SMCP S.A. (SMCP) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the SMCP conference for the Q1 sales communication. [Operator Instructions] Also, I must advise that the call is being recorded today, Wednesday, the 29th of April 2020. And without any further delay, I would now like to hand over the call to your first speaker today, Ms. Célia d'Everlange. Thank you. Please go ahead.

Thank you. Good morning, everyone. This is Célia d'Everlange, Head of the Investor Relations speaking. Thanks for being with us today for SMCP Q1 sales. I'm here with, if I can so, with CEO, Daniel Lalonde; and CFO, Philippe Gautier. We are once again meeting under special conditions, as I'm sure most of you are probably listening to this call from home. On behalf of all of us at SMCP, we wish you well. We hope the technical condition will be okay today despite the context. And as usual, we will go through the presentation, and then we will have the Q&A session. Before I hand it over to Daniel and Philippe, I invite you to go through our usual disclaimer on Page 2. And I think we can start now. Daniel?

Yes. Thank you. Thank you, Célia, and good morning, everyone. Thank you very much for being with us this morning. As Célia said, I really hope that you're all safe and your families and loved ones are all well. In these unprecedented times, I'll begin with a quick overview of Q1 2020 and an update on COVID-19 situation, then Philippe will detail our sales performance by region. So if you go to Slide 4, as you've seen from the press release, Q1 was in line with our expectations, even slightly better, thanks to a better performance than expected in Mainland China. SMCP sales were down 16.7% on reported basis and 20.4% on an organic basis, i.e., where we exclude De Fursac and at constant foreign exchange. So this performance reflects the impact of the spread of the COVID-19 pandemic in all regions across the world, following a great start to the year and a gradual improvement in sales and traffic in Mainland China since mid-March. Showing early signs of recovery, which for us is encouraging. In parallel, for the first time in history, the group closed 6 DOS in Q1 2020, and this has been driven by, first, a slowdown of openings in our international markets. Basically, net openings are almost flat outside of France. Q1 is usually a small quarter in terms of openings. But obviously, we decided to postpone most of our projects until either the end of this year or next year, and I'll come back to that in a minute. And then second, we made good progress on our French optimization plan with 6 additional closures in the Provence area. As mentioned on March 25, the group has decided to take immediate measures to mitigate the economic impact and protect its cash flow. Since then, we have executed our plan, and I will detail these remedies in a minute. Finally, considering this very unusual context, we recorded good performance in e-commerce, notably in China, where sales were up 39% in Q1. Since the beginning of the crisis, the teams have been fully mobilized to foster digital sales through several initiatives. And one example is our latest operation on Tmall on Page 5. So moving to Page 5. We have been selected by Tmall to launch our first live streaming event on prime time, just from 8:00 p.m. to 9:30 p.m. following the reopening of our stores, we agreed to participate as we're able to propose the full personalized services in-store in parallel. We launched it for Sandro this Monday and for Maje just today on prime time. The concept is a new form of TV shopping with the objective to showcase our collections by leveraging some key celebrities or influencers in China. For this first event, we selected Linda Li for Sandro, a runway model in China, one of the most active Chinese participants in the luxury fashion shows, gathering approximately 4 million followers on Weibo and WeChat. And Yuyu Zhangzou for Maje, a key influencer in China with over 4 million followers on Weibo and WeChat. During the 1.5 hours, they will shop in some of our key stores and present our key looks, introducing new trends and mix and matches live on Tmall apps. On the same screen, customers will be able to shop directly. Through this new form of shopping, reinforcing the omnichannel experience, we'll be able to fully leverage the Tmall traffic and extend our customer base. The first test on Tmall from April 27 to May 1 is very positive. As the first day for Sandro, we reached almost half of our sales objectives with approximately 75,000 viewers just during this 1.5 hour. On Page 6, a couple of comments on the current status of our stores and our e-commerce network by region. So starting with our physical stores, 82% of our DOS are closed today. In France, all of our stores have been closed since mid-March, and we expect a gradual reopening of our stores from May 11 onwards based on recent government guidelines. In EMEA, 100% of our 370 DOS stores are closed, except for Scandinavia. Since April 23, we've also started to gradually reopen our stores in Germany, approximately 10 stores. In countries operating operated by our partners such as the Middle East and Russia, all stores are closed. In the Americas, 100% of our 157 DOS in the U.S. and Canada have been closed since March 18, while our partner stores in Mexico were also closed. And finally, in APAC, all of our 195 physical DOS in Greater China are now open. They started to gradually reopen at the end of March. And meanwhile, our partner stores are open in South Korea, but partially closed in Australia. In parallel, as you know, all our e-commerce operation function normally, and teams are fully engaged digitally with our customers. Turning to Page 7. As mentioned at our fiscal year results, we have decided to launch a strong action plan, addressing the entire group cost structure, aiming at mitigating the impacts of COVID-19 on group profit and cash generation. Like to give you an update on what has been done so far. So first, on CapEx. The objective has been to meaningfully reduce it by only keeping our essential projects. A greater focus has been allocated to our digital road map, which is more than ever a key driver of growth today and in the future. We have, thus, for example, maintained our investments in one of our key projects called Unified Commerce, which is ready to start for Maje in Europe today. We'll also comment on that in further detail in Q2. In parallel, we have decided to significantly reduce the number of net openings this year to 20, representing an adjustment of about 75% compared to last year. On one side, we have selected key openings, notably in China, to balance our investment between future sales growth and cash management. And on the other side, we will pursue -- even accelerate our optimization plan in France. Overall, our CapEx will decrease by around about 40% this year compared to last year. Second, on OpEx. So we've actively worked on optimizing our cost basis, our e-store cost and SG&A cost. For our store costs, the 3 most important components are commissions, which are fully variable and represent a bit less than 30% of our store cost last year. Second, personnel costs that represent a bit more than 30% of our store costs in 2019. We have placed our retail teams in temporary unemployment, both in Europe and North America with the support of the local governments. This action represents a substantial cost reduction starting in the last week of March and will continue through April and a part of May. And last, rent costs that represent a bit less than 30% of our store costs in 2019, we have reached out to all of our landlords to discuss adjustment of our leases. It's about negotiating rent relief during the period of the lockdown and lower rents for the slow recovery period that we anticipate. We have already -- we're already quite advanced starting in Asia, but also now in North America and in Europe. In parallel, we continue to adjust our SG&A costs in 2020 through, first, strong efforts on overheads, including fixed compensation freeze, reduction in the variable compensation, adjustments in the HQ headcounts and a reduction of 30% of the COMEX and Board's fixed compensation during the crisis. Second, some savings on discretionary spending, such as off-line A&P in H1, external services and obviously, T&E expenses. All in all, we should be able to variabilize more than 50% of our group costs. Third, inventory management. To limit the surplus of inventory at the end of the year, we are adjusting our collection plans between spring/summer '20, fall/winter '20 and spring/summer '21 we have also reduced the fall/winter '21 collection buy, and we continue to centralize our inventories to ensure the best allocation by region in order to have the right product at the right place and at the right time. Fourth, e-commerce, as I mentioned, this is and will be a key driver to our future growth. This was a key strength in China during the peak of the crisis as we recorded some very strong results in our e-commerce channel. And all the teams today are fully mobilized to engage as much as possible with our customers on digital. Several initiatives have launched -- we -- have been launched to foster this channel like the Tmall live streaming operation. And of course, some specific operations are also planned by our teams in Europe and North America. In parallel, as I said in March, we drew the full capacity of our RCF, and we now benefit from a solid liquidity position to face the cash burn during the crisis and all of our short-term maturity reimbursements. In addition, we are in close contact with our banking partners to look at all options to further strengthen our financial flexibility. Last, we stand more than ever alongside our employees, partners and all of our stakeholders. The global crisis management team, whose priority to ensure the safety and health of our teams around the world, is currently working to organize and prepare for the upcoming transition period. And I'll pass it to Philippe.

Thank you, Daniel, and good morning, everyone. So moving to the regional breakdown on Page 9. So in France and EMEA sales were down, respectively, 19.4% and 11.9% on an organic basis. This performance includes 3 distinct periods: first, we had a good start of the year, i.e., for the month of January; second, a sharp decline in tourism from February, especially Chinese tourism, which was down 50%, for example, in February in Europe; and third, deterioration in March linked to the total closure of our stores in most of our countries except for Scandinavia. In the meantime, EMEA recorded a good performance in e-commerce driven by strong trends in Germany, Switzerland and Benelux, which led to a better resilience of some of these markets with Germany notably being flat in Q1. In Berlin we made solid progress against our French optimization plan with 6 additional closure versus December '19, mostly in the Provence area outside of Paris. Overall, in France, we demonstrated a better resilience than the French market. The IFM Index was minus 22.9% in Q1 versus SMCP at minus 19.4%. In the Americas, sales were down 17.4% on an organic basis, also impacted by the COVID-19. Since February, the group has seen a slowdown in tourism and experienced further deterioration in sales in March following the store closures. The group's distribution center continues to operate in North America normally to ensure e-commerce operation. However, e-commerce performance has been soft at this stage. Turning now to APAC performance on Page 10. Sales were down 33.4% on an organic basis for the region. Following a very strong start of the year, sales were significantly impacted in February by the lockdown in most Asian countries, especially in Mainland China from January 24. Since then, the group has seen some early signs of recovery in Mainland China, alongside a gradual improvement in sales and traffic from March onwards. On the bottom of this slide, you can see the evolution week by week of Mainland China sales for physical stores. With the reopening of our stores from the end of Feb, the performance has sequentially improved driven by slightly better traffic and conversion rates. These encouraging trends are notably observed in the south of China with a few cities being positive versus LY in April. Overall sales decline has been reduced from circa minus 80% in February circa minus 35% in March. This encouraging trend has been confirmed as well in April. In parallel, the e-commerce channel, which remained open throughout the crisis, recorded very strong result in Mainland China, plus 39% sales growth in Q1 2020. Thanks to several initiatives designed to encourage sales on digital, such as the Women's Day, the beginning of March, which will be followed by the live stream event mentioned by Daniel. In other region, traffic remained weak in Hong Kong as access from the Mainland remain closed. On the positive side, Taiwan and South Korea recorded better resilience in sales.

All right. Thank you, Philippe. In closing, on Page -- Slide 12, I'd like just to say a few words on 2020. In this context, SMCP sales and profitability, as you know, are meaningfully impacted. As we have described, the group has taken immediate measures to mitigate the economic impact and protect our cash flow. In parallel, our teams are fully focused on preparing the post lockdown period, while ensuring the safety of everyone when stores and headquarters are open. Group has also ordered all the necessary protective equipment, including surgical masks, hydrogel and gloves. We have also adapted our selling ceremony to protect our customers and our teams during this period. So given the uncertainty around the severity and the duration of the COVID-19, it's not relevant for us at this time to provide specific guidance for our 2020 financial performance. We will continue to monitor, obviously, the situation closely, and we'll update the market in due course. And finally, on Page 13, a few words just to highlight some of the solidarity actions taken by SMCP and our brands. In line with our values and commitments, SMCP and all of our employees wanted to contribute to the collective effort and help others through fabrication and donation of masks as well as a couple of other meaningful initiatives. So thank you for your attention this morning, and I think we're happy now to answer your questions.

[Operator Instructions] So our first question is from the line of Chiara Battistini.

Can you hear me?

Yes, very well, Chiara.

Perfect. I have a couple of questions, please. The first one is thinking about your opening plans beyond this year. Is the current situation and maybe also a further growth in e-commerce penetration making you rethink of your opening plans and how the [indiscernible] in the medium- to long-term and especially as you continue to...

Chiara, we didn't hear the end of the question. Your question was the opening plan beyond 2020?

Yes. And if you actually are rethinking about the strategy and new store network for the medium- to long-term, given then possibly digital is becoming more and more of a key channel. And the second question, again, on e-commerce. You have mentioned in the press release and the presentation that e-commerce was softer in North America in Q1. Could you please provide more color on this? And also, if you could provide the development of e-commerce sales at group level for Q1, please?

Okay. Daniel, I don't know if you heard the question. The first question is about the opening plan beyond 2020. Okay. You heard it, okay.

Yes. And at group level. Listen, I'll -- thank you, Chiara, for your questions. So on your first one on the, I guess, the physical brick-and-mortar store opening beyond 2020, just say a couple of words. The first is the target we have in net openings that we mentioned for 2020 is 20, roughly speaking. So that's very much as a result of COVID-19. But beyond that, beyond 2020, clearly, one of the big vectors of growth and investment for us will be on the digital and omnichannel segment. And also driving more initiatives to drive like-for-like growth. So these will be -- and they were at the beginning of the year, our major objectives for this year, and they will be beyond. The question is what does that mean in terms of new store openings in the future? Well, it's, again, 20 is as a result of this year. But I can say simply that it will be less net new store openings than we've had in the past. And as you know, we've guided in the past roughly to 80 to 90 DOS openings per year, which is something that we've done. So you can expect -- we certainly expect that number to be reduced, not to 20, 20 is for this year, but it will be reduced in the future with a greater focus in investment on developing like-for-like through, again, digital, omnichannel, sustainability is a really big investment that we have also in the future. So there'll be new drivers for the future. In terms of e-commerce, second question in North America. Yes, it's been a little bit softer, as we mentioned. I mean we've had some interesting weeks in the last couple of weeks in North America, but we've seen -- overall, as you've seen, we've had some very strong results in China, double digit, which continue through today, which is good. Europe also, we're in a double-digit growth mode on the e-commerce channel for April. But it's been a little softer in North America. Why? I think there's many reasons. I think the customers perhaps are not there, are not shopping as much in this market. It's a market that's most -- the most affected today. But we expect this to change. We've just seen a much lower growth than in Europe and in China today. Chiara, you had a question at group level e-commerce.

Yes.

Yes. What was your specific question, Chiara, on that?

If you could give us the rate of growth or development year-on-year in Q1 for e-commerce at group level?

Yes. Philippe, did you want to take that specific question?

Yes, sure. Yes, one second. Yes. At group level, we are significantly flat in e-commerce for Q1. And as Daniel mentioned, there are different situation in the regions. So APAC being really -- growing very fast, almost 40%. And then a reduction in Americas and very favorable in EMEA, France, almost flat. In EMEA, you have certain countries where there is a very strong correlation. And for example, it's Germany, where the penetration is already very high, we're close to 50% penetration in e-commerce in Germany for the full quarter. So we are benefiting from these countries in the north, we are benefiting from the stronger penetration of e-commerce.

So maybe just to conclude on that point, Chiara. So we do expect and we saw in the first quarter and in the future as well that the e-commerce penetration rate will increase. And I think what we're seeing today is I think it will probably even accelerate versus maybe the original plans we had, which were fairly optimistic and aggressive. I think this moment will even enable us, and I think just the industry in general, to accelerate the e-commerce penetration in our business. And certainly, what we've seen in Q1, and I expect that to continue throughout the year.

The next question is from the line of David Da Maia.

Can you hear me?

Yes, very well, David.

Okay. 3 questions for me, please. The first one on like for like. I know you don't provide like for like on a quarterly basis. So I will ask the question differently. Is it fair to assume a mid-single-digit positive contribution from this space as you only closed -- will closed 6 DOS in Q1? That's the first question. The second question on breakeven or cash burn. We already know that Q2 will be the worst quarter in -- of the year. In this context, do you think you will be able to generate a positive adjusted EBITDA with like-for-like sales down probably by minus 40% in H1? It would be very helpful if you can give us some indication on the breakeven point before or maybe after the cost cutting measure you are currently implementing. And the third one is on the liquidity risk. Can you please give us an update on your current negotiation with the banks? What are the different options you have today? Are you going to ask a term loan facility guaranteed by the French state in order to secure the cash flow and better prepare the recovery?

Okay. Thank you, David. Philippe, do you want to take the 3 questions?

Sure, sure. So the like for like, as you can imagine, the trend in the like for like is not very different from the overall trend. So we are talking about reduction, which is a bit over 20% across the board with the nuances that we explained also in terms of our geographical performance. So this is not very surprising. If I talk a bit about the cash burn and breakeven point. I'm not going to provide you guidance on the quarter, like we've explained, we don't feel it makes too much sense. What I can tell you is that, clearly, we have been acting a lot on our cost base. And as Daniel mentioned, we are able to make variable about 50% of our stores -- of our cost, be that our store costs or our SG&A. And we have been very active. And a lot of this reduction, they are touching Q2. These are for the leases. Also from a cash point of view, first step we have done is to connect with all our landlords in Europe to delay the payment of the Q2 rents. And this has been done in agreement with the landlord, and almost 90% of the landlord have agreed with that. And then we have been in negotiation, and we are quite advanced in terms of obtaining savings. So there is an offset here. There is an offset in temporary unemployment because like we will reduce those as our store staff cuts in Europe and North America. And then we have significant savings in SG&A. So what I would say that we have -- we are able to reduce significantly our fixed cost during that period to reduce the cash burn in April and May. Maybe your question on the liquidity. So as Daniel mentioned, we have taken all the actions to work both in terms of mitigation actions that we just described as well as in terms of financing, first step we took was to draw the full capacity of our EUR 200 million RCF. That's where we had end of Q1, a cash position over EUR 200 million. And the idea is that this is sufficient to face on one side of maturity that we have on our commercial paper program. And on the other side, the cash burn of -- that we expect during the lockdown period. So that's the first thing. So we have sufficient cash. And now we have been in close contact with our banks to further strengthen our flexibility. And what we mean by that, there are 2 aspects. One is the covenants. We have, as you know, a long-term trade facility for 5 years of EUR 465 million, on which we have covenants of 3x EBITDA. So we have initiated the discussion with our banks to obtain a covenant holiday. And I mean our banks, they are very supportive, and they understand that this level of covenants cannot be really maintained in such an exceptional period. So that's one thing. And then as you mentioned, we are looking at French facility warrantied by the French state, so-called PGE in France. That's an option which is available to us that we are willing to look at as a precaution to provide us more headroom in case there would be further risk. So we feel that makes sense. And we have started the discussion with our banks on this topic, and they are certainly open to that.

Your next question is from the line of Aurélie Husson.

Can you hear me?

Yes.

I have several questions, please. Can you tell us about the stores in Germany that have just reopened? I know it's very early stage, but are you seeing normal traffic? What is the level of sales? It's just to have an idea how can sales could react in France after the 11th of May? My second question is still on France. Can you remind us what is the percentage of your stores in France that are in malls and in malls of above 400,000 square meter? And could you -- maybe you have given it earlier in the call, I'm sorry, if I ask you to repeat that. But can you give us an idea of the CapEx for 2020 and 2021?

Okay. Thank you, Aurélie. Maybe, Daniel, you want to take the first question about Germany opening? How is the traffic sales and how many stores, et cetera?

Sure, Célia. I can even touch upon the other ones quickly and maybe let Philippe complete the last. So it's very early days in Germany. We opened roughly 10 stores last week. And listen, it was -- traffic was obviously meaningfully down. But in some of the stores that we've opened among our 3 brands, we saw some -- I'd say, some decent results, some good sales days made up with, I'd say, higher average basket with fewer customers, but they were -- I qualify them as good sales day, but with traffic being down. So it's still early to tell. And at this stage, I don't have -- I don't want to use necessarily -- we're following it very closely, but I don't think it still represents potentially what could happen in other markets at this point in time. I think it's just too early. But I'd say it's been good level of sales as expected during this period in those stores in Germany. Going to France, we have -- very little of our distribution is in malls. I'll let Philippe maybe comment on that. You mentioned malls above 400,000 square meters. I think there's very, very few stores that we have in those malls. One of the key channels we have in France is department stores. So we're with strong partnerships with Le Bon Marché, Galeries Lafayette and Printemps, of course. Freestanding stores are a big part of our business as well, and they're mainly outside rather than in malls, and then we have an outlet business on the brick-and-mortar side. On the CapEx 2020, as we mentioned earlier, we're -- it's basically minus 42 LY to last year. So we've done some meaningful adjustments, pushing other projects to next year. And I think for 2021, it's still a little bit early to tell at this point in time where we're going to set the CapEx level. But obviously, with a very selective -- we'll be very selective on the lens on where we open, particularly the store CapEx. On the nonstore CapEx, we will continue to accelerate all of our digital road map next year as well. Philippe, did you want to complete anything on that?

No, maybe just to complement. So that means, if you remember, the CapEx were a bit shy of EUR 70 million in 2019. So that would be around EUR 40 million in 2020.

Okay. Maybe just a follow-up on my second question on the malls. Do you have any idea if the department stores like Galeries Lafayette or Bon Marché are supposed to be reopened on the 11th of May? Where is the decision in the hands of? Is it the Prefect of Paris? Is it the mayor of Paris? Is it the minister? Who decides whether Galeries Lafayette reopens?

Well, I think -- again, I'm not -- I won't supplement myself for giving the answers for all of those partners. But obviously, we're in touch. I'm in touch with them fairly regularly. Their plan at this point in time, is to open on the 11th of May. There are certain constraints on security, on safety, on counting the number of people in the stores as well. Those are the big issues, how to protect, how to have enough masks for everyone, which we will have, gel, et cetera, et cetera, and then limiting the number of people of the density. There are some guidelines being reviewed at this point in time in terms of density to be able to open. So I think there's still -- it's not, I think, the intent. I could say at this point, their intent is to open, but I think there's still some [Foreign Language] to go. And it's different per country. As you know, Germany is not allowing any openings of stores larger than 800 square meters at this point in time, that might change. So I think the rules and guidelines are different per country. And I think it's still a work in process in the French department stores, but their intention is to try to open on the 11th of May.