Pet Center Comércio e Participações S.A. (PETZ3) Earnings Call Transcript & Summary

[Foreign Language] [Operator Instructions] I'd like to inform you that this call is being recorded and will later be made available on the company's Investor Relations website. Today, we'll have the company's executive Sergio Zimerman, CEO; and Aline Peli, Financial VP, VP for Investor Relations, ESG and New Business. Now I would like to hand the floor to Mr. Sergio Zimerman.

Good morning and thank you for your time. Before we actually start the presentation, I just wanted to highlight that this quarter is a typical quarter that you see on those news articles when you have a bad headline, but good content. The headline doesn't help a lot. Unfortunately, many people just focus on that. And the headline would be that is not profitable and has losses of that many millions. What happens is that fortunately, this type of scenario is pretty much an accounting scenario like you will be able to see throughout the presentation. The operational indicators and the operational results in the quarter were extremely robust and consistent, making it clear that we are going through a recovery trend as indicated in the third quarter results call, and the fourth quarter results only confirm that previously announced trend. Exactly like I've mentioned before, but now with more data, we can see that -- looking back at 2024, we had a first quarter that was quite challenging. We were worried with low growth rates with a gross margin that was minus 0.9 percentage points versus the previous year with a drop in the bricks-and-mortar sales channel. So several indicators were worrying us. And in the second quarter, even though we had some numbers that were not good, I would say that we had a mixed balance. But within those numbers, we had very positive operational indicators, which would probably indicate a recovery starting in the second half of the year. And this forecast -- and again, here, I'm talking about an increase in traffic in our bricks-and-mortar stores, an increase in frequency of purchases and several other indicators that we monitor on a weekly basis and indicators that started to be improved in the second quarter. And the third quarter really confirmed those forecasts. Here, we started to see a recovery of our growth with a 7.6% growth year-over-year. We had a record revenue reaching BRL 1 billion in the quarter, and the Accessories category with a 15.6% growth after several quarters of a lower trend. But when we look at the fourth quarter now, like I mentioned before, that was the quarter of the consolidation of our recovery trend, growth was of 9% in products when we look at our B2C operations with a small detail. And I would like to highlight this detail because it's small, but quite important. It can help us and hinder us, but it's important for you to be aware of that. Our internal inflation throughout 2024 was actually negative in 0.8%, meaning if the average official Brazilian inflation was 4% or 5%, we had internal inflation of minus 0.8%, which means that all the growth we had in same-store sales and the overall growth we announced represent real growth. Roughly speaking, we should add 0.8% since we had that deflation effect. And that explains why our operational indicators, like volume of sales, frequency of purchases and traffic, are way better than our financial indicators because again, deflation on one side gives us a basis for real growth. But on the other hand, it also puts pressure on the results because several expenses are corrected by the inflation rate, especially labor cost or wages and rent costs. And when you don't have inflation in the products that you sell, you need to sell more volume in order to get to the same financial results. The fourth quarter also included the launch of more affordable prices or affordable products, which was an extremely successful strategy. Our private label that over the year was doing quite well. In the fourth quarter, it consolidated itself with an outstanding sales performance, later, we'll give you more details on that. We also launched a gamification feature which was a big success. Actually, that was launched in the third quarter. And then in the fourth quarter, we continue with the same gamification feature, which put a lot of focus on the sales in bricks-and-mortar stores, which led us in an outstanding growth in our physical channel of 11.4%. So an 11.4% growth rate, going back to that idea of 0.8% deflation, we are talking about a real growth of over 12%, which is a very robust growth rate in our stores, indicating that we had more traffic and more frequent purchases. And these are the 2 components that allow us to see this type of growth in our physical channel. And our gross margin also with a recovery of 0.7 percentage points year-over-year. Like I mentioned before, the 9% growth rate, an increase in 11% in the number of coupons or tickets that growth in physical stores of 11.4%, a 7% growth in our digital channel with a more balanced growth between both channels. And one of the reasons for that is, once you make stores competitive again, it's natural to expect some lower growth rates in the digital channel because a big growth on digital puts a lot of pressure on our margins. So it's a very positive trend to see growth in our stores again. A very strong growth in our subscriber base, 21% growth year-over-year, and now we have 538,000 subscribers. Gamification was a big hit, a huge success, something that we continue to seek in the first quarter. In the second quarter, we're going to have the second addition of our championship. And the sales gamification practice came to us at a very positive moment in a very timely manner, and it certainly helped us see this type of recovery in our stores. And again, our omnichannel customers, they purchased 2.5x more than customers purchasing on a single channel. And I also would like to highlight that the first quarter of 2025 remains with the same trends, especially those related to our operational indicators. We still don't have an internal inflation, which again puts us challenges in our cost management strategies. Once again, we have reached a record revenue with our gross revenue of BRL 1.1 billion. It's a record for the quarter. Our same-store sales of 5.1%. And again, just a reminder, 5.1% with a 0.8% deflation. So we're talking about a real growth in terms of same-store sales. Our gross margin of 39.5 with 0.7% recovery. Our growth in our -- gross profit was 9.2% year-over-year. The adjusted EBITDA margin, a growth of 24.8% year-over-year, and the adjusted EBITDA margin was at 7.9% with a 1.1% growth versus the previous year. Our private label products with a very robust growth, we are talking about 46% growth versus the previous year. Actually, it was 40% of growth in 2024, 46% of growth in the fourth quarter. And our adjusted net profit with a growth of almost 50%. So again, on this highlights page, when we focus only on our operations and only on the results that are exclusively related to the operations, the numbers are doing quite well. As you're going to see later on, nonrecurring results or accounting results, as Aline will explain to you later are the ones generating results that ended up in the news. Again, our private label is growing at a very robust pace, representing 12% of share in the fourth quarter. And 1 percentage growth every quarter. We started in the first quarter of 9%; second quarter was 10%, then 11% in the third quarter; and in the fourth quarter, we had 12% of share in our total revenue. A big highlight was the launch of selections, our private label for dry food products. Selections were not only really welcomed by consumers, it's the only brand of pet food that promotes -- that sends part of the profits to NGOs working with animal protection as part of the identity of the brand. That's part of the packaging, part of all the messages we have sent from the beginning. And consumers are giving us very positive feedback because now they know that when they feed their own pets, they're also helping feed the pets that NGOs take care of. We have 20 SKUs with packaging of 3, 10, 15 and 20 kilograms each. And of course, it's important for consumers to accept the brand, but it's more important to be accepted by the decision-maker, the true decision-makers, our pets. And luckily, we have seen a spectacular number of repurchases because customers can buy the product once, but they're not going to buy it again if their pets don't accept the product. And our repurchase level is at the same -- par to par with the top brand. Just to give you some perspective on the growth we had. Pet Food grew 8.9%; Pharmacy 8.8%; Hygiene and Cleaning growing at 16.4% and Accessories once again driving this growth rate with a 15.6% growth year-over-year, which really highlights the strategy of positioning us in different categories. Spike is one of the brands that helped us do that. It's sells products at more affordable prices and it gained big relevance, especially for Pet beds. Now we have more than 50% of market share from our private labels in that category and for toys as well. Sales are doing quite well, especially in the first quarter of '25, we have launched over 200 SKUs for toys with better margins, exclusive products, not just as a brand, but as a product itself. We are bringing to Brazil toys that cannot be found in any other store from the same segment. Now I would like to hand the floor to Aline Peli, who will be disclosing our financial results. And in the end, I come back to take any questions you might have. Thank you so much.

Good morning. Now I'll give you some financial highlights without going too deep into them because Sergio already shared a lot of them. We had a record gross revenue of BRL 1.1 billion with a 7.4% increase in our total revenue, but it's important to bring you some highlights. First, the growth in our B2C line, everything that has a Petz brand or everything that's sold by Petz brand, everything that's sold directly to consumers. We grew 9%. In our B2B efforts, we had a performance that was affected by a very tough comparison basis from the previous year. As Sergio mentioned, in our stores, we work to improve the competitiveness, improve our cash margin. We did the gamification efforts that made our team to become more dynamic and not lose sales, which generated an important recovery of channel, 11.4% over minus 2% in the previous year. And as a consequence, digital grew a little bit less, only 6.4%. But again, the comparison basis was 19% of growth in the previous year. Our same-store sales, we have a graph after that to show that, but with a beautiful acceleration of 5.1% beyond the official inflation rate of Brazil. And another positive result came from services, both for grooming and veterinarian services with a 14% growth with a lot of improvements in volume and productivity. Now talking about our gross profit. Our gross margin was relatively high, 39.5%, with a 0.7% increase year-over-year. And when we talk about being more assertive in our commercial strategy and increasing the share of the stores and offering more private label products, all those factors have contributed to this positive result in our gross margin. As Sergio mentioned, in the first quarter, we still has a little bit of pressure in the gross margin. And in the third and fourth quarter, we were able to recover and resume our levels. Now talking about our EBITDA margin, we also had a significant growth with [indiscernible] of expansion. And I would like to highlight our operational expenses, we're able to have a dilution of 40 basis points, and I'll give you more details about that later on. But basically, I don't know if you remember this, the comparison basis was a little bit tougher because when we did the brand refresh of the Petz brand, we made a lot of investments in TV, media and out-of-home media. And now we only need to maintain our marketing strategies. Our adjusted net profit -- I'll also give more details later on about the reconciliation, when we go from the adjusted to the accounting, but in the adjusted net profit that doesn't include noncash elements. So it doesn't include stock options. It doesn't include the effect of our 4131 debt and also the impairments that we have that I'll explain later on. If you remove all those noncash related elements, we had a growth of 49.7%, which is a very positive number. Now on this slide, it's important to mention that we were able to see a significant improvement in our same-store sales. We said -- we saw a big acceleration. We started the year with about 2% of same-store sales, and we continue to grow. I would say negative, and then we accelerated that and we're able to achieve 5.1%. And this graph shows this change of trend between the first and the second half of the year, something that we have been talking a lot to the market about. If you look at the table in our 4-wall EBITDA margin, we are at the same levels from previous quarters. We saw some improvement in our 4-wall EBITDA for a couple of stores, which is quite positive. When we look at our expansion plan in 2024, we opened 16 new stores, 16 pet stores, the stores that you are used to know with the Petz model that have between 400 and 700 square meters. However, over the last year, we also opened 3 pilot stores, 1 store for Petz cash & carry, cash & carry of our own products. It is a pilot project. We're following the performance of the store, it's located in Sao Paulo. And in the fourth quarter, we opened 2 Zee.Now pilot stores. Zee.Now is our delivery app that can deliver actually faster than Petz, but all the deliveries, all the shipments come from Petz stores and no longer from Petz hubs. And we also opened Zee.Now stores. We have 2 with an average of 140 square meters. So it's a concept of a smaller store that we start to test, but with a different brand and a slightly different value proposition. It's important to remember that we opened a store in Sao Paulo, one in the State of Minas Gerais. We are testing the waters, testing the market, we haven't operated stores this size. So it's important to test them first. And another important element to be highlighted is that 50% of our stores still have less than 4 years. So we still see some room for maturation with the same terms we have presented in previous years. Now for gross margin, I've already mentioned this in the first slide, we saw great results, 39.5%, 50 bps versus the previous year. And if I were to select 3 or 4 main factors associated to this 0.7% growth was the recovery in the stores because it has an important effect on the mix. I have more discounts on the digital channel, more subscribers, I sell more pet food. So automatically, when I see a recovery in the stores, I see a recovery in the margins. And like Sergio mentioned, we also had a very positive performance in our private label products. If I were to compare the share of private labels, we reached 12% in the end of the year, and this number was closer to 10% or 9% 1 year ago. So without a doubt, our private label products have helped us improve our gross margin. And we also had a more affordable product offer for some categories, mostly related to accessories. And these are categories that have better margins on their own. So roughly speaking, I would say these are the main elements associated to the improvement in margins. And in terms of cash margin as well, one thing we have mentioned before is that our focus has been looking at the whole basket that customers have. In the past, we might have positioned ourselves for pet food brands or specific products and we'd lose the value associated to that product, but also on the whole basket. So sometimes, it's better to have a lower percent gross margin in percentage points, but you have a biggest share of wallet for the customers. And that was the dynamic that we saw in the second half of the year. So we always mention the same example because again, sometimes I lose the sales of BRL 500 in a pet food package because I'm 3% or 4% higher than the market, but I don't lose only that BRL 500. I lose BRL 1,000 because BRL 500 more would come from pet meds, accessories and snacks. So that has been our mantra since mid last year. Now talking about expenses. Regarding expenses, of course, marketing was a significant expense line last year. And we didn't need that anymore because we didn't do any launches or brand refreshes, so that really alleviated or helped us with our expenses. But now with the fact that we have more volume, we're selling more affordable prices. Of course, that puts a little bit more burden on our DC and our logistics efforts, will put some pressures on our expenses, but something that we were able to offset with other elements like marketing. Another thing that helped us other operational expenses because we opened fewer stores, we didn't have so many preoperational expenses, so with a drop of 26% year-over-year coming from other expenses. So roughly speaking, these are the main highlights I had for you. Like Sergio mentioned before, our biggest challenge for 2025 is finding a balance between the expenses like rent, cost of labor, which are very important expenses from our stores. With a pet inflation or the average inflation of what we sell, that is pretty much 0. Expenses continue to grow more in line with the official Brazilian inflation, rent, wage increases, they are growing at 4%, 5%. So it is very important to carry that to the price coming from the industry. So we can actually transfer that and have more operational leverage in 2025. Next slide. And now I would like to cover 2 topics that are very relevant like Sergio mentioned in the beginning. Perhaps the headlines are not so good. But when you look -- actually look at the results, we see very positive results with a growth of our EBITDA margin of 25% and our growth in our revenue. So why do we see the bad headlines? 2 elements. And they are not related to the cash. They don't have a practical effect on our results, on our accounts. [indiscernible] we did it in 2 companies that we acquired in 2021 Cão Cidadão and Zee.Dog. What was the total amount of the impairment? BRL 55 million that's the impact on EBITDA. And in terms of net profit because I have a tax yield of 34%, the impact is BRL 36 million. Why did we do the impairment of these companies? Cão Cidadão, we did pretty much a total impairment of what we had at the time of the acquisition, what we had booked at the time of the acquisition. And that happened because in our estimates in the moment of the deal in 2021, they included the development of additional services. Like pet hotels, pet seaters, dog walkers, something that did not become a priority and did not develop with the founders of Cão Cidadão and that led to a significant difference in future forecasts, so we did the impairment. For Zee.Dog, it's a little bit different. We do this test on a yearly basis. And it's the first time we do some type of impairment. But why are we doing that right now when the Zee.Dog operations is no longer giving us losses, it's very positive with a very high EBITDA because now it's fully integrated in our expenses structure. That happened because there was change in the country. The auditing companies that helped us in this test they have [indiscernible] they use to do the discount of future forecast that we provide, which are the best estimate on how much these companies would generate for future benefits of the company. When you change the [indiscernible] because the interest rates in the country goes up, you need an adjustment. So I think the message I'd like to convey to you is that the adjustment that we made on Zee.Dog was not due to reviewing our forecast down, but due to an elevation in the discount rate in the country. If that rate hasn't gone up, we would have a positive value for Zee.Dog, and we wouldn't needed to have done the impairment. And another important message is that nothing changes in terms of the use of our fiscal benefits. We still have BRL 45 million currently from the acquisition of these companies that still can be used. So again, it's an accounting issue that we need to do, and we are bringing you full transparency on the matter. Now from our 4131 Debt. It's a debt that we had since the second quarter of 2023. We've been talking about it for some time. But the difference here is that for this quarter specifically, we had a variation in the exchange rate that was quite significant. Just to give you an idea, we started the year, actually, we started the fourth quarter with the FX of [ 5.42 ], and we ended with the FX at [ 6.20 ]. So a big variation in the FX rate and that gave us BRL 12.8 million of impact in our net profit in our accounting net profit. Now in a 5-year horizon of our 4131 Debt, there is no type of cash effect. The result or the impact will be 0. And it's important to say that now in the first quarter of 2025, we're going to see the opposite effect because we started the year at 6.20 and now we are closer to the 5.7 FX. Of course, it depends on the final FX rate in the end of March, but positive -- we expect a positive result and the adjustments will be made accordingly. Now on this slide, we do the reconciliation from negative headline of BRL 43 million loss of accounting loss, how can we get to BRL 22.4 million, which is the number that internally we consider to manage the company because it's the number that actually reflects our operations, and that gives us a 49.7% growth in our adjusted net profit. So pretty much -- on the first green bar, we have BRL 61.5 million what we have here. We have the BRL 55 million from the impairment and BRL 6 million from nonrecurrent. And that includes, again, expenses related to the Cobasi deal. We have advisers, due diligence companies working in the integration process, the BRL 6 million of nonrecurrent expenses are related to the deal. And then the other elements you're used to, we have around BRL 7 million every quarter of our stock option expenses. We have -- we pay for the acquisition of companies and our swap debt that 12.8 I mentioned before. Since these 2 elements, both the impairment and the debt have [tax shield], we returned this 20.8 from the red bar. So we wanted to give you full transparency on our adjusted net profit calculation. And finally, on the last slide, we have a very positive headline. Our cash generation -- operational cash generation grew 51.5%. So again, we continue to be really focused on working with accounts payable, fix payments, working capital, including terms for suppliers and stocks especially. So our cash generation has been quite positive. In terms of investments, of course, we see a reduction here because we invested less in new stores. We didn't open as many stores, like I mentioned before, we opened 16 stores, in the previous year, we had many more. And we have investing less in technology because the big investments or the main investments that we needed to make in infrastructure and digital transformation had already been done in 2022 and 2023. And finally, our leverage, it goes a little bit up of 0.3x our EBITDA, and it's pretty much due to the dividends that we pay in November, already in the context of the Cobasi deal. We use the accumulated profits we had in our balance sheet for the dividends, and that's why we had a little bit more leverage. So I think these are the main messages I had for you, and now we can start our Q&A session.

[Operator Instructions] Our first question comes from [Vitor Fuziharo] from Santander and the company will read the question. [Vitor's] question is [indiscernible] to see the performance, or the ratio between the performance in the stores and the digital channel, which led to changes in the share of the digital channel. Was there a change in approach still on channels? In the release, you talked about commercial policy management as an expansion driver. Can you talk about the evolution of the margin on different channels?

Okay. Thank you, [Vitor], for your question. Yes, on the third quarter, we started that. On the fourth quarter that was more consolidated. We saw an increasing competitiveness in our stores. And that improvement in competitiveness was due to a number of initiatives that we took: A better assortment, more competitive pricing, and the gamification initiatives, which also contributed a lot. So those 3 elements can explain the recovery that we saw in our stores. And again, the recovery in that channel is connected to the cooling down of our digital channel because many times when customers realize that there is a big difference in the online channel, they go to stores, but they say, well, it's better to buy online. When that is no longer true or no longer so evident, they can keep shopping in the stores like they normally did. So we are very happy with that result. We're very happy to see this recovery in growth in our physical stores. Now regarding margins per channel, what I can say is that there is a convergence between the profitability of our online channel and our stores. Many times that means that we need to lose a little bit on our online margin because of efficiency and sometimes lower our margin on the physical stores to improve our competitiveness. So the margin of the stores continue to be higher than our digital margin. But over time, we see them becoming closer together.

Our next question comes from [Gustavo Fortino] from Bank of America.

Well, we have 2 questions. The first one is about your B2B channel. I thought it was interesting to see that. Perhaps you could give us more color on what happened on that channel. I think there was a significant drop, and we'd like to hear what you expect from that. Our second question is about the initiatives to improve or perhaps have a private label assortment in the accessories category. What are those discussions like? And what is the impact that, that can have in terms of margin and sales?

Thank you, [Gustavo], for the questions. Well starting on the first question, the drop in the B2B channel is not linear. It's quite the opposite. When we think about global Zee.Dog has a significant growth in the fourth quarter. In the local market, we did see a significant drop. I think just like Petix had a drop in the national market. And we explained that by a more challenging scenario in the Pet segment. The whole market is facing growth challenges and perhaps a perception by retailers overall that well, perhaps, they're trying to step away from brands that pet sales like is the case of Zee.Dog and Petix. It might be a combination of both factors that could help explain a little bit the drop that we saw in our B2B model. But when we think about the future, well, B2B is not our core business, especially inside Brazil. In our global market, we have a more interesting performance. But here, we'll do our best efforts to keep a healthy margin for everyone in our B2B effort, so making it work for everyone. But when -- especially when you think about hygiene pads, we do have a lot of suppliers working either at 0 margin or even on the negative to try to capture the more markets, something that Petix doesn't need to do because we already have quite a solid distribution base with the pet stores.

May I add to that, when we look at hygiene pads, inside Petz because Petix had a drop on B2B, like Sergio mentioned, but inside Petz, we grew 25% on that category of hygiene pads. Hygiene -- the hygiene category grew 16% and only hygiene pads, more than 25%, which shows our strategy to strengthen our own ecosystem. And just a comment on global, in the quarter in the year, it grew around 40%. Since 2023, you have been working the possibility of doing international licenses. So instead of caring that structure of office, teams, to many places in the world, we are licensing that to local operators. We did that quite successfully in the U.S. in the beginning of last year. In the middle of the year, we have a deal with an Italian distributor and our distributor in Italy is working in Portugal, Spain, so they are covering other countries. And now we are in discussions with the Philippines. We are growing those initiatives of global licensing and that really highlights the fact that we have different paths. So in global, we see a significant growth in B2B. And locally, we had that effect when you have Zee.Dog -- so we are opening Zee.Dog franchises as well, which of course, makes that product less attractive for the B2B model for small pets -- pet stores that used to buy a significant volume of Zee.Dog in the past.

Thank you, Aline. And regarding your second question about our private label accessories, not only accessories and pet food as well, perhaps, this is one of the main avenues that we have to build customer loyalty and to have a positive effect on our margins over time. Because without a doubt, it has been a very successful initiative for the company. We look at this indicator on a weekly basis. Actually, recently, we saw -- and again, we treat our private label products as a single supplier, so we could compare it with other suppliers. And our private label products, they already come from the biggest supplier -- supplier with the biggest growth in the company. So we are being very assertive both in the launch of new products and in the quality of the SKUs that we are bringing as well as in the pricing of those products. The margin is still not the full margin we expect for our private label products. Because again, private label products have these characteristics. In the beginning, you see some increase in the margin. But what's actually going to give you substantially higher margins is time because once you consolidate bigger volumes, you get better negotiations for those products. Considering all the prospects that we have for this company in the future, I could say that private label products are one of our main pillars. And the year of 2024 worked exactly for that to consolidate that as a pillar. We had a barrier. We needed to beyond 10%, and we did that quite comfortably. Now we have 12% of share of our private label products. And our expectation is that for this share to keep growing in 2025, so we are very excited about the potential that our private label products have.

Our next question comes from Larissa [indiscernible] from XP.

We have 2 questions also. The first one on gross margin. Sergio talked about the private label products just now and we saw that the improvement in gross margin is explained by many factors on your press release. Some are more structural factors and others have to do with the seasonality of the fourth quarter. So my question is, perhaps you could you give us a little bit more details on what to expect from the gross margin from now on? What comes from structural changes and what is to be expected for the future. And then about your working capital dynamics, we saw that it was a little bit under pressure year-over-year. So perhaps if you could give us more details on that as well. What has brought that effect and what we can expect for the future? And congratulations on the results.

Thank you, Larissa. Aline, would you like to take that one? Or should I?

Well, regarding working capital, in the end of the year, many times, we see a little bit of pressure, stocks that we built for Black Friday for the beginning of the year. So in terms of future trends, we don't expect any changes. We continue to see our terms for delivery being very short 30 days -- sorry, accounts receivable 30 days. We sell lot by credit card. We are incentivizing fixed payments in the company. Regarding stock, there could be moments with more volume. We mentioned that before our DC had more stock with that strategy of bringing more affordable prices. So that has an impact on our stock levels, but it's not a structural change. I think the trend for working capital that we saw in the couple of last months, actually, for a couple of years, is quite related to stock. And we continue to certify those credits that were in our balance sheet. So we are seeing a good use of those credits to be made right now. So I wouldn't expect any type of a structural change in our working capital except from those isolated peaks that are related to our operations like the case we had in the DC with higher stock level eventually. And regarding gross margin, of course, the fourth quarter margin tends to be higher. It's a seasonality effect. But I would say that looking ahead, we don't have many reasons to imagine any pressure -- additional pressure on the margin. Of course, it depends on the competition and how the market will behave, if we are going to see any price increase coming from the suppliers or not, up until now, we are not seeing many changes in that sense, but the idea is to have stable margins for the coming months. It is what we have been observing in the past few months. We still haven't closed the quarter. But we are anticipating some stability. Because many of these trends, like those related to private label products and the ratio between stores and the digital channel that is to be maintained in the first and second quarters as well. In terms of growth in sales, we hear other retailers saying that December was not so strong. January was not so strong. But in our case, we see a continuity of trends from the third and fourth quarters. If that remains true, we will be able to sustain our gross margins as they are.

Our next question will be asked in English. [Operator Instructions] I'm activating Andrew's microphone from Morgan Stanley.

Two from my side as well. First, can you talk about the perspective for store openings in the year ahead? And I'm curious how you're opening plan balances, cyclical factors, high interest rates versus how you're thinking about the opening potential longer term? And then second, you mentioned the inflation. I'm curious if you could just break down if there were any differences the inflation trends for your food versus nonfood categories.

Thank you for your questions. Answering your first question, and our perspectives for more store openings. Well, there is a combination of 2 factors that I would like to share with you. Well, the first one being, since 2023, we changed a structural element of the company. First, we would do our budget, our sales budget, and that would imply some cash generation. After that, we will do a CapEx budget, how many stores we want to open, technology investments, and that would represent an X amount of CapEx that usually was much greater than our operational cash generation and then we would decide how we would fund the difference. Starting in 2023, we no longer do that process. Now first, we do the budget. We see what cash is to be generated on that year. And based on that, we limit our CapEx investments. That's what we did in 2023, in 2024. And we focused especially on keeping some investments in technology because those investments would improve our productivity, and we removed the priority of opening many new stores, especially because in 2021 and 2022, we saw a big expansion in the number of stores. We understand that 50% of our stores still have less than 4 years. We still have a lot of stores to mature. And now we are much more focused on getting that process right, getting their operations right and their profitability. So looking ahead in terms of new stores, opening new stores is not a priority for us right now. The priority is to ensure the profitability to build a good relationship with our customers and to keep that at current levels or to see improvements. And through our loyalty program through the club, we have been able to improve the frequency of shopping, which is excellent news for us with the same number of stores, which still have some [indiscernible]. So that's why we are more concerned in making the 260 stores we already have worked to their best then to focus on new stores. Now regarding your question about deflation and the differences in the inflation between categories. When we look -- think about that deflation rate, that might sound weird because many products have suffered an inflation. But we should look at in a broader way and realize that during the pandemic, the inflation for the Pet segment was substantially higher, the average inflation for other products. So in the years of 2023 and 2024, we had a period of correction of an excess of increase that happened during the pandemic. Now from 2025 onwards, our expectation was to see some price changes in the beginning of the year. That still hasn't happened, but there is an expectation that, that will take place in the second quarter. Remember that inflation for retailers. And again, we are not good when we are way above average because that puts pressures on the shoppers. But when we are below pressure that puts pressure on our profitability because again, people or labor and rent costs go up accordingly to the official inflation. So when the cost of goods or the price of sold goods don't -- doesn't go up according to average inflation, you have a natural pressure on expenses. That's why I say that having a deflation, of having an inflation that's way below the official inflation, has a positive and a negative side. And that is another focus for 2025.

Our next question comes from Nicolas Larrain from JPMorgan.

I had 2 quick ones. I just wanted to follow up on what you said about inflation now, Sergio, and perhaps, understand how you see, face or opportunity to eventually transfer the price increases that might come? How do you see that in the competition and the expectation from consumers? And my second question has to do with expenses. I think in your release, you talked about the [BRL] reversion. I would like to see -- understand more about the impact there. Anything you could share with us would be great.

Thank you, Nicolas. Aline, please go ahead.

Yes, from that point of view, we had about BRL 6 million of reversion because, again, the budget for the whole year expected bigger growth and bigger margin. Our plan was to have the second half of the year for the whole year. Since we didn't achieve those results, we reverted part of that. And your second question about price increases, would you take that one?

Well, price increases -- for about 2 years, we are not -- and we haven't done any price correction. And that, of course, creates a phenomenon. People, on average, they are seeing increases in their income. So some type of increase, something between 5% to 10% of price increase in several products that could be easily absorbed by the market with no major concern.

Our next question comes from Goldman Sachs.

I just wanted to go into details about the difference between online and offline channels and perhaps think about how you perceive the competition on the online world, the level of incentives. And the improving performance on the offline channel. Do you believe that you lost market share online. I know the sales there are not as profitable, but I just wanted to understand how you see this market dynamics as a whole. If you believe that consumers not only on your business, but also in the market as a whole is referring the offline channel or if the trends from the past are to be expected. And my second question would be, perhaps, you can give us more color on SG&A. I believe there were some impacts that you mentioned that are sort of temporary due to the stocks of more affordable prices, those stock levels that were higher. But I wanted to understand how you think about that for the future.

Thank you, Irma, for the question. First, talking about the offline-online differences. Actually, the online competition landscape, I mean I don't think there has been any adjustments. I don't think we have become less competitive for that matter, quite the opposite, actually. We try to become even more competitive online. And we also measure that looking on the churn of subscribers. We have a customers that are not subscribers as well. And in the fourth quarter, we had the lowest level of churn in our subscriber base. Having said that, we don't see any structural changes in the competition landscape. We see marketplaces and other platforms with some stability, competing in a balanced way. We saw a change in the off-line channel. In the offline channel, many times, we were losing competitiveness, whether due to lack of right products or right pricing or due to lack of incentives to the team which was what we fixed with our gamification efforts. So everything that we did in the offline world gave us back more competitive on that channel without impacting our ability to compete online. Again, everything that happened on the online channel was due because we were at the right level of competitiveness. So it's fully competitive to any other online platform. The big transformation came from the off-line channel. But that has an impact on the online world as well because there is a group of customers that sometimes are there in the stores. And once they realize the last -- the worst price there or bigger price there, they prefer to shop online. So they don't buy in the stores, even after they [paid for] the store. So I think those were the major impacts that we had there. And we expect that this level that we have now of 40% to 50% of share from the online channel, perhaps, is a balance that is to be expected in the future. We had quarter-over-quarter with significant growth of online share. But I believe that now we are starting a period of a certain stability on our online share. Regarding [D&A], well, I think there would be room to see a more significant decrease here. If it weren't for the deflation effect because it's quite complex. Especially on the SG&A cost, there is a full impact from the average inflation rate in the country. Everything that's there is pretty much corrected by the inflation. But again, you need to remember that we don't have that same effect on revenue, which creates pressure. But like I mentioned before, we consider that this is just a stabilization from that increase we saw in the past. And we expect the inflation of the Pet segment to be more in line with the overall inflation for products.

The Q&A session is now over. I would like to hand the floor back to the company for their final remarks.

Thank you all for attending this call, for sending your questions. And I would like to say that we are extremely excited and confident that the path to our operational recovery is solid. We have clearly left those tougher numbers behind us in terms of our operational indicators. We continue to monitor them on a weekly basis. And we are very happy to see that every week, these indicators are reacting quite well to our initiatives. So more traffic in our stores, the competitiveness in our online channel as it should be and the growth we are experiencing in our private label. Thank you for your attention, and I wish you all a great weekend. Thank you so much.

The Petz call results is now over. The Investor Relations department is available to answer any other questions you might have. Thank you to all the attendees.