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

Hello, and welcome to SMCP 2023 Full Year Results. My name is Melissa, and I will be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I'll now turn the call over to Amelie Dernis, Head of Investor Relations. Please go ahead.

Thank you. Good evening, everyone. This is Amelie Dernis, in charge of Investor Relations, speaking. Thanks for being with us today for the publication of SMCP full year results. I'm here with our CEO, Isabelle Guichot; and our CFO, Patricia Huyghues Despointes. I'm sorry, we had an issue on our website, so I sent you the presentation through email. Do not hesitate to send any email during the presentation if you did not receive it. As usual, we will go through the presentation, and then we'll have the Q&A session. Before I hand it over to Isabelle and Patricia, I invite you to go through our usual disclaimer on Page 2. And I think we can start now.

Thank you, Amelie. Good evening, everyone. Thank you all for joining us today to talk about the 2023 full year results with, first, the key highlights on results and then business initiatives. Then I will hand it over to Patricia, and she will detail our performance. And finally, I will go through our main initiatives for '24 and coming years. Moving on to Page 4 of the presentation. You can see that our full year sales came out at EUR 1.231 billion, an increase by 4% at constant exchange rate and 3% organic. Second semester is nearly stable despite a challenging environment with consumption slowdown and persistent inflation. Here are the key messages from the full year sales. Sandro and the other brands performed well with a mid-single-digit growth, and Maje remained stable versus last year. The pursuit of a full price strategy, which is a key pillar of the group strategy with a nearly stable discount rating season despite good comps and a challenging environment. Our digital share remains at a satisfactory level at 22% and gained 1 point versus '22. The network increased by 40% net, which means the result of openings minus closing in key areas. Page 5 now. You will find you the performance by region. Patricia will get into more granular detail later in the presentation. Just a few highlights. By region, APAC gains 2 points versus last year, resulting from '22 impacted COVID restrictions. And symmetrically, America and France decreased by 1% each from '23 with more challenging economic environment. By brand, homogenous performance between Sandro and the other brands during the year. Maje slightly below, especially in H1, while H2 trend was similar between brands. By channel, no change. You know that we have mainly, dominantly retail business. 92% of our business is coming from our retail network and 8% coming from wholesale, mainly from partners and a few outside players. Page 6 now, a few highlights on our Q4 sales. At a level of EUR 326 million, that remains stable at constant expert rate versus '22, a decrease of 1% organic, explained by the consumption slowdown in Europe and particularly in France, and in the quarter in China, less dynamic than expected. U.S. are more resilient and remain positive at constant foreign exchange rate. The trend is homogeneous across Sandro and Maje. Other brands are more exposed to France. The network is growing by 26 point-of-sale net openings during the quarter. Page 7 now, some key P&L figures now. Management gross margin, which remained at a satisfactory level with a strong improvement in the second semester, and it was a common goal for the different brands to achieve this. Profitability has been impacted by the complex environment. The adjusted EBIT lands at 6.5% of sales as we released and anticipated during our information at the end of January. Financial strength has been maintained with a good cash flow generation in the second semester, enabling us to improve net debt compared to year-end '22. Page 8. We are proud to share with you some 2023 major achievement in terms of sustainability. We strongly improved our Sustainalytics rating. As a reminder, Sustainalytics is a leading independent ESG firm involved in corporate governance research, ratings and analytics. They analyze more than 50,000 companies. With a grade of 13.9, we came out in their top 10% in terms of rating, and we gained 20 ranks versus '22. Now let me dive on our 3 pillars that you're all aware of. In terms of products, 59% of our fall/winter collection have been made with more sustainable materials and products. I'll remind everyone that it means that they've been produced with more than 50% of their components being more sustainable, which is a strong improvement versus fall/winter '22, which was at 45%. As far as planet is concerned, we're really proud to have obtained for our carbon footprint strategy 2 very good results from external agency. First, we strongly improved our CDP scoring rating from B in '22 to A- in '23. On top of that, our strategy of -- for carbon trajectory has been validated by SBTi, the Science Based Target initiative, meaning that our carbon strategy is in line with the Accord de Paris and is based on strong, reliable assumptions. Finally, regarding people, we standardized and deployed across the world our diversity and inclusion strategy. For example, under this new strategy, parenting policy is now aligned in all the countries where we operate on the most favorable countries. Clearly, these '23 achievements in CSR mark a milestone for SMCP. The 3 external ratings and recognition we have received from CDP, Sustainalytics and SBTi are very strong and put us in the upper category of the not so many companies having achieved very good progress recently. Now let's move on to brand desirability, which, as you know, is the key pillar of our group strategy. And we keep -- we're constantly reinforcing that brand desirability. For Sandro and Maje, a few examples of creative windows the Harrods windows takeover, Maje celebrating its 25th anniversary with a dedicated capsule and specially designed windows to celebrate that. If I move on Page 10, a very nice shooting for an after ski capsule for Claudie Pierlot. And for Fursac, more and more KOLs wearing the brand, Rami Malek on the left side, for instance. Key openings in Q4. We opened -- as I mentioned earlier, we opened stores in America with 2 stores in meatpacking district in Manhattan. And we also opened in a very beautiful California mall, Westfield Topanga. We opened 2 stores. APAC, which means in this case Malaysia and Australia that we took over last year, some nice openings with 2 new stores in Malaysia and 2 in Chadstone, Melbourne that we opened and have been very -- the APAC region has been one of the best-performing regions for the group in '23. We kept on also expanding in new countries with partners. Some -- a few examples that you can see on the map. We opened new stores in Saudi Arabia, in Riyadh Park. We're already present in the country, but we extended our presence. In Mexico, where we're already present, and we opened some new corners at Mexico Palacio De Hierro. And in Malta, where we kept on opening stores, start initial opening. So it's a good performance. It's always a very interesting activity for us to keep on opening with those partners. And as you know, and I will speak about it later, we have a major milestone with the opening of India next year -- this year, that was a misspeak. Finally, we continue to expand our digital presence with both our own website and through marketplaces. As regards our own channels, Sandro Secondhand is now live in Germany, Spain and Netherlands, combining digital presence and circular economic development. Fursac accelerates digital European extension on its own website, now serving customers outside France. And on marketplace, we have added 3 brands of our portfolio, Sandro, Maje and Claudie Pierlot on Zalando in Spain and Italy. And our [indiscernible] partner, El Corte Ingles, is now -- we're operating on marketplace on their website. And we've also joined 24S, on the marketplace, with our brands. As I just mentioned earlier, future opportunities. And among them, a few words on our development that we announced at the end of '23 with exciting opportunities of entering India, thanks to a partnership between SMCP and the #1 Indian distributor, Reliance Brands Limited. India is a remarkable country, not only in terms of culture, population or size, but it's also -- its relationship with garment is very vibrant in terms of color, material, craftmanship, style and fashion at large. It's a very educated market, and we are very optimistic and confident in our potential. Our collaboration with Reliance would be crucial to enter this market, and we have a profound respect for the expertise and excellence in the execution. Openings are scheduled now in H2, in Mumbai and New Delhi for Sandro and Maje, and we're drawing the plan as we speak. I will now let Patricia present you 2023 figures in more detail before coming back for conclusion and action plan for the coming years.

Thank you, Isabelle. Good evening, everyone. So let's start with the sales on Slide 17. With France first, with sales of EUR 430 million, flat versus previous year with a high basis of comparison in 2022. The second semester has been impacted by a slowdown in traffic, especially in December. We can, however, underline some positive features of our brands for '23. By brand, good figures for Sandro and the other brands, positive in France in full year, and by channel with a solid progression of digital sales with a high single-digit growth. Twelve openings during the year, mostly in digital, on our website or by our marketplaces, as Isabelle just explained earlier. EMEA now with sales of EUR 389 million, progressing plus 3% organic, driven by like-for-like network, explaining half of the growth, which is quite a resilient annual performance made up of a strong first semester and a second semester more impacted by persistent inflation leading to traffic slowing down. Several EMEA markets performed well like Germany, Spain, the Middle East, while the year was tougher in the U.K. and in Switzerland with lower touristic flows. The network remains nearly stable with one net addition, the openings being offset by the final closure of the point of sales of the former partner in Russia. In America on Page 18. Sales of EUR 173 million for the year are slightly negative versus previous year at minus 3% organic. But it's important to remind that this follows an outstanding performance of 2 years in a row. U.S. sales are quite resilient and show a sequential improvement in the second semester with a Q3 performance above H1 and a Q4 better trend than Q3, this quarter having a positive organic growth both in brick-and-mortar and in digital. To be noted also that Canada is back to growth in Q4. Network increased by 17 net additions with nice openings in strategic spots such as California. In Asia, sales stood at EUR 255 million for the year, plus 13% organic, with nearly all markets above 2022. Growth was mainly driven by Mainland China with a double-digit growth from 2022 with a quite low basis of comparison. But we have also good performance in Hong Kong, Macau, Singapore and Malaysia. All Southeast Asia benefits from good local dynamism but also touristic flows within the region. And as a reminder, Asia Pacific benefits also in 2023 from the integration in retail of the Australia and New Zealand partner. In Asia, the network increased by 17 POS, and you saw some in the previous slide. Now let's move on to the P&L on Slide 19. And we'll start with management gross margin, which is at 73.8% of sales in 2023. The main point we want to underline on this topic is the improvement in the second half of the year from 73.1% in H1 to 74.4% in H2, so in line with previous year in the second half supported by a continued strict discount policy. The increase on discount rate has remained at a very sound level despite very competitive and promotional environment. It remains under 25% in season. Now let's talk about operating expenses on Slide 20. You have seen the figures in H1, and you remember that our goal considering the complexity environment was, at the time, to limit as much as possible the growth of OpEx in the second half. This is what we did. And the graph that you can see on this slide show a strong deceleration of the trend in H2 compared to H1, both in store costs and in SG&A. The increase in store cost despite inflation of rent and staff cost was divided by 2 in the second half. And as far as SG&A are concerned, we managed to maintain them stable in H2 versus a plus 9% in H1, thanks to a savings action plan that went much further than what we have initially planned. On Slide 21, this led to an adjusted EBIT margin improvement in H2 by 1 point, 7% in H2 and 6.5% in total year. Slide 22, the as far as the net result is concerned, the evolution versus '22 mostly derived from the decrease of EBIT, of course. It's accentuated by some higher interest expenses. This is partially compensated by a lower income tax charge, and we have also some impairment entries in the context of inflation in the P&L of the stores and also in the context of higher interest rates that reduced the value of some intangible assets. So we booked EUR 14 million more impairment compared to 2022, as you can see in the graph. And net-net, the net result is EUR 11 million, but stands at EUR 37 million before those noncash nonrecurring bookings. On Page 23, some figures about balance sheet and cash. First, inventories, which have significantly increased in 2022, were reduced by EUR 10 million in 2023. This helps us control the variance of working capital, which does not significantly change compared to previous year, whereas the increase in '22 versus '21 have been much more significant. As far as CapEx are concerned, the level of investment is in line with the usual percentage of the sales at 4.5% of revenue. Free cash flow generation after the first semester with a minus EUR 9 million consumption of cash is positive in H2 with a generation of EUR 23 million. This cash generation enabled us to reduce our net financial debt on Page 24 by EUR 20 million in the second semester, landing at EUR 286 million, with a strong improvement of the trend over the year. On the right, you can see the usual split by line of financing. No big difference compared to what we shared during the half year publication as all the reimbursement of debt are performed in H1. And as we have already shared, the debt extension with all big lines, state guaranteed loan and term loan and RCF now ending in '26 or '27. The ratio net debt divided by EBITDA is just above 2.5 at 2.54 something. This slight deviation has, of course, been shared under the right by our lenders. We'll pay the highest attention to the level of net financial debt throughout 2024, and this point is a very important one in our action plan for '24 and onwards that Isabelle will now present.

Thank you, Patricia. Let's move on now to the action plan. After a tough '23, SMCP will accelerate its mid-term action plan to foster growth and protect profitability with the 4 key priorities. Our action plan is articulated as follows. You can follow it on Slide 26. First action would be to reignite growth and gain market share because you can keep on gaining market share even in a tough environment; to mitigate risk across geographies; improve its efficiency, which means not only cutting our spending but spending more efficiently and having expenses that are more contributing to the business improvement; and protect profit, cash and liquidity. I will present you the 3 first priorities, and Patricia will explain the last one. Moving on to Slide 27. First in challenging market condition with a lot of uncertainties, SMCP has many assets to reignite growth and gain market share. First asset will be our desirability and constant brand relevance and positioning. The priority is to voice out louder and clearer the specificity of our brand to foster the desirability by sharpening further brand singularity and personality and make it resonate to relevant audiences; adapting product architecture and merchandising, which means increase the share of carryover and updated products to reduce fashion risk and leverage novelty to animate collections and also reinforce accessory and men contribution; developing qualitative marketing investment with more local decision by localizing content creation while ensuring global consistent messaging, increased share of decision and focus on digital support, obviously. Second point would be to maximize our product offer by becoming an accessory destination, especially in Europe, will be a key growth driver for the group, mainly for Sandro, Maje and Claudie Pierlot, obviously. For example, we boosted bag, belt, footwear and small leather goods launches and marketing support. The recent launch of the new Miss M bag at Maje is the perfect example of the winning formula. We also want to boost the men business by several initiatives like, for example, leverage the gender fluidity collection and communication, expand internationally and adapt the network to take into account local specificities, for example, being on the right floors of the mall for men activities. We will continue to enrich our product offer with new categories like, for example, Sandro teams that have a true passion for lifestyle and home products, and they are contemplating new product addition and new interesting launches. Third priority is regarding the boosting of digital opportunities. We are determined to take advantage of the global replatforming. We are rolling out, as I speak, on our DTC side, which will start in March. This will enable us to fully exploit omnichannel capabilities and mobile function. We'll also keep on working on international development such as cross-border, which will help us to serve underpenetrated countries by shipping from adjacent countries. We'll also continue to address local specificities like in China, for instance, which has, as you know, its own digital ecosystem, and take advantage of live streaming capabilities on Chinese platforms such as Douyin and Little Red Book, and that's only one of the examples of the many options that we have in the digital Chinese ecosystem. Fourth priority, we'll finish with initiatives to enrich our business model. At the same time, we will enrich our business model and see new retail opportunities offered by retail partners and travel retail operators, for example, in European and American airports. And of course, we'll continue to integrate organically sustainability in our business model with the acceleration of traceable certified responsible collection and also circular business acceleration that we've already started with most of our brands. Moving on to Slide 28, geographies now. The main message on this slide is about rebalancing. We have to seize opportunities everywhere and avoid depending too much on some markets. We have had a strong focus on China over the past few years with an extensive development in more than 40 cities. And while we continue to believe in the huge potential of this market, we also have the capacity to rebalance our geographical footprint by shifting focus to other potential development areas, as I mentioned before, while enhancing partner-centric expansion in key markets. After more than 10 years of fast-paced expansion in China with more than 200 stores, this is now the time to optimize our exposure in this market in order to adapt to new market conditions. After a complete review, we have decided to resize the network by closing the less profitable point of sales, circa 30 in '24, approximately 15% of the network, to focus on the most profitable stores. Of course, we will keep the capability to rebound in China when the market will be back to solid growth rates. Globally, we have the agility to rethink our presence and to challenge the business model in areas where the cost of operation and the complexity are not in line with expected profitability. In this case, we have 3 options: better materialize between brands, switch to partner operation or close as we do in China. In parallel, we are accelerating opportunities in geographies with obvious potential via local partners, for example, Middle East, India, as I mentioned before, or South America that we're exploring as I speak. We will also address new countries with cross-border and digital, as I already mentioned, in order to tap the market before entering into either a partner format or a direct format. And as far as travel retail is concerned, we are also working on the rollout in Europe after a good proof of concept in some airports in Asia. Third priority is about efficiency. As you can understand in this slide, this is not all about cutting. It's also about optimizing, allocating or reallocating and challenging. It will encompass several aspects, processes first. We are already a group with a lot of mutualization in many functions, and it has been a part of the success story of SMCP. We'll go a step further, and we are currently looking into how we can accelerate in this respect. This will, of course, have a favorable impact on the cost side. And we are currently conducting a very thorough review of all categories of spending to investigate and negotiate all possible improvements of condition with our partners. Second, inventories. We have developed tools and policy in the past to enhance inventory management. And we have made a lot of progress, but we know that we can go deeper in the efficiency by optimizing the number and productivity of references and by relying even more on planning, forecasting and better clustering in our very important network. Third, CapEx. We will challenge our design, project road map and conduct of projects, be it in stores or in information systems, to save money, of course, and gain agility, thanks to a fine-tuning of the dimension and scope of our projects.

All the previously mentioned actions are focused on an essential goal, which is to protect profit and cash generation, as indicated on Slide 30. We will continue the strict monitoring of OpEx that we have initiated some months ago. Now our goal is to ensure that year-over-year, we manage to maintain such savings not only by one-off cuts but also by making sure that we identify the correct way of working, enabling us to secure that savings will last. We will give priority to the most productive investments, especially in stores. For example, in 2024, we will overweigh in our store projects the opening in corners in department stores, which are, at the same time, lighter in terms of CapEx and also safer in terms of variable costs. We have also engaged an important reflection on how we can adapt the business model of smaller brands to accelerate their growth and profitability. In the way we work, our goal is to keep supporting them, thanks to our central teams, but being more agile, for example, in their participation or not to good transversal projects. In the way we develop them, we will adapt the business model, and they will benefit from the initiatives we described earlier on retail and nonretail developments with partners but also with a bit of wholesale. Ultimately, this will serve cash generation with a goal to continue to reduce the net debt of the group.

Thank you, Patricia. I confirm that all what we've just presented, the underlying principle is to secure the return to a continuous path of profitable growth. I know that you will ask for figures about this plan, but it's a major plan with a lot of topics with organizational impact and network adjustments, meaning that we are still in the process of quantifying the various options that we have identified and will be more granular during Q1 publication at the end of April. As far '24 is concerned, what we can see so far is that the market conditions are quite similar to Q4 '23, meaning that '24 will once again be area of 2 different stories with still a tough H1 and an expected improvement in H2. We lack visibility on economic perspective, so we don't give a guidance for '24. I thank you for your attention, and now we will take your questions.

Operator, I think you have one question.

[Operator Instructions] Our first question is from Marie-Line Fort with SG.

First question is about India. What kind of contribution can we expect from your new partnership? And how is the GLA structured? Do you -- will you consolidate turnover on [indiscernible]? First question. The second one is about the write-off. You passed on the 2023 full year earnings. I suspect that it corresponds to the closure of Chinese stores. Will you need to anticipate another impact for 2024? I would like to know also how was the sales period because I know that January was pretty difficult, at least in France and probably in Europe. Do you expect some impact on your gross margin? And last question, just in terms of figures for our model. Is it possible to get the personnel expenses for 2023?

India, it's -- I mean it's not going to be extremely material in '24. We are going to open 4 stores, and we're really excited about the development and the way it's going to roll out. We have another 2 other openings that are planned for end of '24 and early '25. So we think it's going to be only the beginning of the story. And we think that it can be among the 3 or 4 important partners that we have with Korea and the Middle East. So we have a strong expectation about India. The other point I could answer is about the sales. Q1 -- usually, Q1 has a strong weight of end of season of -- end-of-season sales of fall/winter, which means that the beginning of the year remains in the same trend as December. As you mentioned, it's been -- January has been a complicated month that you wanted to know the impact on the gross margin. What we can say is that what we see in February is a good take of our spring/summer collections, which are now more really rebalancing the fall/winter end-of-season sales in our stores. So it's a very encouraging sign. And for the time being, we see since mid-February a good takeover, I would say, of the spring/summer collection. That's all we can say at this stage.