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 2024 financial results. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Stefano Beraldo, CEO. Please go ahead, sir.

Hello. Good morning to everybody, and thank you for attending this conference relating to the full year '24 results. I will start with a general overview. I think that we had again a very good year which has been characterized by a difficult start because of a very negative weather condition, which affected, has already been reported, the first half of the year. And in spite of this, we end up with the first half, which has been positive and the second half, which has been very, very strong, bringing total sales to more than 6% versus last year, mostly generated by like-for-like and merchandising initiatives basically. I want to mention that some of those initiatives. In OVS, Piombo is achieving a material turnover of more than EUR 100 million, approximately EUR 120 million. Piombo grew by 3%, 4% versus last year. And we are introducing new initiatives regarding Piombo like Piombo Tech and Piombo Contemporary, which are generating expectation for a possible enlargement of the size of Piombo sales in the next coming quarters. Another initiative, which has been very positive has been the one dedicated to the younger generation like B. Angel. In B. Angel, we had an important growth approximately 50% of growth in '24 compared to '23, more space, more merchandising and even higher sell-through, which means that the initiative is very solid and generating good cash margin. Also Altavia and Utopia are the 2 initiatives, which the first of them, which started basically in 2024 and Utopia is in the second season. Both these initiatives are generating solid growth and are attracting, and this is even more important, new customers, people which are looking for more sporty and outdoor garments and Generation Z with Utopia. Also, it's worth mentioning the continuous support to the growth and to the introduction of our brand to new customers generated by the beauty department. The beauty department inside the OVS store is becoming an important part of the business, accounting now for more than EUR 100 million. The growth in year '24 has been about 20% and we expect this growth to continue at high single digit, maybe low double-digit growth also in 2025, thanks to new initiative improvement in the merchandising. This segment is continuously attracting new customers, generating also important cross-selling opportunity in favor of the women's segment, which, by the way, is for the third consequent year, the portion of our business, which is growing the most. I want to take the opportunity also to mention the result of Les Copains in the beginning of the year '25. We introduced Les Copains in OVS with this spring/summer season. And the initial results are more than encouraging, are very solid. And in this moment, we believe that based on the first couple of months of sales, this initiative has been another success and will have the potential to achieve the same sales of Piombo. Obviously, Piombo is also dedicated to men when Les Copains is only women. So basically, we expect that from Les Copains, we can achieve in 2025, probably EUR 40 million sales and in the future, even more. A couple of words about international. We decided to mention even in the press release, the one small reference to the international activities, which are growing either in terms of top line. We had approximately plus 15% in the top line, entirely generated by like-for-like. We are cleaning a bit our network and focusing on the most performing store and starting operating in new countries with franchising partner. It was mentioned a new agreement that we have with Mexico, a new agreement that we have with Japan, two country where two of the biggest local players decided to start working with OVS and with some of our brand on the basis of a wholesale basically agreement. So basically, we don't enter in CapEx or rent or SG&A risk, and the margin is going to be good. And even in 2025, based on this new agreement, we expect another, hopefully, 10%, 15% growth in sales and profitability as well. So in terms of initiatives, I think that we continue to demonstrate that we have the power to generate ideas and always or almost always successful ideas, which are bringing to our brand a new and most enlarged customer base also with more elevated customer profile in terms of per capita spending, which is allowing us together with the improvement of the quality of the stores, windows and atmosphere and also, most importantly, quality of the merchandising, we are also continuing elevating our average price and increasing the conversion rate, which is a good evidence that independently from market expectation and behaviors, sometimes market are -- consumers are maybe concerned like now about the international situation and the uncertainty and the electricity bill, which is increasing. But what we see is that OVS as a destination continues to remain the preferred place where Italian families are deciding to go and this is demonstrated by the very high conversion rate. A couple of words about SG&A. SG&A has been impacted by the cost of labor increase, which has been higher than normal. You are already aware that last year, the new labor agreement has been signed, and this impacted almost EUR 50 million in our profit and loss. A material amount of SG&A, about EUR 20 million, EUR 25 million has been generated by growth, so new openings. And unfortunately, we have been affected in the last portion of the year by this one-off element, which we have been forced to report as EBITDA even if it is extraordinary element of EBITDA, which refers to a couple of situations where customers in financial trouble and under the protection of the Composizione Negoziata decree for the ones of you who are familiar with, it's kind of Chapter 11 differently from what had been reported before forced us to a major and higher depreciation of our credit. And another element has been the change in the tax law regarding the research and development activities, which impacted all the credit generated in the fashion industry by these activities, which has been subject to a change in the law, which forced all of us to claim and to enter in negotiation with the tax authority because the change in the law has been -- has forced all of us to change our accounting policies basically, our credit versus the state because part of this credit has been not recognized. So this extraordinary impacted by about EUR 5 million in our account. So the adjusted EBITDA, if you want to say that, once the nonrecurrent element would be not considered is about EUR 200 million. We believe that this means that the company has been able to confirm to be a very solid player in this market. CapEx has been high compared to our historical level for the last year in terms of extraordinary CapEx because we completed, as we announced, the 3-year program of innovation in several of our technological innovation like the new deposit, the opening in Bari of the center dedicated to rework the product which are left over and in order to increase the life cycle of those items with a positive aspect also in terms of profitability for the following year because thanks to this investment, a high amount of goods of our garment will be refurbished and reported for the following year as new. Also, we mentioned the good performance of Stefanel in the second part of the year. This is not material in our account because it remained very small, approximately EUR 25 million turnover for the full year. But it's worth mentioning that after a period of uncertainty or negative performance generated by the collections, which were made by a former manager. Now finally, I believe we have found the solution with a new manager in charge of it, a new designer. And in the second half, Stefanel sales grew double digit compared to the past. And also in this first part of the year, the Stefanel sales are very promising. So that's it for now, and I hand the word to Francesco Leoncini. But before doing it, I remember also that in light of the good net financial position and cash generation, we decided to propose to the shareholder meeting a dividend of EUR 0.11 per share, which means an increase compared to the ordinary dividend of more than 50% and also an increase of 10% compared to the total dividend, which has been distributed the year before. Thank you. And Francesco, I leave the word to you.

Thank you, Stefano. So I move now to Page #5 with some further details on the income statement. Most of the comments have already been provided by Stefano, so I quickly summarize the plus 6% in net sales. The growth of 91 basis points in gross margin that despite the inflationary pressure that led to an EBITDA increasing by EUR 13 million over last year. And with the net result growing a couple of million, in this case, also penalized by some increase in the tax rate due to some new international regulations that impacted our group. I move to Page #6 with some more colors of this performance over the quarters. We have already commented over time the first 3 quarters, just to remember a good Q1, a very -- weather penalized Q2 with sales growing just 3%, but then with a strong Q3. In that case, weather was favorable. And then Q4 that was basically a normal quarter in terms of sales that unfortunately did not translate in a further increase in EBITDA because all these one-off items mentioned by Stefano, that is the provision, the loss on receivable and the adjustment on the fiscal credit happened and took place in Q4. So the EUR 60 million reported is net of these costs that needs to be based on the accounting principles reported above EBITDA. I move to Page #7 that provides a breakdown by channel and brands with all positive figures. So the franchising -- both franchising and direct stores are growing. Both brands, OVS and Upim are growing, particularly Upim in the course of 2024 had very strong results, plus 8% in sales that translated into a plus 16% on the business unit EBITDA that now passed also the line of the 10% margin with OVS consolidating an EBITDA margin above 13%, so in line with the best practice of the industry. On Page #8, we start to have a look to all the financial items of the company. In a context, as I said, of growing business, we also managed to generate cash out of the working capital, global EUR 12 million as a combination of flattish trade receivable, a sign that we have a very strong credit management policies vis-a-vis all the franchisees and that is a slightly cash-generative item. On inventory compared to last year, we see a EUR 25 million increase due to a couple of elements. On one side, the growing of the beauty that requires some stock to be put in the store as a starting stock, especially for the new opening or the new opening within our stores. And on the other side, we have still alive the issue of the Suez channel that forces to have a longer shipment time. Last year, it was just taking place. So we were in a sort of ramp-up phase, and now we have normalized with about EUR 20 million stock in transit higher than last year. On Page -- on payables, sorry, we said we are benefiting of the growth of the business, plus 6% and that are more or less EUR 24 million and the rest due to this anticipation extra purchases on goods. Page #9, we have the view on capital expenditures that are basically in line with last year, even if, I mean, of course, the topics that we touched during this year changed. Last year, we completed basically the automation of our Pontenure DC. And this year, the main investment was on the innovation center in Bari, where we deal with rework of garments. In terms of IT, we also had during this year, the rollout of the new cash system that is easy, the interaction with customers, and also all the omnichannel activities. And in total, we reached EUR 95 million, EUR 94 million like last year, and we expect 2025, of course, to reduce this peak of investments. Page #10 provides the view on the cash flow. Cash flow that is increasing by EUR 5 million versus last year as a combination of EUR 13 million higher EBITDA, working capital still cash positive, and in line with previous year, like the investments that were substantial. And the fact that we -- during the 2024, we terminated our tax credit related to the past year losses, COVID-related losses, and so we had a strong increase in the tax payment also with a double effect of the first year in which we recover due -- vis-a-vis the government. The element I would like also to highlight is that single year cash flows can somehow be impacted by extraordinary elements like a payment arriving or paid one day or the day after. But over 3 years, we are now in front of a row of over EUR 60 million cash generation that totals about EUR 200 million. So a view that provides a solid feeling on the cash generation capacity of this company. Page 11, what have we done with this cash generated? Basically, we gave it all to our shareholders, either by direct dividend distribution that increased over time by EUR 11 million in 2022 to EUR 25 million in 2024 with an increase in buyback. As anticipated by Stefano, this year, based on the results, we expect to further increase the dividend distribution to EUR 0.11 per share. And we are also proposing to the shareholder meeting to go ahead with the buyback plan with EUR 10 million for the coming months. Page #12 is -- provides a view on the net financial position that is basically stable given the fact that we are distributing all the cash generated with a leverage ratio between 0.76, 0.80. So basically a super safe number that even over the -- taking the average of the last 12 months is 1.3. So in a situation of normal business. Page 14, we move to the future. And with a couple of -- one dedicated slide that we thought was necessary to comment the storm that affected the markets over the last 10 days is the tariff of U.S. Of course, we are worried in general about the -- how such a relevant topic was dealt with go and forth -- back and forth. But in general, we see for OVS positive elements. The first one that we already recorded is the improvement of the value of euro vis-a-vis the dollar. And this allowed also to fill one of the gaps that we still had a few months ago that was how to cover spring/summer '26 because at that time, the euro-dollar was 1.03, 1.04. And now we are managing to cover it with, let me say, a standard value of 1.10 plus in terms of coverage. The other is depending on how this saga will end, but most probably, there will be some reduction in import from the Far East to U.S., and this will free up capacity -- production capacity in those countries to the benefit of a negotiation with suppliers. So both of these 2 items, we think have a positive element vis-a-vis OVS. So in general, on Page 15, the expectation for 2025 are of continuing in the growth, first of all, in the business-related items that are the appreciation of our collections. As said by Stefano, we launched with a very successful plan, the Les Copains brand and all the other elements are moving well. So we expect a '25 growing both in terms of EBITDA and cash generation vis-a-vis 2024. The initial months of this year were affected a little bit by the weather. So we -- and we are comparing, as said, with an excellent result in 2024. So we are managing to keep basically this result. And we hope, of course, in rebound of the weather in May, June that are the focus month for our business. And last year were very negative. So we expect an improvement in that moment. That's it. So I will say, I leave to the Q&A session and give back the word to the operator. Thank you.

[Operator Instructions] The first question is from Luca Orsini Baroni of One Investments. Mr. Baroni, maybe your telephone is on mute. The next question is from Daniele Alibrandi from Stifel.

Congrats for the results. Two questions and follow-ups. I'll start with the follow-up. First one is if you can give us an idea of what is the tax rate guidance for this year? Second follow-up on Stefano, you mentioned double-digit growth in H2. I remember, H1 was minus 8%, Q3 plus 5%. So I would say there has been -- there was an acceleration in Q4, just checking on this. And the two questions are first one on gross margin. What should we expect for 2025 in terms of gross margin gains as we are seeing energy costs decreasing? The U.S. dollar is weakening, which should be helpful for your sourcing and also a potential resolution of the conflict in the Red Sea could actually push freight rates down. So just want to check this with you. And last question on Goldenpoint, if you can give us an update on the numbers last year, the strategy you wish to implement here, the cost of the option and the potential synergies you can extract as basically market is not factoring anything there yet? And at some point later this year, I guess, in September, we have to adjust the numbers. So thanks for the answers.

So the tax rate going forward should be around 26%. Of course, we are working on some potential benefit coming from the Italian legislation supporting some investments, especially in the south of Italy or in the digital IP transformation like [indiscernible]. If all these measure will be effect on our tax rate, it will go down about around 24%. But for the time being, 26% is what we have in our plan.

Okay. On the question relating the gross margin '25, I expect that as a balance between different elements, the gross margin might remain more or less stable. After a couple of years of price increases, which we have been able to pass to our customers, also thanks to the improvements that we made in our store and in our merchandising, we decided for year 2025 to keep prices more or less stable. And the dollar that you correctly mentioned will be an advantage mostly on 2026 sourcing because the recent weakening of the dollar is enabling us to start buying dollars for spring/summer '26 at a much favorable rate compared to this year and last year. But on the other side, most of the sourcing for year 2025, as usual, has been hedged. So we have a very small advantage, almost immaterial compared to 2024 in year '25. All the advantages will be taken, and we are buying dollar now to the advantage of the 2026. Other aspect, as you correctly mentioned, might generate advantages like the shipment cost. But in this moment, with a huge turmoil that we see in the market, it's difficult to incorporate those kind of benefits in our assumptions. On the other side, we must be also conscious that the market this year might require some further markdown in case the customers would be reluctant to spend. So we don't know what will happen in the consumer feeling. We don't have evidence in this moment of a negative aspect, which are impacting our customer base. We believe, again, that if there will be a continuation, if I may say, of the down trading trend, which is affecting the market, OVS will be properly positioned to take advantage of it like we are doing now. But I prefer to remain flattish in my expectation of gross margin this year and we are working in order to have 2026 with a further improvement in gross margin, not because of a further price increase, but because of a lower cost of goods, mostly thanks to the 2 elements, which has been mentioned, dollar and also -- and this is going to be very important. The present situation of high custom duty are creating a sort of a strong reaction in the Far East suppliers. And we are receiving continuous request from vendors to meet and to start discussing prosecution of our orders for 2026. And in exchange of this, they are ready to give us a better condition because as Francesco mentioned, they are concerned because one portion of their production capacity will be void next year due to reduction of sales in the United States. This is already happening. This is not a speculation or something theoretical. This is happening because the orders from our competitors, which are operating in the United States like GAP or Abercrombie are basically strongly reduced or in a still standing position waiting for news from the custom duty side, which apparently will not be good for them. So difficult to give you a more precise guidance. But as Francesco said, we believe that the success of some projects like the growth of beauty, the growth of B. Angel, the growth of other elements will generate a positive effect by default in the like-for-like sales. The gross margin will be more or less stable. And also, we started an important activity of cost cutting. This is not because we are scared, but because we believe that given the international turmoil, it is appropriate for us to try to make some savings in our SG&A structure, which will generate some medium of advantages in year '25 compared to year '24. So all in all, that's why we are confident that year '25 will be another year where top line and EBITDA will grow. We have some negative elements, again, like the cost of labor increase. You might remember that the national labor contract foresee a 3-year distribution of the cost increase. So the first year has been '24. The second year is '25. And in a lower extent, it will impact also 2026. Stefanel, Stefanel in the second half grew by 25%. So that's why after a first half double-digit negative, we end up with a positive like-for-like. And in the first part of the year, the sales are increasing again like-for-like compared to the year before. Goldenpoint still soon to draw conclusion on the impact on our sales and profitability. All in all, the results of Goldenpoint in year '24 has been EUR 3 million, EUR 4 million lower than our expectation. And this is -- this generated in our negotiation with the owners, the decision to change our agreement regarding the sequence of options. So basically, we are reducing by this amount the cost of the second call option and also the first option that we expect to exercise within July instead of being paid to the present shareholder will be injected in the company. So basically, 50% of this price will be to the advantage of our stake. From the industrial point of view, everything is moving in the right direction. We started -- we didn't have time basically to activate initiatives at the merchandising level because of the seasonality of this business, which require as you know, months in advance before generating new products and introducing those products in the store. But the first signals are very good. For instance, I can tell you that the segment of nightwear, where we are very strong and they were very weak, has demonstrated to be a big opportunity because in the last part of the year 2024, we had the opportunity to introduce part of this segment, moving some of our product from our dedicated store, changing the label to Goldenpoint and the increase of sales has been immediate and very material. So this means that from this category in year 2025, we will see an important sales growth. Same it happened to the fitness line. We have a fitness line in OVS, and we introduced in the second part of last year, very successful. Some of those items has been given to Goldenpoint as a pilot and the sell-through has been super strong. So they went out of stock in a few weeks. So it is clear to us that the store are reacting to every new good idea and good segment of product that we will generate. One other information, we -- in the first 2 months of the year, we started converting better to say, refurbishing, according a new image, some stores of Goldenpoint and even without a completely new merchandising, which will be visible in the second part of year '25. The stores, which has been refurbished are increasing sales by about 15% compared to similar store in the same geographic area, which has not been refurbished. So all good signals. I hope to have answered to your question completely.

The next question is from Domenico Ghilotti of Equita.

My first question, if you can give us a sense of what was the performance compared to the market? So if you have a sense of your market share performance in 2024 and any change in the competitive landscape? The second question is on the CapEx. Well, in general, the CapEx level for this year, but more in particular, we should expect maybe also the mix in CapEx change a little bit, so more dedicated to store openings and store refurbishment or say the same compared to last year? And the third, you were mentioning in the press release also the opportunity to push the Beauty also through dedicated monobrand stores, just if you can elaborate on this initiative also.

Thank you, Domenico. And your first question regarding the market, I can tell you that in year '24, in the last quarter, market has been reported by Sita Nielsen negative by minus 2%, and the total year, the market has been positive by 0.7%. Those figures are according to Sita Nielsen. Our performance has been plus 3.7% -- sorry, our performance like-for-like has been 3.7%, I see. And in total, we achieved a 6% decrease. So basically, we -- 1 year again, we overcome the market performance. In the first month of this year, we are, again, outperforming the market, which started negative with a minus 1%, more or less, minus 0.7% in February and minus 1.2% in March. And we are performing better than the market again. In terms of competitive landscape, nothing special to mention. If not, that Benetton is really deciding to disappear from the market. They are closing stores. We are benefiting from this trend because we are opening stores that were formerly managed by Benetton partners, for instance, in the Puglia region, which is in the south of Italy, we are about to open about 10 stores, small or midsize with the former Benetton partner. And those stores we became a Goldenpoint, we became Stefanel and this is really an opportunity. From a more general point of view, Inditex is still doing well with mostly all of their format, not increasing number of stores, but performing well in our opinion. Primark is on its market positioning continuously growing and performing well. Pepco seems to have some trouble. They grew very much, but they are not delivering quality in the proper way. And all the others are suffering. The mid-market is suffering hugely, and the performance of Stefanel is particularly encouraging, given that in the bridge and premium part of the market, most of the players are really suffering. And this is, again, a confirmation of the right positioning where we expense because we are really attracting a big amount of those customers buying Piombo and now also buying Les Copains. CapEx question, the mix is changing because the reduction of CapEx is mostly related to the special project, which has been accomplished. So basically, the new opening CapEx, dedicated CapEx and refurbishing dedicated CapEx, will remain more or less the same, because the total amount will reduce, the mix is changing in favor of revenue-generating CapEx. On the Beauty, Beauty is really I think the most important project that we have been able to create and generate in the last 5 years. Sales density of Beauty in our stores is much higher than the apparel, which is normal, EUR 6,000, EUR 7,000 per square meter sales with a slightly lower margin means that the GMROI or the gross margin per square meter of Beauty is almost double compared to the margin generated by the apparel. So Beauty is useful not only to attract new customer in OVS stores, generating cross selling, but also to generate absolute EBITDA per square meter. Regarding your question about the opening of stand-alone stores, I'm happy to say that in Pavia, we opened last week our second pilot and the results are even better than the Ferrara first pilot. In the first 6 months, Ferrara is generating 20%, 30% sales higher compared to our budget and the store we expect that we'd achieve EUR 1 million sales. The story is a 90 square meters store, so more than EUR 10,000 per square meter. It will be a very profitable store. In Pavia, the start has been even higher. So the first days doesn't mean anything special, but there were few people queuing waiting for the opening of the store. And we are achieving sales in absolute value in the first days, which are comparable to full format of OVS store 5x bigger. So a very good start. And now we decided to enter in the second phase of our, call it, pilot, but it's not that much a pilot anymore. It will become a development plan. I think that we opened -- we will open this year between 10 and 20 beauty stores. We are looking for locations now. And this business is very promising.

The next question is from Andrea Bonfa, Banca Akros.

My question is related to the month of May and June. Stefano, assuming that weather normalized, how much of sales would you recover compared with last year in terms of absolute number? Are we talking of EUR 40 million more, EUR 30 million, EUR 60 million? Just to have an idea.

Well, when I think and my team is thinking, I touch wood, so because we are talking about something which is not depending from our power. It will be a material number, maybe EUR 30 million could be achieved. Also because as of now, weather continues to be very negative. You are in Italy, you know that today is cold, it's raining, et cetera. So we believe that most of the sales, which characterize the start of the real spring sales period still has to come. So I expect a strong rebound because our assortment is well in place. We have no delay this year, while last year, we suffered some delay in the arrival of merchandising. So it could be EUR 30 million, it could be even more. Very much will depend from weather. If weather will change as apparently will happen in 10 days from now, we start mirroring the worst days of last year because as of last year -- last year, as of today, sales were very good and weather was positive. From mid-April, weather changed drastically. And so we have easy comparisons starting from next week, basically. So let's cross fingers, EUR 30 million minimum, we expect to increase compared to last year.

[Operator Instructions]

One thing maybe I will say because I think that we missed mentioning one element, we told you that during 2025, CapEx will be reduced. We didn't tell -- we didn't give you a guidance. We believe that at least EUR 10 million less CapEx will be done in year 2025, if not EUR 15 million. Thank you for attending this call. And I wish you a nice Easter period. Good -- have a nice day, Ciao.

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