Veste S.A. Estilo (VSTE3) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to Veste S.A. Second Quarter 2026 Earnings Conference Call. Joining us today are Mr. Alexandre Afrange, CEO of Veste, and Ms. Elisa Lima, CFO and IRO. We would like to inform you that the second quarter 2026 earnings release is available for download on Veste's IR website at www.veste.com under the Results Center section. Before we begin, I would like to make a brief disclaimer. This conference call is being recorded and simultaneously translated. Following the call, the presentation materials will be made available on Veste's IR website. [Operator Instructions] Please feel free to submit your questions at any time during the webcast. We would like to clarify that any forward-looking statements made during this call regarding the company's business prospects, operational and financial projections and targets represent the management's current beliefs and assumptions based on information currently available to the company. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions as they relate to future events, and, therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry dynamics and other operational factors could affect the company's future results and cause actual results to differ materially from those expressed in such forward-looking statements. We'll now proceed with Veste S.A.'s earnings presentation.

Hello. Good morning, everyone. Thank you for joining us. I'm Alexandre Afrange, and joining me today is Elisa Lima, our CFO, who will give you details about our second quarter operations. Once again, we have good news to share. We had the second quarter in a row of the best net profit in the last 7 years. This shows that, quarter after quarter, we have great consistency of operations. Our adjusted net profit was BRL 30.7 million with a relevant increase of 80.5% year-over-year and net margin of 8.7%. These results should be praised and celebrated. They do deserve a highlight. And this is not by chance. This is the result of a consistent strategy based on strong brands, higher full price sales, expense discipline, investment criteria and growth with profitability and greater operational efficiency. I will now show you a video with further details about that. Our second quarter 2026 results reinforce a conviction we have been sharing with the market. When the strategy is clear and executed with discipline, results no longer depend on a single period and begin to reflect the ongoing efforts. Veste is now a more profitable company, well positioned to achieve consistent growth. We closed the quarter with gross revenue of BRL 433 million, up 8.6% year-over-year. Adjusted net revenue reached BRL 353 million, a 9.5% increase with same-store sales growing 7.4%. In April and May, same-store sales reached 11.9%, in line with the momentum observed in the first quarter of 2026. In June, the World Cup generated headwinds by reducing foot traffic in physical stores and impacting operating hours. Even so, we closed the quarter with positive growth, bringing year-to-date same-store sales to 9.3%. But more important than simply growing is that we grew with higher quality. Adjusted gross margin expanded by 2.9 percentage points to 67.2%. Adjusted gross profit grew 14.3% to BRL 237 million. This expansion reflects a higher share of full price sales, a more precise assortment, commercial discipline and increased efficiency at our plant. Adjusted EBITDA reached BRL 89 million, up 19.1% with an EBITDA margin of 25.4%. These metrics show that earnings increase was not driven by an isolated factor. It was accompanied by growth, margin expansion and improved operational profitability. Nonrecurring adjustments for the quarter will be detailed by Elisa. Looking at our brand portfolio, we see solid progress across multiple dimensions. Le Lis grew 11.5% in the quarter, remaining the company's primary driver of value creation. Active customer base expanded by 6%. NPS reached 90 points, and the Morumbi Shopping store opened in March is already among the brand's top 3 locations with low cannibalization and strong new customer acquisition. Dudalina grew 7.4% with same-store sales up 4.1%. The brand's repositioning highlights the progress in the franchise network, while CRM integration with franchisees reinforced a strategy that has strengthened customer relationships and operational execution. At John John, net revenue declined 1.8% with same-store sales down 2.6%. This performance was the result of a deliberate decision to scale back on promotional sales and preserve full price sales. As a result, B2C gross margin expanded by 4.7 percentage points. In April and May, prior to the World Cup impact, same-store sales were up 7.2%. Individual also recorded a revenue contraction in the quarter, but expanded its B2B gross margin by 6.2 percentage points. Across both John John and Individual, despite the lack of growth, we remain strictly focused on profitability and quality of earnings. BO.BÔ was our main growth driver, posting a 30.9% revenue surge and 23% same-store sales growth. These outstanding results stem from a powerful combination of product offering, fine tailoring, customer loyalty, brand sophistication and fashion authority. By channel, B2C grew 10.3% with full price sales representing 86% of the total. Digital channels grew 19.6% to BRL 88 million, delivering a 4.6 percentage point expansion in EBITDA margin. Proprietary apps now account for 28.6% of total digital sales. B2B grew 6.4% with expansion in both gross and EBITDA margins. Financial discipline is also reflected on our balance sheet. Inventory levels dropped 5.2% to BRL 249 million, while inventory days decreased from 225 to 200. We continue to invest with discipline and responsibility. Every project is evaluated based on return on investment, payback period and value creation. We do not pursue growth at all costs. We invest to strengthen our brand portfolio and systematically expand our long-term earnings generation capacity. Our strong quarterly performance validates our strategy. So these were the highlights for the second quarter of 2026. Now, I turn the floor over to Elisa, who will give you further details about our numbers.

Thank you, Alexandre. It's a great pleasure to be with you this morning. As Alexandre said, we had an excellent quarter, and I'll give you some details about our numbers. Second quarter gross revenue was BRL 433.1 million, up 8.6% year-over-year. Growth was particularly robust in the B2C channel at 10.3% with same-store sales up 7.4%. This performance was driven by both physical stores, up 7.5%, and digital sales, which maintained a strong growth pace of 19.6%. B2B sales also grew 6.4%, accompanied by a 6 percentage point gain in gross margin. Meanwhile, the outlet channel posted a 6% decline. Inter-quarter volatility in outlet performance is normal and fully under control as channel volume depends on leftover inventory from prior seasons made available following promotional markdowns. In the first half of the year, total revenue reached BRL 799.8 million, representing strong growth of 10.5% year-over-year, driven by gains across all sales channels. In retail, our primary driver, same-store sales for the period reached 9.3%. All of these advances are fully aligned with our strategic plan. As a key highlight of the quarter, full price sales reached 86% of total B2C revenue, up 3 percentage points year-over-year. Combined with higher gross margin during June promotional sales and cost efficiencies at our proprietary plant, this structural driver contributed significantly to a 2.9 percentage point expansion in adjusted gross margin, which reached 67.2%. We also benefited from a temporary tailwind from the U.S. dollar exchange rate, which was more favorable than originally budgeted for imported product pricing. Adjusted gross profit stood at BRL 237.4 million for the quarter, up 14.3% year-over-year. The gross profit adjustment in the second quarter '26, as in the first quarter, represents a line item reclassification as we've been doing since 2024. We reclassified amounts between revenue deductions, costs and expenses to ensure year-over-year comparability following our adoption of CPRB or gross revenue payroll tax. Year-to-date, adjusted gross profit reached BRL 436.1 million, up 15.8% with a gross margin of 66.1%, expanding 2.4 percentage points year-over-year. The combination of strong top line growth and gross margin expansion yielded an adjusted EBITDA of BRL 89.8 million in Q2 '26, up 19.1% year-over-year. Operating expenses increased 11.6% in the period. Variable expense lines tracked revenue growth, while fixed expenses reflected a temporary concentration in the specific items such as CRM campaigns, travel and sales rep compensation. All these items will normalize over the year. The takeaway is that we remain disciplined in expense management. From January to June, adjusted EBITDA totaled BRL 158.3 million, delivering strong 29.5% year-over-year growth. Over the same period, adjusted EBITDA margin also expanded by 3.3 percentage points. Our consistent strategy resulted in adjusted net income of BRL 30.7 million in Q2 '26, representing an 8.7% net margin, while in the first half of '26, adjusted net income reached BRL 42.1 million with a margin of 6.4%. In the second quarter, we recognized certain nonrecurring adjustments to our results. These relate to issues originating over 10 years ago with no connection to our current operations. The impact was BRL 6 million on EBITDA and BRL 18.7 million on net income, while cash flow impact will be diluted over the next 5 years. The primary impact came from the settlement of 2 legacy contingencies during the quarter. On the civil side, we reached a settlement regarding a 2014 contractual dispute with an insurer, payable in 48 monthly installments and earnings impact of BRL 12.3 million. On the tax side, we entered into a 60-month installment plan to settle a litigation regarding corporate income tax for fiscal years 2008 to 2010, totaling BRL 7.9 million. We also adjusted a deferred tax asset movement with a positive net impact of BRL 1.5 million. But even with these nonrecurring impacts, accounting net income for the quarter was BRL 12 million, representing a 3.4% net margin, while in the first half of '26, accounting net income totaled BRL 23.3 million. This is the result of our ongoing focus on profitable and sustainable growth for Veste. Consequently, our capital structure continues to strengthen. We closed the quarter with net debt of BRL 108.2 million, equivalent to 0.5x LTM adjusted EBITDA ex IFRS 16. This leverage ratio stood at 0.9x at the end of June '25. In April, we also made the scheduled payment of BRL 18.8 million corresponding to the second installment of our 13th debenture issuance. A key pillar of our cash generation and capital structure optimization is inventory control. We closed June with BRL 249.7 million in inventory, a 5.2% year-over-year reduction compared to '25. Inventory coverage also improved significantly, decreasing by 25 days year-over-year. So we continue confident in the combination of growth, profitability gains, debt management, and inventory management. This is how we can generate more cash to invest in a stronger Veste. Thank you all for joining us. And now we can move to our question-and-answer session.

[Operator Instructions]

We received a few questions, and I'll start with Gabriel Ettori's question. In his first question, Gabriel asks about our CapEx expectations for the coming quarters, whether we expect reductions in lines such as technology, stores and operations to speed up free cash generation. Well, Gabriel, what I can tell you is that we've been making consistent investments that are coherent with our strategy. Throughout time, we should see our operation generating more and more cash, and our investment level is in line with this strategy. So we do expect cash generation coming from operations. Now, about your second question about the expectation of paying earnings from now on. Well, our dividend distribution policy is at 25%. So we will continue applying that policy. Now, I'd like to turn the floor over to Alexandre to answer Pedro's question. Pedro is with Mapa Capital. Thank you for your question, Pedro. He's asking about same-store sales, which declined from 11.9% from -- in April and May and closed the quarter at 7.4% because of the World Cup in June and July. So he's asking about the same-store sales in the first weeks of July and August and whether there has been a recovery of the flow after the World Cup. And he also asks if there has been a weakening of consumption from high-income clients and more specifically about John John, up until when the effect of lower markdowns should still impact same-store sales before the brand can resume revenue growth. Over to you, Alexandre.