Track & Field Co S.A. (TFCO4) Earnings Call Transcript & Summary

Well, good morning, ladies and gentlemen, and welcome to the Track & Field video conference to discuss the results for the first quarter '25. This video conference is being recorded, and the replay will be available on the company's website at www.tfco.com.br/ir. The presentation is also available for download. [Operator Instructions] Before we proceed, please bear in mind that the forward-looking statements are based on the beliefs and assumptions of Track & Field's management and the current information available to the company. These statements may involve risks and uncertainties as they relate to future events and depend on circumstances that may or may not occur. Investors, analysts and journalists should consider that events related to the macroeconomic environment, the segment and other factors may cause results to differ materially from those expressed in the forward-looking statements. Present with us at this video are Mr. Fernando Tracanella, CEO of Track & Field; Ms. Patricia Abibe, CFO and Investor Relations Director; and Mr. Fred Wagner, CEO of TFSports and Vice President of Strategy and New Business at Track & Field. I would like to turn the floor over to Mr. Fernando Tracanella, who will begin the presentation.

Good morning, everybody, and thank you for your presence. It is a pleasure to present the results of this quarter. It ended up being a special quarter because of the growth of sales and the results. I'm going to touch upon some highlights and then Patricia will go into further details on the figures, and Fred will speak about the ecosystem, transportation and much more. We had strong sales, a sellout of almost 34% and same-store sales, almost 25%. There's no specific reason. It's a combination of several factors. One of the factors that we have mentioned at length with you are the winds blowing in our favor, the trend of having ever more people committed with the health trend. And this means we're growing more than the average retail stores. The addressable market is also growing considerably. And internally, we have some factors as well. For example, we launched a fashion for winter in March, very different from other collections with a very positive impact on the second quarter. The events that we hold increasing customer loyalty and leading to considerable satisfaction. And of course, our e-commerce already represents more than 10%, growing at a greater speed than the brick-and-mortar stores, the omnichannel as well as the infinite shelf, gaining traction and helping us ever more in our performance. And a better stock network compared to the first quarter of the last year. And we observed several opportunities to further enhance this point, but we did have an evolution since the beginning of the year. And of course, the renovated stores. On this first slide, you can see that we had almost double the growth of same-store sales in these stores, sound and consistent growth that will help us in other periods. Net revenue growing at 31.2%. And perhaps what is the more interesting thing of this quarter is that it was a period of strong growth with an increased pace in profitability. EBITDA margin historical since the pandemic, 42% and a margin of 25.7%, very high for the first quarter. An interesting figure, BRL 39 million for net profit compared to BRL 30 million in the previous quarter. So we had a growth of 37% and a margin of 18.3% for the first quarter. Well, this is the first healthy gross margin. We had good growth because of our mix and an improvement in each channel, and we had a decrease of expenditures once again. Despite this vision, all of the figures that we're speaking here are consolidated figures. So despite the higher investments vis-a-vis the first quarter of last year, you will recall that, that first quarter, the total result was very close to 0. This year, we had almost BRL 4 million in investment. And despite this, we were able to reduce expenditures on net debt with a positive impact on that line item this quarter. The company continues to have 0 debt. We had good cash generation as well. A cash generation that, of course, could have been higher, but we did invest in the buyback of shares, reducing cash generation somewhat, but we believe this was a good allocation of resources, of course, leading to valuation. In the first quarter, we had less store openings. We had 4 new stores. We now have 402 stores in the network. The outlook is very similar to that of last year. We have a very hot pipeline in terms of new stores for this year, a strong demand of the franchisees, especially those that are part of our base. And we already carried out 7 renovations, 1 in our own store and 6 franchises. So very similar to last year where we had 43 stores opened. We should end the year with 50% of our network fully renovated. These are the main highlights. I will give the floor to Patricia. He will give you more details.

Thank you. Thank you, Traca, an excellent day to all of you. Let's delve into our figures and differently from other quarters, I would like to begin with the expansion. This is one of the main factors that had an impact on sell-out. Tracanella showed you the main information on expansion, 4 new stores throughout the first quarter, all of which were franchises. We end the first quarter of this year vis-a-vis the first quarter last year with 41 stores more. And I will connect this to our sell-out. We have an ever more robust network as we carry out the store expansion and we renovate the stores. And these renovations, as they materialize, the store growth almost twofold more than an already existing store. This is what we call same-store sales. And this has an important impact on our sellout. We end the first quarter with 402 stores, 349 franchises and 53 owned stores. In the new layout, we have approximately 47% of stores in the new layout and 60 -- excuse me, she says, 60% is our owned stores in the new format, more than the franchises, as you will see. Let's connect this with the sellout. Now to speak of a record sellout of growth vis-a-vis all of the previous quarters and same-store sales is very relevant. And I just explained to you that this is due to expansion and renovations, an important driver of this growth. We need to recall that, additionally to that, as Tracanella mentioned, it's not a single initiative. We have all the digital sales growing 38% over last year. We got to 11.4% of representativeness of our sell-out. Once again, a very important factor we have gone beyond that barrier of 2 digits for the share of sales, e-commerce in terms of omnichannel stores connected to the infinite shelf. Remember that this is the modality where we avoid losing sales. We ensure that the customers leave the stores highly satisfied, offering them good experience. They look for a product. If we don't have it, we use the infinite shelf. We have 329 stores connected to that. In digital sellout, this represents almost 10%. And we have a 1.2% stake in this process. I also like to refer to the representativity of digital sales that we carry out in social selling. Social selling are those sales that represent 37% of our sales, a highly strategic channel for us. We cannot end this slide without speaking of the excellent performance we had in our sales. We turned the year very well stocked. Our net revenue for the fourth quarter had a greater representation that a sell-in. In the past, we had a higher representation in sell-in. All of the franchises were very well stocked up to guarantee exchanges at the end of the year, the customer coming back to the store to have the opportunity for a sale. And of course, our sales that had a very good mixture colors and products, and we had a successful sale this year. Now the organization of events getting stronger through experiences and series and all the other initiatives. And this, of course, takes a large flow of customers to the brick-and-mortar stores contributing to our growth. Now net revenue accompanies the sell-out pace this quarter. If we look at the fourth quarter and the third quarter, the sell-in representation was somewhat higher when we looked at net revenue. This will not happen this quarter because the stores were well stocked, although the collection changed at the end of March. We had a share, very similar to that of last year, a little less representation perhaps. And because of this, we gained representation in our royalties. Last year, it was 1 percentage point over this year. And this is important for gross profit. We have the representation of net revenue in a channel like retail or something similar. When we carry out sell-in, there is a pressure on gross margin. Now this will contribute positively to our gross profit net revenue with a growth of a sell-out of about 31.2%. Retail of our own network was very good, 33.4% -- if we look at the result of renovated units, a growth of almost 41%. This for the entire network for the sake of comparison and the royalties with significant growth and a significant impact of the renovated franchises that will contribute to a further growth of royalties. In gross profit and because of our sell-in this quarter, we didn't have a higher representation in sell-in. This contributes positively to our gross profit. Why? Because our net revenue fell into royalties and the retail sector itself. This brings us a more favorable channel mix as a whole. But in fact, we do have significant gains in practically all of our channels when we look at the markup we had between 1 year and the other. We're speaking of countless initiatives, greater representation of sales with a full price, the customer going to the store attracted by the opportunity of summer sale, for example, but also looking at the products that had just reached the store, the winter preview. And once again, all of this contributes to higher sales at full price in the sales period. We have some negotiation with suppliers, a strong partnership with them and transferring as little as possible to price, gaining competitiveness in our end product. Operating expenses, when we look at our expenses and if we compare this with last year, there is a reduction of 0.6%. And this due to what we mentioned last year that we were expecting to have a higher dilution. We're speaking of a more comparable period because of all of the initiatives with Track sports. It's almost simpler to look at these figures. They're comparable. Last year, this was difficult to explain. The initiatives had a significant weight in our expenses. And it was difficult to explain this. This quarter, we have a better comparability, and we begin to show that, that dilution does exist despite the investments in Track sports. Additionally, we have the power of the business itself. As we grow the speed of sales in franchises dilutes the cost. Even commercial costs, we don't need to have variable expenses because of a sale in our own channel. This leads to further dilution. So through time, this line will bring about enhancements. It worsens the gross margin somewhat. We have lower margins, but it does contribute to diluting operating costs because of the format. We also have a consistent management of expenses. For some years already, we have been working very positively in refining, understanding the opportunities that we can enhance and dealing with competition processes, opening leads as we have more recurrent contracts. So we have some opportunities in this line item as well. Now when we look at expenses with sales, you're going to say, I don't see any dilution here. Why don't you see any dilution here? In essence, because we had initiatives relating to events that are included in this expense line item. There are gifts, T-shirts that we create for the events. and the performance media. We have sped this up and held some initiatives in that field. Administrative expenses have a dilution of 0.6 percentage points, making everything more comparable, and this is a dilution in our expenses. EBITDA will reflect everything I have just explained, strong sales, a margin that is better in practically all the channels, the best margin in the business, and we also have an operating leverage of 0.6 contributing to the EBITDA. I have added important information here. When we look at the investments we made in track sports, it led to a practically -- to a breakeven in EBITDA. Now this quarter, I had an impact of BRL 4.6 million. Why? Depending on what happens at Track Sports, I have some possible mismatches of sponsorship, the interest of contracts, a change in the event calendar. If we speak about events, if we compare this to our core, they're very different. We don't have a clock to every quarter be able to have the same vision. So we had a mismatch in sponsorship that will lead to an opportunity of offsetting this impact in the second quarter. And with all of this EBITDA growth, if we hadn't had that displacement of sponsorship, EBITDA would have had almost 60% growth. Now net profit, strong growth, 37.6% already considering financial results, income tax, depreciation and a net margin of 18.3%. I think we have another slide on our cash position. We had a significant net operating cash generation, 27% year-on-year and our cash equivalents, well, besides the investments we traditionally make on the track and field sports platform, in the inaugurations of our own stores, the renovation of our own stores, we also had investments for the buyback of shares. And that is why the cash is somewhat lower. We continue without any indebtedness. It's important to show sustainable growth. And in the midterm, last quarter, I mentioned here pressure that we had on our average term of inventory when we include the Santa Catarina initiative, for example, in May or June last year, we practically became self-sufficient with one of our main fabrics that come from Santa Catarina. As we do that, we have to buy all of the raw material referring to that. And this causes pressure in periods like the first quarter and the second quarter regarding raw material that we had to purchase that we did not purchase in the past. And there's a detail here. We also have imports in the fourth quarter. This sped up a bit. In this quarter, we will also see a fast pace because of anticipation of some orders. And this will impact the midterm. If we take this away from the account, we're almost 10 days below what we had last year. Very well. That is my presentation. Fred, let's speak about TFSports.

Good morning, everybody. It's a pleasure to have you here. First of all, I have a message that refers to the discussions we have over TFSports throughout the period. We spoke with the feedback of investors in terms of our results. Here, you see that the system is gaining traction. We begin to show the beginning of dilution of the investments in TFSports, and we present good results in all of the company areas. We see TFSports, we suggest this, and we have spoken at length about this of TFSports being an upside option in the company. Now TFSports gradually has become a benchmark in the wellness market. We have consumers, trainers, event organizers, brands that connect the participants to a healthy way of life. It's important to observe that traction and the reflection it has on TFSports, Track & Field and all the participants of our ecosystem. To refer to the figures, our platform with our recently migrated app with 955,000 users year-on-year growth of 48.2%, 8,300 registered trainers, registered on the platform with 25% growth. We're beginning to pay more attention to this number of events with a growth of 12%. Last year, we had a speed up in this field, but it's important to see how our events gain adherence, 57% growth in number of participants enrolling in the events. The number of participants per event grows consistently, showing that adherence, people are looking for social connection in sports events, and we're very well positioned here. And of course, this reflects on the revenues with a growth of 35.6% in the first quarter. I simply have one more slide. To show you how we're expanding our addressable market in other areas. One of the new businesses for Track & Field is that linked to food and supplement. We have the food and market emporium, selling not only healthy food and supplements, but several things related to wellness as well. Now this operation had a growth of 57% year-on-year, very strong growth besides generating a connection with consumers in other areas. And this is -- well, food and market should be a brand where people also find curatorship on food and supplements. So this will be part of our platform, TFSports, the point of sales and part of our events as well. It is a pleasure, therefore, to show you a part of our strategy, and we hope to continue to deliver these results in all of the areas. Thank you very much, and we're now open for questions and answers.

[Operator Instructions] Our first question comes from Laryssa Sumer from XP.

Congratulations for the results. At our end, we would like to speak about competition. We always speak about that topic, but it would be important to hear an update. What is happening with the competitive scenario in the core in TFSports? We see several entrants in the events category and which could be an avenue of growth, an avenue of differentiation or niches that you can explore in these 2 BUs going forward?

Thank you for the question. Competition in the wellness market grows at a very fast pace. It's normal. It's healthy. We have always dealt with competition. We have strong international brands like Nike, Adidas and others. We also compete in Brazil, and this competition makes us focus on enhancing our product and the services we offer in all areas. It doesn't change our strategy. We change our strategy based on the market and the consumer behavior. This is our focus, and that is how we will continue. It has worked well for the last 35 years. That focus always connected to new trends. In Track & Field, in ways of doing business and updating the company, sports modality, technology that we bring in, behavioral changes, I think this is the strategic view we have, and we will continue on that way of doing things as they have worked well. Simply to add something here. You spoke about differentiation. Our factor to set ourselves aside is our ecosystem. We have a brand that goes way beyond the product. It shows the importance of developing TFSports, the development of the marketplace. It reinforces the fact that we are right to seek that differentiation through the ecosystem, doing this through our network of franchisees.

Our next question comes from Mr. Kelvin Dechen from Itau BBA.

Can you hear me now? I do apologize. We have 2 questions at our end. One about profitability, a highlight for the quarter. You're once again delivering operating results. And going forward, which will be the dynamic for the rest of the year? Can we say that the company has reached that turning point in terms of investments? And could you give us more color in terms of your strategies, investments in marketing this quarter and anything you have about your new strategy?

Kelvin, thank you for the question. I'll begin and Patricia and Fred will complement. We don't have a formal guidance for the growth of profitability. And of course, we couldn't disclose it at this meeting. But in the second quarter, we see the continuity of a very good trend in growth and growth above what we expected for the year. Now this trend remains with healthy margins and the operating leverage that you mentioned is something that we spoke about in other meetings. The company would once again present this. We have a very tight budget for expenses, and we do want to deliver operating leverage and dilution of fixed costs. And this trend remains, therefore, for the first half of the year. This growth? Well, it's difficult to say that we're going to keep it throughout the year. It was very positive growth. In the fourth quarter, the base of comparison is tougher, but the trend is very favorable in all line items, gross margin, top line, dilution of expenses, I think this year will be very positive in terms of results, but we do have the whole year ahead of us still. It's worthwhile complementing with the marketing initiatives. Nothing has changed here. You see investments we make and the magnitude of the investments vis-a-vis our revenues. What does exist is that mismatch of TFSports and events that line item could suffer pressure or not depending on the quarters we're comparing, but nothing has changed in our strategy. It was only this quarter that we detected this dynamic and performance media that accompanies the return on the investments we make. As we make media investments as they materialize, this accelerates. But the proportion will be the same. There won't be significant changes here.

Our next question comes from Mr. Bob Ford from Bank of America.

Congratulations for the results. How should we think about your positioning to leverage technology even further in marketplace, in terms of the trainers? Is there anything you can do with the store to make the infinite shelf even more accessible with 3D scanning or new interfaces and Fred in TFSports, how should we think about your return on investment and your effort to have outsourced sponsors to enhance your investments? And how are you thinking about the buyback of shares? Now in the absence of buybacks, what will you do with capital allocation?

You didn't hear anything. Did you know, we did. We did. We heard everything. I can speak about how we should think about enhancing the leverage and sales within our ecosystem. We already have hints of consumers that are participating at various points of our ecosystem. They participate in events, they buy from the stores. They have a significant LTV, one that is higher than a consumer that does not repeat this behavior. Now to have these consumers participating in several points of our platform as we open up our offers to food, supplementation, health, we want to become a core player in the consumers' life linked to wellness. This will increase expenses significantly. This doesn't have to reflect on the opening of stores or an exponential increase in the number of events, more digital purchases, and we're capturing data on consumers that are more efficient in how we offer products and services to them. I think this is the thinking that could significantly leverage the company profit without having huge investments in CapEx and increasing dilution. We have observed brands that want to position themselves correctly in the wellness market. They perceive how the world has changed. People are more concerned with longevity, health and well-being, and they want to participate in an ecosystem that we created, do it with coherence responsibility. We have a commercial area that is very well structured for sponsorships, but brands do look out for us to participate in that ecosystem. I think it's a trend that is the result of this construction of our ecosystem and brings an increase of sales in same stores, digital sales increasing, a search for brands in which they can participate. All of this is part of the strategy we set up, and we're beginning to see the results. Now to complement this, Bob, there's also an opportunity in being transparent, improving the store supply working from the commercial viewpoint. We began with this last year with optimal results. We still have opportunities to enhance that part. When you spoke about the infinite shelf, we have devoted a great deal of attention to that, thinking about how that process will cause ever more -- ever less friction at the store. It already represents 10% of our digital sales. It truly has grown, has helped us to diminish losses because of stock out, and we're looking for alternatives to further enhance the customers' experience. The last point refers to the buyback. Now in buyback, we saw a significant opportunity in buying back the -- we set up an activity for that. This generates value for shareholders. And as we buy back, we also cancel those shares. Now going forward, the company does have alternatives for capital allocation. The last month, the buyback made a great deal of sense. And the company has a cash generation model that at some point will allow us to think of even more alternatives to generate value for the customer. We could think of a payout perhaps going forward. But at present, we have important investments to make in store renovation. So this would not apply to this year. This year, we will have 100% of our own stores renovated very close to 100%. So in the distant future, therefore, we will have opportunities to think of new alternatives for capital allocation, not this year for sure, but maybe next year, that could be a possibility. When you speak about reducing friction at the store, are you thinking of digital foot scanning? Or are there other means? Our mindset and the challenge we have is how to make the integration of our digital ecosystem with the store. It's less an operation of digital foot scanning. We could think about data to offer products with the right sizes. It's very difficult in other places of the world to see a store that can offer all these services in a single way and in a coherent way. We are thinking about this, and it's possible that we will enhance interfaces for our sellers with the consumer to obtain that integration, not putting aside the idea of the digital foot scanning.

Our next question comes from Matthews[indiscernible].

Congratulations for your results and also congratulations for your excellent capital allocation and the buyback of shares. Could you give us more details on the partnership you have for the new sponsor for TFSports? Is this an additional growth lever in holding events? Or is it a way to reduce the expenses made by Track in your present day events?

Thank you, Matthews, for the question. Porto, of course, is one of our big partners. We have a very good relationship with them and the partnership with Porto, of course, enhances the experience. We have Porto Track Experience in more than 40 sports events, including running. And with them, we're going to go from 800 events organized throughout Brazil. The Porto brand has a huge correlation with the health field and that mindset of caring for the ecosystem, the relationship we have with our franchisees, with our ecosystem is very similar to the relationship Porto has with all of its system and brokers. So we have the same mindset in how to care and to ensure that the ecosystem is well positioned within the company. This is a very satisfactory Porto and has allowed us to increase the number of events.

Our next question comes from Mr. Lucas [indiscernible]

Congratulations for the results. Given your net cash position, how are you going to use those resources? Could you comment on M&As and expansion? And how are you going to continue to invest consciously with a return to shareholders?

I will begin answering. I spoke about this in the previous question. We still have a way to go in terms of store renovation. This is a reality for 2025, perhaps 2026. This has been the main consumption of investments as well as investments in the TFSports platform. These are the 2 main investment poles for the company. There is no M&A agenda or any change in our expansion strategy besides focusing on franchises. What we see are onetime opportunities, more strategic venues that may require more investments or the outlets that are always our own outlets. But the focus will continue to be with franchises. We're very satisfied with that pillar. It's important to say that we have net cash, but we also have a minimum cash policy. You know the company for quite some time. We have been listed and the philosophy is 0 debt. And this comes hand-in-hand with the need of having minimum cash levels. We need to also look at CapEx versus minimum cash as a projection of our flow. So no changes going forward to sum up. Besides the main investments I mentioned, no intention to carry out an M&A and maybe onetime store expansions. To complement this, we're always asked about M&As and our viewpoint on this, we want to create internal business basically through time, we began with Track & Field's. 30 years ago in 1994, we began making the races feasible. This was the beginning of the creation of TFSports and the brand. We have several assets, the Porto Track & Field Experience, Santander events, Beach tennis, all of these are still there. The TF Mall, food end market, our emporium for food and supplements. So our tradition here is creating value in-house with an eye on cost, of course, you need more time, more patients, more focus perhaps. And it's a cultural issue. M&As represent a cultural risk for us. Other companies have different cultures. Many times that works out, but it could also bring about problems. So our mindset is to use our investment capacity to create brands and through time to expand our addressable market.

Our next question comes from Gabriel [Avila].

Congratulations for the results. The growth of franchises has been robust, which is the appetite of franchisees because of the volatile macro scenario. Could you also comment a bit on the royalties?

Gabriel, we still have a large appetite of franchisees for the stores. We have more than 30 stores undergoing renovation or openings, and they practically have been contracted. In fact, our business does present very good returns. So there's no change because of the macro scenario. We continue on with our pace. And the business model royalties, financial returns are not going to change going forward.

[Operator Instructions] Our next question comes from Victor Castro from [InFinance].

Is there any capital allocation foreseen for internalization? Is this a test? Or is this a structured plan? Congratulations for your results. In truth, our Cascais model is a franchise model, asset-light and the investment is made by the franchisee. And of course, there is a consumption of internal resources that we have to manage for this operation outside of Brazil. But there is no CapEx involved. We're satisfied with the results of Cascais. Last year, the results were above what we had expected, and we're thinking about 2 additional stores for Portugal, one in Cascais and another in [Lisboa]. They will be more definite test because they will be stores in shopping malls. Cascais is a store on the sea front, the Marina small store with a huge flow of tourists. And we will now carry out a more definite test in shopping malls, which is a model more similar to what we have in Brazil. But for the time being, we're focusing on Portugal. We're not conversing with other locations. Now simply to add something, we're trying to carry out this pilot. So once we prove that it works can be applied to other countries of Europe and Latin America, but we're still focused on ascertaining the operation before we replicate what we're doing. We have -- we are quite satisfied with the Portuguese store, replicating the model we have in Brazil. Of course, we want to use what we learned here and replicate it abroad. We still don't have a structured plan to speed this up until we're able to prove the adherence that we expect. The question-and-answer session ends here. We would like to return the floor to Mr. Fernando Tracanella for the company's closing remarks.

Well, first of all, I would like to thank all of you for your presence. We're very satisfied with the results, quite enthusiastic about going forward. I would like to congratulate the teams of the company for the results, the financial results, the organization of this meeting. I truly would like to thank our franchisees. Without them, we wouldn't have results. I thank them for their engagement, and we're at your entire disposal, should you have any additional doubts about this call. Once again, thank you very much, and have a good day.

The Track and field video conference ends here. We would like to thank all of you for your participation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]