Pepco Group N.V. (PCO) Earnings Call Transcript & Summary

Good morning, everyone and thank you for joining us today. Yes, I'm Stephan Borchert, the Group CEO of Pepco Group and I'm joined here by Group CFO, Willem Eelman. I'm very pleased to present our third quarter fiscal year '25 trading update today. Before we dive into the numbers, I want to highlight that following the successful completion of the Poundland sale on June 12, today's discussion will follow on what we are calling the New Pepco Group, comprising our Pepco and Dealz brands. As highlighted at the CMD, the simplified structure positions us perfectly to capitalize on the significant growth opportunities ahead of this new structure. If we go to the Q3 performance highlights, I'm delighted to report that Q3 was a standout quarter for New Pepco Group. We achieved record revenues of EUR 1.1 billion, representing 8% constant currency growth year-on-year. This performance was driven by our relentless focus on strategic execution and operational excellence. Let me break down the brand performance. Pepco delivered strong Q3 results with like-for-like revenue growth of 2.4%. Importantly, this marks Pepco's third consecutive quarter of like-for-like growth. This growth was driven by 3 key factors really, improved product availability, sharper price focus on our best-selling items and enhanced product ranges that resonated with customers, driving volume growth. Our strategic exit from FMCG within Pepco remains on track for completion by the end of '25. This will further enhance our focus on higher-margin categories where we have clear competitive advantages. When we exclude FMCG, Pepco's like-for-like performance in the quarter was even stronger at plus 4.8%. Dealz also reported a solid quarter with like-for-like sales up 5.8%, demonstrating positive demand across both food and general merchandise categories. Our gross margin performance was particularly pleasing with Pepco achieving a 180 basis point improvement year-on-year in Q3, continuing the momentum that we already saw in the first half. We also maintained our store expansion momentum with 45 net new store openings in Q3, primarily Pepco stores in the CEE region. We remain on track to open approximately 250 net new stores across fiscal year '25. Overall, our transformation and value creation program is delivering tangible results. The sale of Poundland has simplified our structure and improved our growth profile with New Pepco Group now demonstrating higher revenue growth, stronger profitability and enhanced cash generation. Therefore, I'm pleased to announce that we are initiating the first tranche of our share buyback program of up to EUR 50 million. This decision reflects 3 key factors: first, our strong cash generation capabilities, which provide us with the financial flexibility to return capital to shareholders; second, our confidence in the underlying strength and earnings potential of our business; and third, the Board's conviction that our current share price materially undervalues our future prospects. The buyback demonstrates our commitment to enhancing shareholder returns while maintaining the financial resources needed to fund our growth ambitions. Looking ahead, our momentum continues to build. We maintain our expectation that the Pepco business will deliver fiscal year '25 revenues and underlying EBITDA growth in the high single digits. This is also expected to deliver full year results in line with our previous guidance. In closing, Q3 has been a solid quarter for New Pepco Group. We are demonstrating our ability to deliver consistent growth, improve margins and execute our strategic vision. Our customers are rewarding our efforts with increasing loyalty and we are building sustainable competitive advantage that will drive long-term value creation. We're excited about the opportunities ahead and remain committed to our ambition of becoming one of Europe's most successful discount retailers. Thank you for your attention. I'll now hand over for Q&A, where Willem and I will be happy to answer your questions.

[Operator Instructions] And up first, we have a question from James Anstead from Barclays.

Two questions, if that's right. Firstly, on Pepco's like-for-like, can you give us any geographic flavor in terms of Western Europe versus Eastern Europe? That would be helpful. And secondly, on gross margin, you've had quite a nice expansion in the third quarter year-on-year of 180 basis points. But I think I'm right that the base in the fourth quarter is pretty high. Is it realistic to hope for gross margin expansion for the second half overall? Hopefully, those questions make sense.

Yes, James, thank you very much for your questions. Very good questions. Look, on like-for-like, as you know, we are not breaking it down by region at this moment of time. Look, overall, as I've also discussed with everyone last time, we do, of course, see a stronger pressure in the North CEE regions. I've also guided last time that we would have put a very special focus program on Poland, which was surely one of the areas where we had a bit more pressure on the like-for-like development. So therefore, that is ongoing and we are very pleased to see first positive results in this area. But historically, it's clear that we had a stronger like-for-like growth in the Southern CEE areas. And we see really, really, really strong momentum in Western Europe. I think that's probably what I can say at the moment. But overall, we are working on basically across all the markets on a positive development. And on margin...

Let me take the question on margin. We are pleased with the margin progression. But as you rightly pointed out, last year, quarter 4 was a very strong gross margin quarter for us. So we currently continue to stick to our guidance of a solid improvement for the year and a gross margin for New Pepco Group of the indicated number. Dealz, of course, as you know, is slightly lower than Pepco banner. So aggregated, that translates into the 47.5% guidance. We are confident that we will be delivering against that number.

And our next question comes from Alison Lygo from Deutsche Numis.

James actually asked a few questions I was going to kick off with. So maybe could you talk a bit about the -- that delta in terms of the like-for-like growth and the like-for-like growth, excluding FMCG? It's probably just a bit larger of a delta than I might have expected, implying maybe a bit larger of an FMCG business within Pepco. Is that really just coming through the Pepco Plus format? Could you kind of unpick that a little bit in terms of how you're expecting that to kind of progress as you exit FMCG? And then maybe just talk a little bit about the new stores that are going down in kind of Q4, a little bit of a step-up there still into CEE and just interested in terms of where exactly they're kind of going and how you're seeing them performing in terms of the new space and anything that's surprising you there?

Yes. Thank you very much. I'll take the first question and then Stephan takes the second question. It is important to recognize and realize that we have 3 distinct FMCG businesses, one which will not be impacted, which is concentrated in Dealz because that's their -- that's our brand portfolio in that format. So Dealz clearly will stay as is and will -- is reported separately. Then we have 2 separate distinct FMCG presences in our Pepco banner. One is the Pepco Plus format in Spain, where we've been very clear on the exit strategy that was announced back in the Capital Market Day in March. But we also have transformed what we call the snake. The snake is the aisle where you need to pass through, as you know your checkout, which had been fairly FMCG driven in the past and where we are creating a much more aligned product assortment to our overall store image. So that's probably why it's slightly bigger than that you expected. But we expect this to be completed by year-end. And therefore, the impact will gradually -- will still be there in the first half of next year but then it will have anniversarized and we will be measuring, GM and clothing will be the underlying Pepco metric that also then aligns with our top line reported number. Is that clear?

That's very clear.

And on your question to stores, yes, so as historically and I'll just say for many retailers it's the same. So the second half of the year is an accelerated new store opening period, the same here for us. So we are on track to open our 250 net new stores as guided. And yes, it's predominantly in Central Eastern Europe still. As we set out also at the CMD, we are very, very pleased with the development in Western Europe but we are still in a phase where we try to find out the right calibration, the right formula for a larger and faster rollout. So therefore, this year, the majority of the new stores has opened in the CEE region.

And we now have another question from Byron Jackson-Miller from Foord Asset Management.

Maybe just a quick one. Obviously, the quarter turned out slightly different to the guidance coming out of half year. Just some -- any reflections you can give on how much of that was Easter or seasonality coming out of that half versus weather in the region versus you've just seen increased competitiveness or a tougher consumer in the second part of Q3.

Yes. So let me first comment on Easter. Look, we did not use Easter as an excuse in quarter 2 and we're not going to use it as a driver in quarter 3. Holidays fall as they fall. We are pleased with the continued ongoing progression of our like-for-like. You have stronger months and weaker months in retail, as you all know but we focus on the consistency of the expansion and a real trend line towards a sustainable positive like-for-like across our business and we're pleased with that.

And adding up to this, to your question, I mean, yes, there was a lot of media noise around the May weather conditions here. We, of course, feel the same pinch as everybody feels in retail. However, we are really well prepared and we continue to be well prepared. And I think it's important to mention that our concept is a bit less fast fashion and high fashion. So there's a bit more resilience in our system around the GM and the everyday essentials lines. So therefore, you've seen the Q3 like-for-like. So it's quite steady, I would say. Outlook on consumer and competition. Yes, consumer sentiment, I think, is not a static element anymore. I mean there are so many exogenic factors and it's swinging back and forth. But again, there, we believe that current and future market trends are beneficial to us. Our concept and our value proposition to customers, I think, is spot on to what we see now in the sentiments everywhere. We offer really, really good value to families on a budget for the everyday essentials and that is what we see in the number of transactions and in the volume growth we have. And competition is the same thing really. We, of course, look at competition every day. We respect competition but we will focus internally clearly on what makes sense to us as a unique value proposition to customers. And there will always be a bit of an overlap or not but this is the focus, particularly also as set out at CMD.

Thank you. There appears to be no further questions at this time. I'd now like to hand the call back over to you, Mr. Borchert, for any additional or closing remarks.

Yes. Thank you very much. So I will hand the speech to Willem also for a minute, after I close. But I'd like to thank you for your interest in our company. We are very pleased that we could deliver another good quarter and look forward to an ongoing conversation and engagement with you for the next quarters. Willem will now quickly state on the particular Poundland situation we are in and what are the next steps for you on the disclosures. Thank you very much.

Thank you, Stephan. I want to use this opportunity to explain the upcoming release that we'll have in September, which will be extraordinary in that we will be providing you with much more information than usually. We will have the typical quarter 4 outlook and confirmation for the outlook for the year, that will be unchanged. But we intend to do a full disclosure of year-to-date quarter 3 financials, both in and excluding Poundland, recognizing that, that transparency is required to help you guide on the '26 and beyond developments of the company. We are in the midst of preparing closing accounts and getting them audited by our auditor. You will appreciate we're in workday 6 of the month at the moment. So we do not have full consolidated accounts yet available. Therefore, we could also not use this call to provide that kind of information. And also, we want to make sure that it's properly audited and signed off. So -- but we will be reaching out to you -- not reaching out, we will be doing a full disclosure on the 25th of September, followed up by detailed calls with those who want to have it to further explain and answer any questions because we think it's very important to understand the dynamic of our company and the refocused New Pepco and the shape of the financials and the guidance that goes with it. That's one very important point. On dividend buyback, I want to -- sorry, on share buyback, I want to raise 2 little points. We will commence that coming week. We expect that to commence no later than the 17th. We're in the final throes of completing paperwork with the bank, signing various agreements as required. But we are very confident that this will commence next week after which we need to report to you on a weekly basis and Tej will be a contact person for you in this matter. What I would like to stress is that if and as we will do a share buyback of EUR 50 million quantum, together with the dividend that we already paid out in April, this will be an EUR 86 million capital returned to our shareholders, which is a 3% cash return based on today's market price, which we feel is a very healthy balance between an accelerated growth plan that we have in the business but also capital allocation to our shareholders, all funded through a very strong underlying unlevered free cash flow performance. I think it was worthwhile to stress that.

Thank you very much, Willem. That's very helpful. Thanks a lot for your attention. Have a good day and speak soon again.