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

Hello and welcome to the SMCP Q2 Sales Publication Conference Call. My name is Molly, and I'll be your coordinator for today's event. Please note that this call is being recorded. [Operator Instructions] I would now like to hand the call over to Célia d'Everlange to begin today's conference. Thank you.

Thank you. Good morning, everyone. This is Célia d'Everlange, Head of IR, speaking. Thank you for being with us today for SMCP Q2 sales publication. I'm here with CEO, Daniel Lalonde; and CFO, Philippe Gautier. As usual, we will go through the presentation, and then we'll 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?

All right. Thank you, Célia, and good morning, everyone. Thank you for being with us this morning. I'll begin with a quick overview of Q2 2020 and an update on COVID-19 situation, and Philippe will detail our sales performance by region. As you've seen from the press release, Q2 2020 sales have been, as anticipated, strongly impacted by the COVID-19 pandemic. However, the performance is overall in line with our expectations; even slightly better. In Q2 2020, SMCP sales were down 45.8% on a reported basis and down 47% on an organic basis, i.e., excluding De Fursac and at constant foreign exchange. This performance includes a gradual improvement throughout the quarter on the back of store openings ; the continued recovery in Mainland China, which returned to growth -- positive growth in June; and last, a strong acceleration in e-commerce with 32% of sales growth, starting from a high base of 15% penetration at the end of last year. All of these elements are obviously encouraging. Business trends are moving in the right direction. However, we remain cautious as the recovery continues to be slow and gradual. While our conversion rates in brick-and-mortar were higher than last year, traffic remained weak, notably penalized by a halt in tourism. In parallel, the group opened 8 DOS in Q2, in line with our ambition to be particularly selective this year and focus on Asia. On Page 5, a couple of comments on the current status of our store network and cost mitigation plan to date. So first on stores. Throughout the quarter, we benefited from the gradual reopening of our stores from 20% of stores open at the end of April to 97% at the end of June. The U.K., the U.S. and Singapore remained closed for most of the quarter. Overall, 99% of our directly operated stores are now open, with few stores still closed in the Americas. This is good news even if there exists a risk of further local shutdowns. On sales, the combination of e-commerce and store openings has resulted in a gradual improvement in sales over the period from minus 70% in April to minus -- around about minus 30% in June. However, the lack of tourism continued to weigh on our performance. As you know, we have also decided to launch a strong action plan addressing our cost structure, aiming to mitigate the impacts of COVID-19. I'd like to give you an update on where we stand at the end of H1. So first, on CapEx. We have reduced it meaningfully according to our plan. We have also prioritized essential projects, such as digital, which is and will be a key driver of growth for the future. We've also reduced the pace of openings from around about 35 DOS last year in H1 to only plus 2 DOS in H1 this year. Second, on OpEx. We have optimized our costs by reducing -- optimizing personnel costs, commercial leases and reducing discretionary spending to a minimum. On rent relief, we have made good progress for the first part of the year, and we are now having discussions with our landlords to find solutions for the recovery phase. All in all, in H1, we were able to variabilize 50% of our cost base. Inventories, we reduced purchases in fall/winter '20 collections by more than 30% and applied several adjustments to the mix of the collections. We have also further secured our cash position throughout the -- through the obtention of a French state guaranteed loan amounting to EUR 140 million and additional flexibility on our financial covenants for 2020 and for 2021. And last but not least, our key priority remains ensuring the safety and health of our teams, our customers and all of our partners. So strong progress on costs. We have already secured a big part of our plan. However, we also continue to innovate and launch new initiatives to enhance the desirability of our brands. On Page 6, a couple of initiatives that have been undertaken in line with our road map. So first on digital. We achieved a strong e-commerce performance across the globe. This is the result of successful initiatives to support sales. One example is in China where we posted excellent results for the 6/18 Tmall event. Sales were up 40% versus LY, and we reached more than 2 million visitors and boosted Claudie Pierlot's visibility, leveraging key influencers on live streaming. In parallel, we pursued our omnichannel road map with the launch of unified commerce. Our ambition is to offer a seamless customer experience and complete our omnichannel services with the ship-from-store and 2-hour delivery option. We have just started with Maje France by mutualizing our global inventories and developing the first ship-from-store service. So far, the results are promising. Second, on sustainability, a key priority for this year and beyond. We will present our strategy in a couple of months at our Investor Day. It is based on 3 pillars: products, planet and people. Circular economy is definitely one of the levers that we want to activate by leveraging the expertise of secondhand platforms. On the right part of the slide, one illustration is with Maje. Since its program, First Stone, last year, the brand has continued to commit to an eco-responsible approach. For fall/winter '20, Maje is looking to address the subject of product circularity in all aspects. A collaboration with Vestiaire Collective was initiated a year ago and the brand continued this partnership in an even stronger form by making it part of its campaign message. And thirdly, on Page 7, our Q2 openings. As you can see, we have opened fewer stores than last year, only plus 2 DOS in H1, including several closures in France, versus plus 35 DOS last year in H1. Our approach today is more selective and based on optimizing and enhancing our French network and opening selectively in international markets, mostly in Asia, as we are prioritizing and focusing on like-for-like growth. Here are 3 exciting projects that launched in Q2: a Maje flagship store in Saint Honoré in Paris, which is featuring a new store concept using less furniture and more vintage furniture to promote a more responsible consumption. A Sandro dual gender store in Beijing, our new concept green store using natural materials, stone plaster wall finishes, some natural stone and, of course, LED lighting. And Sandro Shanghai, our first travel retail store in domestic airport of Shanghai Hongqiao Airport. First results are very promising. This is a perfect timing to open it as government actions to foster local consumption are significantly supporting domestic travel retail channel.

Thank you, Daniel, and good morning, everyone. I will now comment on our regional performance on Page 9. In France and EMEA, sales were down, respectively 49.6% and minus 51.1% on an organic basis, in line with the group average. The performance reflects a gradual improvement throughout the quarter, in line with stores reopenings, even if tourism flows remained absent throughout the quarter. In Europe, the performance was partially contrasted from one country to the other, reflecting various degrees of global shutdowns and levels of exposure to tourism. Among top performers, we can note Germany to around minus 10%, the Netherlands and Switzerland. Among bottom performers, we included Italy, the U.K. and Spain, which posted a decline of more than 70% in the quarter. In France, trends improved throughout the quarter, even if June was impacted by some negative calendar effects as the several sales were postponed by 3 weeks to July 15. In parallel, tourism remains totally absent, which notably explains the outperformance of the province area compared to Paris. In parallel, digital in Europe recorded a strong performance in Q2 with plus 39.7% of sales growth. Finally, we continue to make good progress on our branch optimization plan, with 4 closures in H1; 2 relocations, Strasbourg and La Vallée Village; and 1 closure in Poitiers. In the Americas, sales were down minus 69.8% on an organic basis, showing a greater impact from the crisis, as a lot of stores remain closed until the end of June, notably in the New York area, which is key for us. The situation there remains difficult as the region is still fighting the pandemic. That could result in some potential store closures, such as our recent decisions in Florida and in California to close some stores and in their malls. In parallel, e-commerce is displayed a strong acceleration versus Q1 in North America at plus 21.4% as we solved some of the operational issues we had seen in Q1 and saw more online demand. Turning now to APAC performance on Page 10. Sales were down 19.1% on an organic basis, showing a sequential improvement throughout the quarter. Performance reflected a good resilience in Mainland China, minus 3.4% in Q2 '20 and some contrasted trends in the rest of Asia. In Mainland China, we recorded a gradual improvement throughout the quarter, returning to growth in June with a positive like-for-like growth. These early signs of recovery are encouraging, even if the performance remains contrasted by cities. While the south of Mainland China already benefits from positive trends in many cities, the north remains challenging as some cities are still facing risks of local shutdowns. In the north, the performance was double-digit negative in June. Beijing, which represents a big part of Northern China, was down double digit in June as the city went back under lockdown with strict measures imposed. However, for a couple of days down, situation is improving, and all our stores are now back open in Beijing. In the south, the situation is completely different. The performance was double-digit positive in June with certain cities out of 15 being positive. In parallel, Mainland China benefited from a strong performance of e-commerce, plus 17%, mostly driven by successful operations on Tmall, as mentioned by Daniel. As for the rest of Asia, SMCP recorded contrasted trends, including good resilience in South Korea and Taiwan, which was positive in Q2, and tougher markets in Hong Kong and Singapore. In Hong Kong, the government announced the extension of tightened measure. Several new cases were reported and borders remained close to tourism. In Singapore, situation improved recently with the reopening of our stores. So thank you for your attention, and we're now happy to answer to your questions.

Thank you, Philippe. Operator, I think that we have some questions.

[Operator Instructions] The first question comes from the line of Antoine Belge calling from HSBC.

It's Antoine at HSBC. Three questions, please. First of all, you gave a bit of commentary about the exit rates by region. Is it possible maybe to be a bit more precise, maybe give the global exit rate for the month of June? And if you've seen a further improvement so far in July? Second question relates to the operating loss we could expect for H1. Is it possible maybe to give a range and with maybe some -- or at least some detail about the gross margin decline in inventory, depreciation, et cetera? And finally, maybe on De Fursac, So it is still not in the like-for-like base, but is it possible to have some kind of a comparable store growth on a pro forma basis? And maybe, is it possible to have an update on this acquisition and what you've been doing? And to what extent COVID-19 is postponing maybe some of the initiatives you had planned for that acquisition?

Okay. Thank you, Antoine. Listen, I'll take, very briefly, question 1 and 3, if you like, and I'll give the second one to Philippe. So you mentioned more detail on the global exit rate. I think I mentioned, but I'll repeat myself, earlier in the call. So our global exit rate in June was around minus 30, coming from minus 70 in April. So in the right direction. And as we pointed out, it was positive in China -- Mainland China, and even positive on a like-for-like basis in Mainland China. So that's -- the trends are going in the right direction. For July, obviously, I can't say too much. I can just say that the trends from June keeps slightly improving. But I remain cautious, obviously, on what can happen here until the end of the year. On De Fursac, I'd say a comment to start more broadly on the -- what we've seen in the men's markets in general. We've seen that men are a little bit less out there shopping than women, even when the store reopens. So I think there's a slight difference in performance by category, men versus women, on a global basis, and particularly in Europe where it's been slightly weaker. Has this affected our plan for De Fursac? Yes, of course, it has because part of our plan De Fursac was -- it's a beautiful brand, it's a market leader in France in men's accessible luxury. What we wanted to do was, obviously, expand it geographically. And we have some -- we had to take a little bit of a pause in the store -- new store growth. But we have our road map that we feel very comfortable with in terms of expanding in new markets. We already secured some locations. So we're very happy about that, but there's been a slight delay. In terms of what we're doing with the brand as well is we're using, I'd say, the tailoring routes but to inject them much more into urban casual wardrobe for men. And that's been something we've been working on since day 1, so to develop a much more compelling and larger urban casual offer, which I think corresponds to the market today, but still with the tailoring routes. And that business has been improving. And then in terms of integration, et cetera, within SMCP, our approach has always been to have a very light touch. We want to keep -- I want to keep what's made De Fursac successful is letting them have this -- giving them this independence, autonomy as a small start-up, let's say. And obviously, where the group can help in terms of business development, in terms of maybe store build-out, et cetera, we're doing that. But I'm not seeking to completely integrate it in, and I want to keep its spirit alive. So that's been the approach so far. And like I said, overall, we've had a slight delay in the opening plan because of COVID, but it's -- we've been able to secure some great locations for the future. Philippe, you might want to take -- say some words on question 2, whatever you can say.

Yes. Antoine. So we're not going to comment too much on the EBITDA. As you know, that's the purpose of the call on September 4. So what we can -- to give you a little bit of color on your question on the gross margin, I think what we can say, we're not dissimilar to the overall market. Clearly, the market has been much more promotional during the lockdown and just after the look down. And then you have the impact on the inventory. So that results, clearly, on some pressure on the gross margin, be that in terms of higher discounts or some inventory -- additional inventory depreciation. So that's an impact on the EBITDA. I would say the other element is in terms of cost. So earlier this year, we have talked out our action plan in terms of cash reduction, and we have been really on track with that. And the indication we have given is to say that we can variabilize more than half of our cost, be that store cost or SG&A, and that's through the action that we have been mentioning, particularly rent relief, temporary unemployment and optimization of our structure. So I would say that's an indication that we can provide you today.

Okay. So no -- I mean on the gross margin, I mean, we've seen quite different outcomes for different players, depending on the product mix and sort of percentage of seasonal products. So no way you can guide slightly?

Well what I can tell you is that we had an impact, and then we have explained also what are the mitigation actions that we are getting in place. So yes, there is an impact, but we have also some wins to manage part of it.

Do we have another question?

Yes, we do. The next question comes from the line of David Da Maia calling from CIC.

So my questions have already been asked by Antoine. So maybe a quick one on e-commerce. Your online sales grew by less than 20% in H1 on my calculation, which is significantly lower than some of your peers. How can you explain this on the performance because we saw some big increase in e-commerce sales from some of your peers in H1?

How much did you say, sorry, for H1?

Yes, less than 20% in H1 for e-commerce sales growth.

No. So in H1, it was 32%. 32% was Q2. H1...

Because if I remember correctly, in Q1, it was flattish.

Yes, exactly.

Yes. So I think a couple of things. First of all, I'm -- we're very satisfied with the performance of e-commerce. I think you really have to look at the base as well, right? Our base -- our penetration last year, e-commerce sales was 15%. So it depends what your starting point is. It's very important to take that into account when you look at performance in H1. And listen, we're very happy with the performance in e-commerce. We think we have a very robust plan. We know it's an accelerator for the future. This is what I think COVID has taught us all that it was very important before, now it's going to accelerate. And our plan overall is articulated around 3 building blocks. The first is e-commerce itself, which is mainly done through our websites. A big part of the business, more than 50%, is done through our sites. The remaining is done with partners, with department store partners and pure players. We have been investing a lot, and wisely so I think, on omnichannel services. As I mentioned earlier, we just launched unified commerce, which is a service that not many companies have today. It's been a 2-year journey, and we're very happy to launch it. And the last part of our road map is to digitalize our processes, like visual merchandising and e-learning. So listen, I'd say, overall, I'm very happy with the performance of e-commerce in H1 and, in particular, in light of the 15% penetration as of last year.

Understood. But what's the share of e-commerce now in your total sales in H1 '20?

Yes. I mean I can give it to you, but I don't think it's a very relevant number because you're looking at an e-commerce penetration when a lot of stores, physical stores were closed. So I think it's not a normal rate at this point in time to give. I think it's misleading. It's obviously very high, but I think the question is more irrelevant probably...

Yes. It's quite irrelevant, yes.

Yes. I think so just because most stores were closed. So probably in H2, I'll give you a number at the end of H2, for sure, which will be a more fair base. But obviously, it's very high, but it's not sustainable at this point in time.

Do we have another question, operator?

Yes. The next question comes from the line of Christoph Schmitz calling from Carlyle.

It's Christian at Carlyle. I have a quick question. Could you maybe comment a little bit on your liquidity position right now? And then how you see it develop over the second half of the year? And in particular, I'd be curious to understand what your current thinking is about the maturities of your CP and, kind of, whether you think you can refinance those. And if not, what the alternative fallback plan is for that?

Yes. Sure. Thank you for the question, Christian. So as you know, we've negotiated successfully a guaranteed of so-called PGE in France of EUR 140 million. In the same time, we also negotiated the covenants. So we have a covenant holiday for 2020 and we have an easing of the financial covenants for 2021, which is, I think, a great outcome. So -- and in the meantime -- so it means that we have this new liquidity, which is provided by the PGE. And in the meantime, we have reimbursed our NEU CP -- so our big takeaway, we have reimbursed all our NEU CP, and we have this new PGE in place. Based on that, our cash position is over EUR 200 million, which is, I think, really comfortable to face any potential risk in H2. So I think we are in a good position. As you know, -- may know, the logic of this state guaranteed loan, that was more to provide some headroom and further flexibility as we exit the crisis. So I would say we are in a good spot thanks to this negotiation.

And when you say you were -- sorry, one question. When you say you were above EUR 200 million in liquidity, you were at EUR 200 million liquidity at the end of the first calendar quarter. Does that mean you've burnt the entire EUR 140 million of the state loan already?