gives to another category of a person, more adults, more demanding in style, a great answer to their need at incredibly low prices. And now we will implement also -- expand also Piombo to the women given the incredible success that she made. What I mean incredible, I mean that in the 500 corners of Piombo men, the sales density has been 50%, 5-0, higher compared to the sales density of the remaining areas and comparing to what was generating the same space 1 year before, obviously, keeping into account the lower absolute performance during the lockdown months. Then there is Everlast, which is another brand, which we do not own but we make -- we produce under licensing, which is talking to our customer when they are looking for sporty moments. We are about to relaunch to -- we already have now in the shops Baby Angel, which is feminine and dedicated to young teenagers. And the more we cover the need of a basic teenager when she needs to go to school or to go out of home with friends, so -- and then GAP, GAP is another example of this strategy of multibrand. Even if we own or we develop most of the brand that must speak clearly to singular customer needs and lifestyle profile, some of these brands, we cannot have. And in this case, we want to invite them in our playground, in our platform. And GAP is perfected also to generate more traffic, more interest in our store and in our digital store. Because when I speak about store, I don't want only to speak about physical store. I want to speak about every occasion where our customers are willing to create a dialogue to look our product in whatever channel they are looking for. So GAP in OVS digital and GAP today in 20 store only is because we believe that GapKids will be the most important and interesting part of GAP for the Italian customer, and in future, also in other dozens of Italian stores for sure because thanks to the great result that GAP is already giving as a preliminary indication, we are already planning to expand the GAP to other stores when today, we are testing it in only 20 stores and I insist only in kids. So this approach is transforming OVS into a platform and into a multichannel platform. And I'm very curious in working and looking at what can happen, where we continue with this strategy. And I'm sure that we will have other incredible brands in our platform. And in doing this, I don't want to repeat what Next did perfectly. I think that Next is a great example, but we are moving in a different way. Next is basically an alternative to Zalando or Amazon. But they have a historical background. They had a catalog and they operate in a market which is maybe 30% online. Italy is not that market. And I don't want to compete with Zalando or Amazon. I want to invite brands which are coherent and which are strengthening our position with reference to the single lifestyle. Only as an example, in the, call it, international items, I want to invite not only GAP. I want to invite Abercrombie, which in Italy is not able to have a physical distribution strategy. I want to invite Levi's. And then I stop because I cannot say too much. But I don't want to become a supermarket that sells every brand. We will try to introduce, as we said, either international items or unexpected discoveries. And I think that in this, we will do a scouting activity, offering Italian customer brands they have -- that they don't have the possibility to deal with. And it is very curious to see what is going to happen because I can be the only channel, the only company probably able to distribute, as an example, GAP, either digital and also physical. And because 50% of our sales, but also when I look at the next 3 quarters, they declare that if I'm not wrong, 40%, but maybe I'm wrong, of sales are made with a click and collect, I can be the only solution for an international brand to achieve every Italian city or town with a physical distribution when the customer can place the order, whatever they like in my store, during their weekend at home and picking up the good, not a ton, but in my store. And by visiting the store, as it is happening today with GAP, they will buy also another product of OVS. So this is a strategy, and I hope it is clear. And it is not changing the identity of OVS, but it is simply improving and adding to the identity of OVS something more. Then we will continue growing, taking over spaces, but I don't want to look for space which are greenfield space. I don't want to grab market share in a challenging market. I want to buy market share or to replace at 0 cost market share. So in other words, when H&M is closing its Gorizia store or its Udine store, and if I put Upim, which is a perfect downtown solution in Gorizia -- because Gorizia is a small town. They don't need the H&M, honestly. They don't need fresh, sexy, party things. They need daily -- regular, daily, local consumption. So in this small town, we see that some of our competitors are logically suffering. While we have the answer for this with Upim, which is a very family-driven, call it, variety store, basically, so we will continue growing but not by grabbing market share to other but replacing market share, taking over existing spaces with already a goodwill at a very limited or no cost. A couple of words about Stefanel. Stefanel is an example of how we might grow. We have the -- we will use the same engine, procurement, product development, design, with some addition, obviously, in the artistic part. But most of the value chain will be the same, which is today dedicated to our other brands. The retail knowledge is going to be the same. The logistics platform is going to be the same. So there will be synergies to exploit. And with the Stefanel brand, we can have in mind that we can cover hundreds of Italian cities with -- and not only Italian cities in this case because the Stefanel has a great reputation also out of Italy. And we are having the Stefanel stores out of Italy. And there is such a trust on Stefanel that some of our international franchisee that was formally -- formerly Stefanel partner already confirmed order for about 15 stores out of Italy without having even seen the collection. It means that they need that brand and they trust OVS. So we are not wrong. Final word about sustainability. I think that the 3 main aspects of our strategy are continuing, consolidating the market in physical allocations but without grabbing market share, preferably taking over market share, so replacing market share of other people. Second, omnichannel and online growing like we are growing even in 2021. I can tell you that we are growing at the same rate than we grew last year, even this year up to now, means that we are really doing a decent job there. And finally, pay more and more attention to sustainability issues. The -- as we've been awarded by Global Fashion Agenda as one of the most interesting innovation, best practices for the implementation of the product circularity index has been just one evidence of something in terms of commitment to the sustainability, which is requiring years so we are working hard since many years in order to sell something material and relevant in this respect. And I think that today, we are one of the few worldwide company which can claim that every product we sell has a kind of a patent where you can understand which is the supplier that made that garment, what is the water consumption of that garment, what is the CO2 absorption of that government, what is the recyclability of that garment. And I tell you that in order to achieve that, it takes -- it took years of work because with the thousands of options, it is not a thing that you can do easily. And I think that transparency is the most important element of sustainability. When a company can be transparent, it means that it can be sustainable. And it can also claim that something which the company is doing, which is not 100% sustainable, is at least more sustainable than is made without attention to the way it is done. So with this long -- very long discussion, I also let you have a look to the Page 12, which is a description -- a graphic description of what I hope I've been able to explain to you from a traditional vertically integrated retailer to a platform, integrating digital and physical, so a real multichannel experience, multibrand, multichannel, multisized, multigeographic allocation, downtown Milan or smaller catchment areas, where we can have still penetrations and we have still penetration lower compared to the average of Italy. That means that we have still a lot of chance to grow in a small area of the country, replacing inefficient retailers. So sorry, it has been very long. But to me, it was important. And finally and fastly, an outlook on '21. As of now, we are experiencing negative sales, obviously. According to the figures that we are receiving from Sita Nielsen, much lower compared to the market decrease. But differently from last year, the economic effect of the lower sales is much lower compared to what happened in 2020 and every comparison we made with 2019. So basically, we will not achieve during the full year '21 the sales of 2019, but we will increase drastically the sales compared to 2020 and the profitability compared to 2020. So the first year 2020 was negative -- the first quarter 2020 was negative heavily by EUR 34 million. The first quarter, which is almost achieved today, of 2021 will be barely breakeven. I think maybe something more. It depends on how the remaining days of April will be. But clearly, this tells that in spite of a very negative March, with all the months basically, with store closure in many region of Italy and lockdown in the weekend, the economic effect has been much, much lower compared to 1 year ago. We expect also a strong recovery not only in profitability for current year but also progressive deleverage during the full year. And that's it. Sorry, I've been very long. Sorry for this. And now the word to questions. Thank you.

[Operator Instructions] The first question is from Andrea Bonfa of Banca Akros.

I hope you can hear me. My questions are related to, first of all, the deleverage. You are mentioning that you want to strongly deleverage the company this year. But I'm wondering if there are many parts that we need to take account. First of all, you have to pay the one-off taxes for the realignment of the goodwill and rent, and then you have to pay the deferred rent. And so if you can elaborate at the end of the day where you think you can guide net debt for '21. And my second question is again related to the -- what you just mentioned in the sense that if -- you are seeing the first quarter with the EBITDA breakeven. And my very rough calculation is that sales in the first quarter should be about 40%, 40% lower than the Q1 '19 and I would have expected the EBITDA is somewhat better. Just if you can elaborate on that, that's it.

Okay. On the deleverage, the deleverage will be the result of several aspects. From a top perspective, there will be an EBITDA increase, net debt decrease. The EBITDA increase will depend from a mix. We will suffer much less than in 2020 -- compared to 2020 in sales decrease -- compared to '19, sorry, because there would be a recovery in any case. The vaccination plan are finally in the right way. The government, finally, that we have is stronger and more solid. The attitude of the population will be to buy more as soon as we are out from the pandemic, as it is happening in Israel, as it is happening in U.S. So we expect, like it happened last year, a positive reversal after the month of lockdown, and we do not expect the second part of the year with another unexpected slowdown. So I put together some comments. In the first part of the year, we are suffering like we suffered last year in terms of top line or similarly in the first quarter, much less in the second quarter, and we also suffered less in the first quarter anyway because we had lower number of days of closure and the region where -- with different colors, while last year was -- everything was closed. So basically, last year, we lost 63% in the first quarter of turnover. This year, we are losing much, much, much less, between 20% and 30%. I cannot tell -- I cannot tell more otherwise.

We included the [indiscernible] of trading items. So we said there was a taking down of 100% in February, if you expand the margin [indiscernible].

So basically, first quarter with the top line better than last year. Second quarter, reasonably with the top line much better than last year. Third quarter may be in line. And the fourth quarter, hopefully, much better than last year because, hopefully, not impacted by lockdown again because by the second part of the year, we should be out of the pandemic, hopefully. So this is the assumption on the sales. So I expect that the sales will be lower compared to 2019 and higher compared to 2020. The cost base has been reduced somehow structurally. The landlords are not fighting any second with us. They understood that the change in favor of digital is penalizing their bargaining power. So they are much more realistic this year compared to last year. Last year, they have been shocked by what was happening. Today, they are more constructive. So I expect to be able to drive the rent for the full year down in line with the sales performance, basically. So maybe up compared to 2020 and down compared to 2019. In cost of labor, again, we have optimized also the headquarter, down compared to '19 in a structural way. And I think that -- I'm sure that a material part of the reduction will remain even at the end of the year. In terms of working capital, we will benefit from the reverse of some of the items. The stock, so the inventory, they referred to normal in the payment term of franchisees and we -- and the payment to suppliers because by buying more, we still have -- we will never gain a source from supplier. And also, we can manage the landlord in function of our negotiations. As we pointed out in our net financial position, we had EUR 25 million of overdue with the landlord. This overdue has nothing to do with the need of liquidity. As you have seen, we have a huge buffer between the net financial position and the total credit line. The reason for managing this overdue with the landlord is that still we have a continuous negotiation in place. And we basically are managing the payable -- the outstanding payable also as a tool in order to maneuver in an appropriate way with them. But all in all, you see that we have several aspect to manage. But once we say that we will deleverage the company, I'm not including expansion in overdue. On the other side, I expect that the overdue will be much lower or 0 at the end of next year. With that, does that answer the question regarding the...

I'm actually fine, Stefano. If you want, I can -- if I may, I will add a follow-up question. I mean what kind of companies are you scouting for M&A? Do you see opportunities? If you see opportunities to acquire point-of-sale to convert them into your brands or to actually incorporate new brands in your perimeter, just your vision.

I would prefer not to disclose the name. I can tell the criteria. The criteria will be that they might be network, which are in trouble, which I can transform in several of our brand. Because today, we are doing extremely well with Croff. We are super happy with Croff. And you know that the trend of home -- living at home is one of the few trends in consumer goods which is doing very well. So we are growing like-for-like with Croff today, and we are opening several Croff, some DOS, many franchisees. So that can be a network of companies, which are reducing the number of stores that we can transform into Croff, into Kids and even into GAP because our agreement with GAP is also based on the possibility to exploit GAP and I believe mostly to GapKids in the future. So it can be a small network, can be stores, single big stores, like the example that I told you before regarding replacing H&M in Gorizia. A beautiful location, where we are performing, according to our informal information, much better compared to what they were doing just because our mix of product is different and more aligned with the local needs. Might be brand. But if they are brand, might be brand on which we have a license, like the example of Everlast, provided that they are fitting with us. Might also be some digital activity, existing digital activity. But in this case, only as a super small investment to accelerate a small startup, maybe which are starting or which are having interesting solutions to be used by our company in terms of digital innovation in favor of retail activities. So the extension of target can be brand or network. But we have so many brands now that we can play with, from Stefanel to GAP, from Croff to Upim, from OVS to Blukids, that the growth will depend from the opportunity and the brand will depend from the locations and from the size.

The next question is from Domenico Ghilotti of Equita.

First question is a follow-up on the M&A and in general on the use of proceeds of the capital increase. If I understand properly, so you are ruling out a big transaction, a transformational transaction as you proceed but more moving on cherry-picking what you need. I wanted your comment on that. The second is a clarification on this platform model. I'm trying to understand how and if this is affecting your metrics. So if it is -- if you expect a sizable contribution from this agreement. And so you should expect a different gross margin. How do you manage the inventory of these brands? You are referring -- in particular, you are referring to GapKids. And so my question is, don't you risk opening the door for, let's say, a brand that is not in your hands, not in your full control in the long period? And last question is on cost inflation. We see freight rates, in particular, very, very expensive and going up. What's your view on this risk? And indeed, I have another question. So just on the understanding of the different zones, we will not probably be totally out of the pandemic in the next few months. Is -- are you able to manage the yellow or orange zones in different ways? Or should we expect that yellow and orange are not that different from the prepandemic level? Or it's too optimistic?

I'll try to go with the order. The first question regarding the takeover. Yes, they will be mostly cherry-picking. So I don't see huge operations. I don't think we buy Conbipel, just to make an example. Maybe we buy 20 stores. But buy is the wrong way -- is the wrong word. We don't need goodwill. We don't need the proceed of -- the capital increase will not be used to pay a goodwill. If we take over 20 or 30 store of Conbipel. But obviously, we need CapEx to transform into one of our formats. So we will use those proceeds to update and to transform those locations into our location.

Just to be clear, sorry, I was thinking about even, say, Benetton, just to give you an example also, even larger or...

And this is why -- this is why I clearly told that as you correctly asked me, I'm thinking more to cherry-pick than to big takeover. And if I made the example that I will not buy Conbipel and eventually would buy or take over 20, 30, 40 store of Conbipel, which are coherent with my needs. Furthermore, I'm not thinking to buy out Benetton. Maybe Benetton might buy out OVS with all the money they will take from selling the highway. So maybe it can be the other way around. And honestly, with Benetton, we couldn't speak about cherry-pick. It's a big melon. It's not a cherry. So basically, it's another deal. It's another story. We are not thinking to that story. It's a beautiful brand in some countries. It's a great company. It's a shame that this is company -- it's a pity that this company is in trouble. But we are not thinking into that company. There are other networks which are on sale. You read about Limoni, Douglas network, for instance, from the new they are dismantling network of sales which are excellent locations. So we might give a look to some of them. We are giving a look to H&M locations. As I said, they are -- they had excellent location, not always placed in the right environment. So downtown Milan has different requirements than downtown [ Terme ] or downtown Gorizia, where we are much better placed. So basically, acquisitions will be made in light of this strategy, as you understood, of cherry-picking other than investing big amounts in bigger brand retail. We don't need brand retail today or at least we don't see big brand retail interesting for us today. Then you had a concern about the risk that introducing other brands might change our KPIs relating profitabilities or inventory. I make you an example. Tally Weijl, Tally Weijl is a brand owned by a Nordic owner with a position which is very much in line with Bershka, Stradivarius, this kind of client profile. This is not our specialty. But in a logic of becoming a place -- a marketplace, physical and digital, where to invite brands which are coherent with our needs or accretive of our positioning, where we are not having a particular credibility because we didn't spend too much in building better goodwill and noticing that they are quite good in what they do. They are in trouble as many European small retailers. And they have a niche position, young, female, fast fashion maybe. And they are closing many stores in Italy. And Italy is the second country for them after, I guess, Switzerland or Germany, don't remember. And they have more than 100 stores, and they are closing. We invited them in our physical store as a pilot. We invited them in 30 stores in the second part of last year. And the base of the agreement is consignment. So we don't have stock. We had a margin based on the sales, and the margin is pretty good, similar to our cash margin, final cash margin, very in line with our cash margin. So they are not diluting our margin. And we are not taking any risk on the inventory. Then you asked about GAP. I don't think GAP is grabbing sales to us. GAP is introducing new customers into OVS. It is still early to have evidences of this. But by the first preliminary results, we see that we are increasing the average ticket of the customer which are buying GAP in our stores because they buy GAP and they also buy other garments of OVS. The margin we have with GAP are good. Basically, we have the title to buy the same FOB cost that they buy. So we have the same sourcing compared to them, and we only pay a small royalty. They have an interest to remain in the country, but they have a strategy of exiting all Europe. So I don't see the risk that you mentioned as an important risk. Vice versa, I look at the value added of inviting new customers to experience what visiting of OVS website means with Everlast, with GAP and in future with Tally Weijl and in future with many other brands. I don't see a change in profitability, and I don't see a material change in working capital. And the final question was the managing the different...

The cost impact [ that freight is having ].

Okay. The freight cost. Okay. Freight cost will increase a little bit. Not in the first quarter. In the first quarter, they will remain stable. In the second, I expect a light increase because we are moving now goods from red zone to yellow zone. So we have to rebalance our inventories level, but this will not impact in a material way in the final accounts. I hope I covered all your questions.

Maybe on the freight rate, I assume, in the sourcing from Far East, so if you see cost inflation.

Sorry, I didn't realize. There is an increase. There are lower quantities because we are reducing the quantities. So there is a combination of balancing between higher freight cost and lower quantities because we are putting lower goods in our store and we are inviting other brands with their own stock in our stores. So there is a kind of compensation. In any case, the cost increase is not -- again, not as material to compromise our driver of profitability. I see maybe margin increases in our gross margin, that can more than compensate this freight increase.

And the last -- I was referring to, say, the red and orange zones. I'm trying to understand if now we are entering -- so we are hopefully out of the red zones that are particularly challenging for you. So when your experience when we had, say, the orange or yellow zones with the malls closed during the weekend is something that you, at the end, were able to manage in a decent way and should you able to manage in a different way maybe in -- entering May, so a critical period for the sun season or still penalizing a lot your business.

I'm sorry, but I'm not sure I understood your question.

So if you are -- from your experience, if you are in, say, yellow or orange zone, so with the stores in the most closed during the weekend, is it something that is affecting heavily your sales performance?

Okay. Okay. Okay. Much less than expected, and it is becoming probably curious to look at what can happen in the future because what is happening in the -- take a yellow zone when -- or even take an orange zone. Orange zones means limited mobility. People cannot move from one area to another area. So this is impacting big shopping mall, which sometimes are out of a certain municipality. Take Napoli, the biggest South Italy shopping mall is Marcianise. And Marcianise is in the province of Caserta. So Marcianise suffered heavily because all Naples consumer couldn't move to Caserta because of the -- because of the restriction, limitation of the mobility. But what is happening inside the region is that most of the consumptions normally generated Sunday and Saturday moved from Monday to Friday. We are losing about 5%, 6%, 7% of sales during that week. The economic effect of this almost entirely recovered in terms of lower labor cost because on Sunday, we have a 40% cost increase that we didn't pay. So all in all, the sales reduction that you can assume to have in a normal week when the weekend is closed can be 5%, but the profitability reduction is almost 0 because compensated by the reduction of cost of labor of Sunday, which is inefficient. My personal opinion is that if during the future, the legislation would go in a direction of closing Sunday, remaining Saturday is open, obviously, the effect might be well balanced. Okay. I think it has been very long for all of you. And unless there are other questions, I...

So the next question is from Francesco Brilli of Intermonte.

Congratulations for the results achieved. I have a couple of questions. The first one is on the new model you have outlined to us in your presentation. And so this is the marketplace option you are shifting to. And I was just a little bit curious on the economics of the model you have in mind as a target for this model. In particular, for example, on the -- for example, on the gross margin. Are you expecting that it will be driven in the next couple of years or in the midterm more by your own brands, which are benefiting from, I mean, higher volumes or cross-selling in your stores? Or this will be more evenly distributed across brands? And the next question is on the CapEx and also in light of the strategic view you provided us. I -- should we expect a jump in investments in the next couple of years to build up the platform also on the omnichannel part of this and to a level, I mean, slightly higher to 2019 level? And just a quick one, third one, on the cost. If rent delays that you have described in the net financial position are just included in the rent reduction achievement of 29%.

Rent reduction. You mentioned the rent reduction?

Yes, yes, yes.

I'll try to answer to your question starting by the effect in the gross margin. I think that the gross margin will be a balance between all the different components, but I don't see a gross margin reduction. What I expect is a margin increase in our vertically made brand, which will account even in the future for the super vast majority of our turnover. The gross margin increase in the, call it, house brand will be driven by a mix of U.S. dollar, which is in favor, and also some price increase as a result of more quality introduced in our collections. Customers which are trading down and that are buying Piombo, for instance, are ready to pay a bit more for a product with a bit more of quality. But in the mix of the 2 elements, there is room for a few points of price increase. So I see gross margin not under pressure because of those reasons. On the other side, when I invite other brand to play with us in our store and in our e-commerce, I don't see a real margin decrease. What I look at is the cash margin because you can have a big gross margin and then you have maybe an inventory at the end of the year. And once you calculate the final contribution of your merchandising to the profitability, you have to take into consideration the cash margin. And the cash margin of our, call it, house brand compared with a cash margin of -- I mentioned the example of Tally Weijl, just an example, is very similar. So no major difference. In terms of driving forces, the future turnover growth will be driven by all those forces. If I have to bet, I think that opening new stores in small catchment areas with our brand with a rate more turnover than the new turnover generated by GAP and others. But I think that there will be an interesting mix. Today, I don't know. I really cannot say what will be the mix amounted to. Then in terms of CapEx, clearly, in year '21, there will be a rebound of CapEx. We had to reduce maintenance CapEx, refurbishment CapEx, some IT CapEx, some logistic CapEx in '19 -- in 2020. There will be a rebound but not because we need a new higher level of CapEx, even because the update of operations in support of the logistics platform has been already started. I cannot say that we are fully invested. We have still to invest. But we will continue managing CapEx and financial position in order to achieve the deleverage that I mentioned because we are convinced that we can provide to the company the necessary level of CapEx without compromising the cash generation, which is one of the utmost goal that I have in mind with our Board. So there will be higher CapEx in the future, but not because, again, we need a new level, but because we have opportunities. And some CapEx will be dedicated to the new acquisitions. So basically, the CapEx will be seen as a mix of maintenance and refurbishing, as digital and logistics and as M&A-related CapEx. So the global amount will increase, including the M&A-related ones. But for the remaining ones, I don't see any particular change.

On the net debt question, it was on the EUR 401 million of net debt. It was at the 31st of January. So because of the postponement of the rent payment, we ended up with EUR 401 million. If we are going to pay it, the net debt at the end of the year would have been EUR 425 million. So this has to be taken into account when we are projecting your cash flow for 2021. And that was your question?

Okay. I was just referring to if this amount was included in the cost reduction for 2020.

If the question -- if the question was related to the -- how can we assume the rent reduction will remain stable, and there will be a new normal. If this is the question, the rent starts becoming really an element of the profit and loss, which is variable. So basically, 2020 sales minus 20, whatever it is, 25%, rent minus 2020 similar. Hopefully, so I'm not talking about my expectation of us, hopefully, if we have a sales reduction compared to '19 of 10% in 2021, hopefully, we have a 10%, 12%, 13% rent reduction. This is the way we are managing rents. This is not happening contract by contract in a mathematical way. This is happening by negotiating with landlords. But the final result is more or less this one. So you can assume that rents are becoming more and more valuable part of the profit and loss. Sure. So thank you. Thank you all. Sorry again for the long discussion. Thank you for your attention. And hopefully, talk to you soon with a good first quarter in spite of the pandemic, which is hopefully ending gradually, and with a good result for you. Thank you very much.

Thank you.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect the telephones. Thank you.