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

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the OVS Full Year 2021 Results conference call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Stefano Beraldo, Chief Executive Officer of OVS. Please go ahead, sir.

Thank you and good afternoon to everyone for this Full Year OVS result conference. Well, as you have read from the press release, basically, we confirmed our indication for the full year that has been given about 2, 2.5 months ago. I believe that from a qualitative point of view, what I can mention -- what were to be mentioned is that in spite of very poor sales in the first quarter of the year that was minus 27% due to the lockdown period, the following quarter has been outstanding in term of like-for-like, which is positive for all the 9 months. And the result was positive for all brands and in all channels with some peculiarity like small catchment areas store, which are having better performance versus the total network and grew more than the last year. From a product point of view, the success of women collection and the new image of OVS as a marketplace has been extremely important to sustain the sales. And the introduction of brand -- of partner brand, which represent a good customer attraction driver and that performed much better in terms of sales density, contributed to the achievement of these good results. Also, in term of space, we already mentioned that the good result has been achieved in absence of increase of square meter and a strong increase in market share. More than 10% increase in market share has been achieved basically without increasing new space. So that means that our brands are becoming more and more appreciated by the customers. As we announced, we've reduced the overall markdown consistency with our strategy. We believe that it was not useful to devaluate goods since our customers were and are rewarding our brands. Thanks to quality and appeal of new collection like Piombo, Baby Angel, Grand & Hill, and also thanks to the higher level of sustainability which is more and more considered by our customers as one peculiarity of our company. And also thanks to more beautiful stores. Markdown reduction allowed for increasing margin. So despite fourth quarter penalized by another surge of Omicron variant and also by good deliveries which has been delayed due to the disruption in some aspect of the supply chain. A portion of goods which has been delayed has been moved to next year, and we will take advantage both in term of cash and better purchase condition about it. Obviously, we suffered for the lack of sales generated by the missing goods in the year 2021. Basically, another aspect that I want to outline is that with the full year '21, we have closed the loop on the working capital impact generated by the pandemic. As we planned, but it was not obvious, we've managed to sell all the leftover of lockdowns, and we bring back to payment term to normal -- the payment terms to normal conditions. As a result, the 2021 cash flow has been extraordinary, EUR 130 million without considering the further EUR 81 million from capital increase. Net financial position is now as low as EUR 190 million, and debt-to-EBITDA ratio has been reduced to 1.3. Basically, in light of this, we decided to suggest that to the general shareholder meeting to return to a dividend policy with an amount of EUR 0.04 per share, which based on the today market cap means 2% remuneration. Finally, in term of sustainability, we believe we are definitely on the right path. In 2021, we have been rewarded as most transparent fashion brand worldwide by Fashion Revolution, the activist company. And also internal market research confirm that our brand is more and more appreciated in term of sustainability commitment. So with this in mind, I think that it has been a very tough year, I would say, a super tough year, started much worse than we expected with another series of lockdown which penalized the third quarter. But I think that we've been able to take advantage of an incredible recovery even in a situation where we had to get rid of old goods. So minimizing markdown in presence of a worse mix between new goods and old goods, I think, has been remarkable, and it's another demonstration that the positioning of OVS is not as risky in term of fast fashion or risk of obsolescence of merchandising like maybe for other brand. So with this, I hand the word to Francesco Leoncini for the -- for some comment on the quantitative slides. Thank you.

Thank you, Stefano. And move to Page 3. For the next 10 slides, I will provide you some further details of the good results of 2021. We start with a full view of the P&L where, I think, the most important element is the increase in the gross margin percentage from 55.5% last year to 56.7%. That means almost 120 basis point increase -- sorry -- despite the fact that we had to clear the leftover of 2020. So a very good result. And as said Stefano, a good implementation of the strategy of reducing the markdown. The doubling of the EBITDA then drove to a strong improvement in the net result that moved from a loss of -- more loss of 2021 of EUR 5 million to a profit of EUR 45 million this year. The result was the overall result in terms of both brands, channels, et cetera. In particular, OVS, on Page #4, we can see increased sales by 29%, basically with no space increase. Upim, which is a little bit smaller and has still a very high potential in terms of market penetration, increased by 45%, also thanks to new opening, most of which in franchising. Then in terms of EBITDA, OVS, as you know, has a much higher operating leverage, thanks to the number -- to the network of direct stores. So bounced back by more than doubling the result to EUR 125 million. And also Upim increased more than the trend of sales to EUR 27 million EBITDA. Comparing to 2019, which is somehow our reference and last year before the pandemic, we can see that in terms of EBITDA, we lost EUR 19 million in the first quarter due to the lockdown of 1 year ago. And then we gained EUR 10 million over the last 3 quarters, thanks to EUR 42 million increase in terms of gross margin. And this was driven, as said by Stefano, by a positive like-for-like performance by exceptional sales on the digital channel. And of course, part of this gross margin increase was assorted by higher marketing and by couple of years of inflation and a small incidents on the perimeter growth. More interesting, I would say, is a result in terms of cash because the magnitude is even higher. In the 3 quarters that were affected by the lockdown imposed by the government, the company lost EUR 237 million. But then, in the remaining 5 quarters over the last 2 years, we were able to generate EUR 275 million, that is EUR 40 million more of what we lost in the closed quarters. And as you can see in the last 3 quarters, we managed to achieve more than EUR 50 million cash generation for 3 quarters in a row. Just to provide you a reference, in the full year 2019, that was a year where the company nonetheless focused on cash generation, we reached EUR 65 million in 12 months. And in this year -- I mean in the last 18 months -- in the last 9 months, we generated EUR 180 million as cash. Then we had the boost of capital increase, EUR 81 million, and so we are lending at EUR 290 million, 1.3 leverage ratio. One of the key elements of this success, move to Page #6, is the careful management of working capital. We managed to reduce trade receivables. Last year, we provided extended payment terms to our partners, to our franchisee in view of strengthening the partnership. This proved to be a successful mover because we suffered basically no loss on receivables. And we are now normalizing the terms, and in addition, moving more and more to the consignment stock model, by mean of which OVS is the owner of the stock and invoice the franchisee only at the moment of the sale to a third party, we reduce our risk and also we reduce structure in the DSO. Inventory. Inventory, I would say, is a major achievement because a couple of years ago, we planned not to absorb, to grow the stock because of leftover and then sell it afterwards, we managed. And that now we are not only EUR 30 million less than 1 year ago, but at the same level of 2019, even some millions euro less. On trade receivable, again, we had normalization of the business, and we are generating additional EUR 23 million by mean of that. So in total, EUR 60 million -- more than EUR 60 million generated in one year by the working capital. Portion of it has been reinvested in CapEx, Page #7, where we focused on quality because, as you can see, the major elements of cashout are store refurbishment, in-store projects and also a new opening, in many cases, a relocation. We closed a store maybe opened 20 years ago in a medium quality spot, and we are taking the big spot, sometimes even entering where the -- one of the weakest player at the moment, which is H&M, is leaving some other places in Italy. We had this in Gorizia, we had this in Grosseto, and we are under discussion also for other locations. And then, of course, we had the other elements of the normal operation on IT and building. And also EUR 6 million invested for the acquisition of Piombo and Stefanel brands. In terms of total cash flow on Page #8, we can see the -- that we see the normal flow of the, starting from EBITDA, then the positive contribution of change in working capital that absorbed last year EUR 80 million and released basically all the value this year. The -- also the other portion of the working capital, for instance, the payment of social contribution that took place on the following months are increasing again, thanks to the normalization of the business. Overall, we had an operating cash flow of EUR 160 million before interest and taxes and EUR 130 million after interest and taxes. This led -- Page #9 on, I said, a very good financial position, EUR 190 million versus EUR 400 million last year. And a drop maybe is not enough because the leverage ratio really collapsed maybe from 5.5 to 1.3. So from a stress position to more than investment-grade situation. And also without consideration and not considering this, capital increase would have been at 1.84. So the capital increase, of course, is a booster, but not maybe the main element, which has been at the normalization of the operation and the cash generated, thanks to that. On Page #10, we provide you a detail of how we leverage this improved situation to not exactly refinance, but substitute the current lines with new ones. So we've managed to close the bullet loan very expensive and the structure that was obtained during the peak of the pandemic with 2 lines, both of them linked to sustainable -- to sustainability targets. So committing really with numbers and with money to reach those targets that are with a cost in the range of 175 to 125 basis points. The total value facilities decreased. But of course, also our needs are much lower than in the pandemic. And we think that we have more than enough flexibility, I mean for -- even for the seasonal peaks that we have in Q1. Page 11, close the loop with the sustainability targets. We were very pleased last year to be ranked the #1 worldwide by one of the toughest organization that in terms of transparency, as I said, put OVS #1, this is the -- an effort that lasted many years. We were the first, I think, to declare on the website the supplier, which product, but also across all the elements, in-store communication, newsletter, et cetera. We are really focusing on transparency. And the next steps, the next targets are now focused on CO2 emissions. Maybe you saw a couple of days ago also the press releases. We declared a very challenging target of a 46% reduction within 2030 of CO2 emissions. I would give back the word to Stefano for an outlook on this strange 2022, but that's it. Thank you very much.

Thank you, Francesco. And as I said in the press release, basically, I used a strange wording because I told that I have a cautious optimism, which is a bit of paradox. But basically, it is because of being scaramantic. The year started worse that anyone could have imagined with all the negative elements from the war to the pricing -- the cost increase, the omicron surge, also bad weather and delay in deliveries that continued. In spite of it, initial '22, sales has been good, has been recovering versus -- strongly recovering versus 2021. And day after day, in April, they are getting closer to 2019 with very good level of sales in the last couple of weeks. Also weather normalization, hopefully. And arrival of spring/summer '22 goods are pushing April sales back to 2019 and I think that we have in front of us a good second quarter because, finally, we will be much better placed in terms of arrivals of new goods. Another important signal as an outlook is that despite a growing market share over the last 18 months from 8% to 9.3%, as we mentioned, in the month of March, we outperformed the market once again. This shows the strength of the brand, and I think it sets the positive expectation for when the market itself will normalize. Inflation. Yes, there is a big issue, and we are receiving continuously question about inflation and impact of inflation in prices and reaction from the consumer side. As declared, we decided to raise prices because of reacting to rising costs. In absence of this, we could not deliver the same price quality ratio that our customer are used to. But basically, seems that this is not generating a great problem. Conversion rate and items particular in line with 2019 showing that customer retains still well balanced our price quality ratio. And as a result, the March EBIT margin, when more than 80% of sales has been composed by new goods, so goods with higher prices, the margin on a like-for-like basis is higher -- I mean the gross margin is higher than 2019 in all segments, which has not been impacted by late deliveries of good. On cost side, we have inflation in line with our expectation, which means that the cost increase in raw material and logistic and transport is included in our budget and in our forecast, and we are not having further surprise on them. If we look at the status about how our brand perception is experienced by our customer, I would say that customers are appreciating that OVS is becoming a platform, a platform with a partnered brand and also house brand. In this moment, in full year '21, the weight of the brand, including our brand like Piombo, Baby Angel, weight about 30%, and 18% in total of our women has been represented by concession. On concession brands or private brands like the onboard Baby Angel, sales density is higher from 20% to 50% compared to the ordinary collection. This means that this is also introducing a new target for our sales density in the next coming season. Introduction of new brand is not only generating additional sales, but also driving traffic on our house brand collection. Finally, last week, an internal research, which has been conducted in 8 store on a panel of 1,000 customer, showed to us that the perception of OVS is significantly improving. New style in women and the new concept of the store with real plants with a cozy environment are inducing customer base to express their appreciation for what our brand is doing. Finally, couple of word on digital, which is becoming more and more central in our strategy. On our website, you can find and you will find continuously new brand which are being onboarded. We have now GAP. As you know, we have Converse Kid on apparel. We have new balance on kids shoes. We have Crocs. We have -- we are about to have Jansport. We have Telluride, many, many others, some of them we cannot still disclose. Basically, the market -- the digital market is not performing well in this moment. I mean the market itself -- according to Sita research, the market in the first quarter -- calendar quarter, January-March, has been negative, and we outperformed the market by about 10%. Basically, the outlook for the next month is positive, also considering that we have a rich pipeline of new initiatives. Few weeks ago has been launched the new OVS app, which is an application, which has been downloaded by more than 30,000 customer in few weeks. And these new -- this customer are spending 130% more compared to average. Omnichannel. A couple of words finally on omnichannel. We believe that omnichannel for us is even more important than pure digital sales. We have launched a new project that we call one-click assortment that allows a franchisee store basically to virtually extend their assortment, giving access to the online inventory of e-commerce and creating in this way a sort of endless aisle. And now we have other projects in this regard, like what we call extended availability, which means that we are about to enable every store of our network to become a warehouse, a place from which a product can be delivered to customers to sustain online sales. So a lot of projects, a lot of good results, I think, in a still difficult environment. Market share, hopefully still increasing also for 2022. And basically, that's it for now, and I leave to your question. Thank you.

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

I got actually 2 questions. One is related -- I mean if you can confirm us your approach or if you can share with us your approach now to the sales spread out of the inflation effect in term of pricing, if it's correct to assume that your price hikes will be lower in the spring/summer and higher in the second half. And what are your expectation for the winter in term of potential -- I mean with this inflationary environment because, of course, you need to segment the price increases according to brands, to items and maybe to apply more inflation in certain products and less in others. So if you can elaborate on that, if you see there's some higher risk on autumn/wintertime, on the spring/summer because of that? And the second one is for Nicola. Your tax rate was exceptionally high, at least vis-à-vis my forecast. If you can elaborate on that. And what shall we expect for the current year and going forward because we demand a standard 26% tax rate?

Okay. From my side, I can tell that the price increase in the first half has been about 8% and in the second half, it will be between 12% and 13%. So the average price increase will be about 10%. I don't think that there will be such a big difference to justify big risk on how the perception will be -- how the price increase will be perceived by our customers. Clearly, they are not happy. Sometime they refer, when they go to the cash counter, to the fact that they are noticing this price increase, but they are also very generous with us because the explanation is very transparent in our -- according to our style. If you want to have the same quality, because our cost increase has been much higher than our price increase, you have to pay for it. And honestly, in these 2 first months of real world where we experience what is the effect of this 8% increase compared to sales, we are also a bit surprised by the fact that the quantity reduction is lower compared to what we expected. And the equation, price increase versus quantity reduction, is even in our favor. What will happen in the second half? Obviously, I don't know, but we prepared -- and I come to the second part of your question regarding effect of inflation. We are trying to secure a sufficient amount of entry level in our price mix to make the people, the customers, which are more interested to low price able to find what they are looking for. On the other side, what we are experiencing, and also the research and the data of our CRM is very supportive about it, is that we are -- thanks to our brand strategy, thanks to what we are doing with Piombo, for instance, or with other brand, we are attracting new customers which are normally visiting OVS for the first time, and this happens especially in the newly refurbished stores. In Milan, for instance, we have a 20% of new customers visiting City Life. They joined the club, and they tell that they never visited City Life. And what they buy, they buy Piombo, men and women, and they pay more because the average ticket is higher. So there is a good combination in my opinion of entry level, which we want to continue to provide to our customers, but also to higher prices, which are concentrated in the brand, and particularly in Piombo, which are attracting new customers, which are downgrading maybe their own preferences to mid-price chain to more value brand like OVS. So all in all, I think that the risk is very modest. And the bigger risk was in the first half where there has been a price increase, which has been more material compared to the one that they will see in the second half. Nicola, to you now.

Yes. So about the tax rate, in 2021, was 33.4%, and this is an extraordinary high compared to our historical and recurring tax rate, that is 26%. Reason behind is specifically due to 2 events, which are now not recurring and no cash items, and in particular, 3.5% is referred to deferred tax asset, followed the brand realignment of 2020. You need to consider that the original law was for 18-year depreciation, and the new tax law is for 15-year depreciation. And so we changed the deferred tax asset. And an additional 4% is due to rental discounts following the COVID 2019, but we recognize in 2020, but for IFRS 16 and for the tax revenues was account in 2021. And this is about EUR 4 million or 4% in the tax rate. So if we depurate these 2, we come back to 26, that is our target going forward. You can also notice that in the cash flow, the tax amount is EUR 6.8 million, so 1/3 compared to the tax rate and the tax items in the P&L. And this is the confirmation that we are confirming the 26 going forward and the difference for this year is on the nonrecurring and noncash items.

The next question is from Domenico Ghilotti with Equita.

I have a few questions. The first step -- so just a clarification on the situation. So on the comments on the price hikes because -- so you were mentioning that basically, April was basically flat compared to 2019. So I can't understand how the price increases that you are mentioning are, let's say, consistent with this flattish sales if you don't have a similar decline in the volumes. And then a question on, in general, on the competitive environment. So you were mentioning that the online market has been suffering more. So if you can comment also in general, your performance compared to the big -- the large usual -- the other large players? And then, well, a question in general on the opportunities that you are seeing on the market given the very low gearing that you have so far? And last, on the Stefanel side, I wonder if -- so for sure, you had some, say, start-up costs in the initial year. Should we expect to see some improvement already EBITDA breakeven this year? Or should we assume additional time to get to this level?

Okay. On the first question, I didn't say that we have now a quantity decrease. I said that we are in line with our expectation. Obviously, we have a quantity decrease, which I said is even lower compared to what we expected, particularly in those segment of goods where we haven't suffered late deliveries. All in all, we have approximately the price increase, which is compensated by quantity decrease. But if this would be a final equation, this equation would be fantastic because from a mathematical point of view, now is maybe not the right time to make math. But the price increase generates turnover. The cost increase is lower in absolute term compared to the turnover once the price increase has been considered on lower quantities. So basically, in this moment, we have about a situation where price increase is compensated by lower quantities. That's why we are flat. So maybe we misunderstood or I mis-explained what I told before. On the second question that was related to the e-commerce, the market apparently is negative by 12% in the third -- in the first 3 months, the apparel market digital. Then we are down by 3%. So this is why we are outperforming the market according to Sita mentioned by about 10%. We don't think this is going to be permanent. I think that this is a kind of an effect of the aspect -- a counter effect generated by the aspect that last year, we had lockdowns and this year, we have not lockdowns. So basically, there's more people going to buy in the store than in the first quarter of last year was Saturday and Sunday, most of the stores were closed. So I think it's kind of physiological effect and will be different at the evolution and more positive for the e-commerce in the next coming months.

Sorry. Maybe just to clarify. So on the brick-and-mortar market, so who are you taking share from? So still there's widespread or...

We are taking share from anyone. I think that I asked Francesco, I know that Francesco has a slide for -- to give you a precise answer to this. Francesco, maybe while I continue with my answer, you will find the slide, and you will answer to this question more precisely than I can. By the way, on the third question, yes, we are looking at several other opportunities like we are saying since several quarters. We are not in final or almost final negotiation with anyone. Every dossier which is coming out in Italy is on our desk, basically. But in this moment, still nothing so close to be realistic to be -- to worth a comment. We also have enough initiative -- internal initiative, to be honest, in this moment to justify the fact that we have a lot of things to take care of and to do in term of turnover increase in the next coming months and seasons. We are looking to bring Piombo brand out of Italy. Apparently, we have good possibilities. We show the Piombo collections and Stefanel collection to some European and American department stores, and we are in negotiation with them to position Piombo also in some international department stores. During your call, I lost the line for a second regarding the last part of your -- the fourth question, if you will repeat that.

It was on possibility to get to breakeven at Stefanel. I saw that in the first year for the start-up, you had some EBITDA -- a few million of EBITDA losses. Should we expect that this is potential -- already potential closer to breakeven or should we...

Yes, yes. Our expectation for the year is to be very close or at breakeven or very close to breakeven. I must remember that the first year of Stefanel has been characterized by the takeover. And we have been forced to pay the rent for the spring/summer without the goods, basically. So the full year '21 has been to consider as even less than a start-up initiative because you might consider that the first 6 months has been partially an acquisition cost given that we have been forced to sell all the super old collection, a good collection of one year before in stores where the rents has been almost full.

Okay. Clear.

Okay. Francesco, you have an answer for the market share?

Sure, I have an answer. If we look to the very short term at least the last 3 months, basically, the area where we are gaining ground is Internet. Internet declined by 200 basis points overall between September and December, and as said, is also projecting some decline beginning of 2022. The other weak -- the other loser at the moment are H&M that said is leaving some location in Italy, and Benetton, which is fairly declining. And also all the chains of men, like Dan John, Doppelganger that, let me say, of course, are suffering at this moment. There's still a high incidence of smart working, and so I mean are still weak. So these are basically the elements, while, for instance, the independent stores are a little bit bouncing back. No, they lost hugely during the pandemic. They are well far behind -- well, far below the 2019 levels, but in this special period are a little bit recovering their role in -- so really in Italy we're seeing customers willing to coming back to stores, try, have the feel and also, this is one of the reasons for our restructuring now because we have to provide a very nice environment for consumers to purchase the goods.

Okay. Maybe just a last follow-up. Have you started to see a comeback of traffic in, say, tourists -- the touristic cities or bigger cities or is it still too early?

No, no. During this last day, from Easter, basically, we are assisted to an improvement also in touristic cities.

[Operator Instructions] The last question is from Luca Bacoccoli with Intesa Sanpaolo.

I hope you can hear me clearly. Three questions from my side. The first one is on the '21 gross margin expansion. I was wondering if there's any positive impact from the FX movements? Then the second question regards the terms -- new terms with your franchisees. So I was wondering if the shift to the consigned model may further generate cash flow in 2022 or the positive effect was basically over in -- or better ended in 2021? And the last question is a follow-up on the tax rate. If I recall well, thanks to the brand's realignment, the cash benefits amounted to EUR 6 million per year starting from 2024. Is that forecast confirmed? Or should we assume a lower amount?

Maybe I answer on the first question, even if probably Francesco and Nicola can give a better answer. But overall, I was saying no to both the questions. So not a material impact on gross margin due to foreign effect in 2021, as you asked. And nothing material to expect in terms of change of working capital because of change from a franchise into consignment. Nothing material, basically. I ask my team in case they need to correct my sentences or directly to answer to your third question.

And now we can confirm. So about the tax rate and the benefit coming from realignment of the brands. Unfortunately, with the new law that is forcing for 50-year depreciation on the amount of realignment, the effect on each year is not anymore EUR 6 million, but about EUR 2.8 million. In any case, we confirm the tax rate going forward, as I already explain, very close to 26%.

[Operator Instructions]

Okay. I think that -- seems that you are fine with this conference. And if okay for anybody, I will close the conference here, and I will thank all of you for your attendance and attention. Thank you.

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