Earnings Call: Q1 2021

May 13, 2021

Good evening, morning, everybody, depending on your time zone. For over a year now, health, economic and social conditions have been deeply affected by the pandemic. However, over the last few weeks, we have all became more confident about the future. Thanks to the speeding up of the Fluorite Passaic campaigns. Performance in the Q1 of 2021 does not at all reflect the one that we are expecting over the coming quarters as the 1st 3 months of the year were still affected by high number of store closures in our main markets. Since mid March, we have been seeing strong improvement in performance. Over the last few weeks, stores have begun to gradually reopen, allowing us to record a significant growth in our direct channel and to complete deliveries to the wholesale channel, which is now ready to receive goods once again. By the end of May, we are also expecting our direct store network to be fully operational again, since we reopenings in a number of countries that are currently still being affected by restrictions, namely Italy, France and Germany. And The combination of these factors would allow us to close the first half of the year with very positive results, reaching high single digit growth in sales by the end of June. During the Q1, we must also highlight the excellent trend that continued to be recorded in those China's end markets not being affected by lockdown measures. Russia and China are growing by 50% and e commerce channel by 85%. During the Q1, we have also accelerated the rationalization of our store network and all the avenues necessary to define new, more streamlined and more efficient business model that is in line with the consumers' new buying behavior. These measures are fundamental in order to free up more and more resources for the activities with greater potential, such as the e commerce talent, advertising, research and development and sustainability. The results achieved over the last few months are giving us confidence in the validity of the path we have taken. Sterica, the most innovative product of the new spring collection, which we've supported with an important TV ADV campaign, is reporting very significant sales figures. In fact, over the last few weeks, we have been selling around 10,000 pairs a week, despite many stores still being closed. Conditions are still complex, but we are convinced that the gradual return to normality will allow us to further enhance the results that we are already achieving. So thank you for attending with us, and I leave the floor to our CEO, Libro Libreso. Thanks once again. Good afternoon, Enrico. So good morning and good afternoon. Thank you for joining us today to discuss Q1 2021 net sales, net financial position, current trading and some trends for full year 2021. Let's start with Slide number 2. With the highlights, sales of €149,000,000 down 19%. This is a result in not coherent with the trend for H1 'twenty one expected to be positive by single digit and the full year 'twenty one expected to be positive double digit. So in this call, we will also disclose information regarding the Q2. There are three main reasons behind top line decrease of €35,000,000 in Q1, €7,400,000 due to the ongoing network rationalization in exchange of a better profitability. And then a couple of temporary and contingent factors, I mean €15,000,000 related to temporary store closure due to the strict lockdown measures in Q1 2021 versus Q1 2020. €10,000,000 due to the requested shift in wholesale deliveries from Q1 to April. On the other side, the performance has been solid in the geographic areas and channels not impacted by these contingent lockdowns. In particular, Russia is delivering a +48 percent and China, a + of 54%. The online channel continues to outperform as well with a sound plus 85%. I invited to this call Giulio Salucci, our Global Web Director and Digital Transformation Leader, that in a while will share with us some reasons that underpin this jump. Net working capital is under control at €183,000,000 versus €208,000,000 recorded in Q1 2020. And the net financial debit at the end of March is €110,000,000 versus €100,000,000 at the end of December last year. Current trading on the right, the start of Q2 is completely different. Like for like is really positive due to the easy comparison base and the reopening trend. Like for like week 2018 to date turned to be positive 3%. We completed deliveries in wholesales and this channel April to date is up 9%. As a consequence, also total sales are did an improvement and are flat at the end of April. We are also experiencing encouraging initial sales figures for the new innovative projects launched with the springsummer 2021 collection, Styrica for Adults and Play Kicks and Tid, driving also important reorders in season. Net financial debt at the end of April is 125. We may consider this as the seasonal EBITDA affected the ongoing lockdown. Our plan is to stabilize the debt within June and then to generate cash within year end. Please go to chart number 3. Here there is a summary of the ongoing network portfolio optimization. The number of Monobrand stores at the end of March is 835 compared with 950 in March last year. So we did 115 net closures in the last 12 months, with an impact in term in this quarter of 7,000,000 in terms of sales. There are additional EUR 63,000,000 net closures planned within year end, EUR 17,000,000 franchising, EUR 31,000,000 DOS and 15% from our distributors. Please go to chart number 4 to see the DOS operating status and like for like by month. The blue boxes contain the average percentage of closures by month. In this quarter, Airbus Network has been closed 34% on versus 15% in Q1 2020, €15,000,000 in terms of sales. On the other side, you can see that starting from mid March, the comparison base in terms of gross rule percentage is really easy and consequently like for like is jumping at plus 100 in March, 108 in April, triple digit again in May. So that like for like year to date week 2018 is positive 3%. Please go to chart number 5. You can see Q1 percentage of closure by country and the reopening calendar. Italy has been closed 39% on average Germany 84% UK, 100%, so no one day of opening during the Q1. Consequently, we've been really successful in the renegotiation and obtaining support from the government in this country in order to mitigate the impact. The Netherlands, 75%. Today, the view is completely different. Reopenings are going at full speed. And within the end of May, we hope that 100 percent of the network will be operative, especially France expected to reopen on May 19 and commercial centers in Italy expected to open also during the weekend from May 22. Please go to Page 6 to comment Q1 top line by channel. Wholesale is down 10% due to the requested shift in deliveries. As said, April to date is up 9% and the same pace is expected in H1, also thanks to good reorders, especially in Kids and Asperic. Franchising is down 20% due to the lockdowns and the rationalization. However, reopening the serving programs and also in franchising H1 is improving and is expected to be flat. The U. S. Is down 31%, totally explained by the like for like decrease to the additional stricter lockdown closures and the perimeter for the rest. However, in H1, it is expected to deliver a high single digit growth due to a good Q2. All in all, as you can see in the chart down on the right, total sales in H1 are also expected to grow high single digit. On Page 7, there is a very quick view to net sales by region. Italy is down 30% and has been more impacted by store closure, 20% over the perimeter, given the concentration of the U. S. And franchising stores in this country. Online is up 55%. Europe is down 20%, being less affected by the rationalization, that 13% of the perimeter and having online up 98%. North America is down 48% due to the 80 reorganization implemented with the closure of 12 DUS in Canada and the total exit from brick and mortar retail in the U. S, focusing the business on online wholesale and the key account partnership both for brick and mortar and online. Rest of the world is flat or plus 7% at constant exchange rate, thanks to a good performance of Eastern Europe, plus 7%, driven by Russia, plus 48%. Also China is doing well, plus 54%. Again, the chart down on the right, you can see that in H1, Italy and North America will be slightly negative, eventually close to be flat. Europe up low double digit and rest of the world up double digit. On Page 8, net sales by product. Just to say that ready to wear is more impacted by the pandemic with the ready to wear specialist really prudent in buying new product, especially in the spring summer. So we have to wait the second half in order to see an improvement also in ready to wear. Let me now give the line to Giulio Salgucci for some insights regarding our online. Thank you, regarding our online. Thank you, Lidio, and good evening, everybody. Today, I would like to share with you some insights from the web business. So let's start from the actual results. So we are at Page number 9. As anticipated at the beginning, the Q1 recorded a +85 percent in revenues, which is of course a very good result. When it comes to the share between online and offline sales in retail, online accounted for 33% compared to 13% last year. So that's really an interesting result. Some insight of the categories, the kids is growing significantly and for us also represent a driver to acquire new clients, which is, of course, our goal to convert also in the adults product afterwards. The Q2, we focus a lot in order to reduce promotions and at the end of the day, increasing the average ticket and also the marginality. If you can go at slide number 10, here you can see that we over the last few quarters, we have been able to, of course, increase the traffic on the website, but also increase the conversion rate together. That's really most of the time those two metrics goes the opposite direction. So in the next few slides, I would like to explain you some reason why we have been able to achieve this combination result. At slide number 11, you can see that in Q4 2020, we made a major release on the website. It was in October 2020. This major release was affecting 2 main areas. The first one is the checkout process. And here, you can see in the red line what we call the cart abandonment rate. So basically, the number of clients that start the purchase process, but they finally do not complete the order. So we've been able to reduce this rate by 800 basis points. So I would say that we also been able to increase the conversion rate and maximize the revenues optimizing the checkout process. In the next one, slide number 12, you can see the same major release also again in October 2020 was also about improving the experience on the mobile navigation. So the mobile is, of course, the first source of traffic. But the interesting thing is immediately after we release this new layout, also the sales coming from mobile exceeded the desktop version. So starting from December 2020, not only we recorded some record month in sales overall, but mobile started to be the 1st source also for revenues. And lastly, at Slide number 13, again, about the optimization of the business, we always try to improve the data analytics part of our job and we try to make decision on data driven. So there's an interesting partnership. So it's a pilot we made with Google. We've been selected among many, many partner and brands in order to pilot for the first time worldwide integrating data coming from the social platform into our advertising platform. And the result is an optimization of the web marketing campaign allowed us to achieve a return on advertising spend of 6% and also a time saving campaign management of 30%. So that's all from my side, and I will leave you to continue. Thank you. Giulio, just to add some flavor to the performance of online, but also to reconfirm that the digital and online are fundamental pillars of our strategy. And we are starting to see the results of the investment in people and technology we did and continues to do. I'm really proud of my team that is able to deal with the champions in this industry like Salesforce, with ranking Google as peers. And so all the results that arise also from these skills we have been able to keep inside our company. Please go to Chart 14, net working capital and net financial position evolutions. Net operating working capital landed at €183,000,000 from €280,000,000 in Q1 2020, thanks mainly to a strict management of receivable minus €36,000,000 We have seen last year really an improvement in cash collection in the second half and also the Q1 of this year is not bad. Also inventories are under control, thanks to the action taken on a careful buying for winter 2020 and the spring summer 2021 for a total amount of EUR 100,000,000 lower buying than the previous couple of seasons. However, the lockdown is penalizing our net financial position that hits the seasonal peak in April at 125. As another factor, the second and the third wave of lockdowns shifted the expected improvement in cash generation to the second half this year. In any case, that is under control. There is no issue regarding liquidity. We have plenty of credit line committed and not used. Please go to Slide 15. JAKS is honored to have received 2 additional awards regarding sustainability. JAKS has been included by La Republique and Maffarefinanza among the best 200 companies in Italy in terms of sustainability commitment. According to a survey made by a German institute, based on, I would say, a pure social listening, I mean, a deep analysis of positive and negative posts, comments, engagements and activation made by people in the web linked to our brand. JOG's position is 2nd in Italy in consumer goods after Nike. Then there is another survey, Esoleventicotoro and Statista, included the JOGS in the list of 150 companies considered sustainability leaders after an in-depth analysis on 1500 Italian companies based on 35 KPIs disclosed in the non financial statements. So this is a little bit more, I would say, technical. We are really proud that people are starting to consider the approach of GeoX to sustainability. We aim to be, 1st of all, a sustainable company and a sustainable brand. And then as you know, we would like also to have a sustainable product, but it is necessary to create a movement and this is the reason why we joined the Fashion Pact in order to be able to change also the entire supply chain. Please go now to Page 16 for the outlook. The summary considering all what we have said is that the strong improvement in performance from mid March due to the easy comparison days, the fact that the like for like is positive at week 18. Also, sale is positive plus 9% in starting from April. The initial order collection for winter 2021 has been positive, mid single digit. And so assuming that the U. S. Network reopening will be completed by the end of May and no more stores locked down in second half twenty twenty one, we may assume that H1 sales will grow high single digit and the full year 2021 sales will grow mid low to mid double digit. In addition, we may forecast an increase in gross margin due to our approach to reduce the promotion in the region of 250, 300 basis points. And we reiterate our strong commitment to keep expenses under strict control and to complete the rationalization of the geographical footprint within this year. Last but not least, JAG's transformation journey is well on track. On the next page, there is a summary at a glance that we will comment deeply for the first half results, including also the profit and loss. What I can say today is that in the future, it won't be the same company. We are really working to change the brand perception, the relevance for our customers, our merchandising approach in order to have a merchandising boost on profitability, also supported by Boston Consulting. And then we are changing, as you know, the business model toward perfect integration between digital and brick and mortar in order to get really an omnichannel approach. And we are also starting, supported by Accenture, to what we call Wholesale 2.0. I mean the new wholesale ecosystem in order to transfer our skills on the digital also to wholesale in order to foster productivity to reduce the cost to serve and also to be high upfront company also in changing wholesale rules in the way to do business. We are now ready to open the Q and A section and take your question. Excuse me. This is the Chorus Call conference operator. We will now begin the question and answer session. The first question is from Marco Bacaglio with Kepler. Please go ahead. Yes, good afternoon. Two questions to start. The first one is including the 63 net closures that you expect to perform for the rest of the year, what will be more or less your assumed guidance of a negative impact from these closure of shops? And the second question is a more general one. So really your guidance, you will be somewhere between €600,000,000 €650,000,000 of sales in 2021. So quite quite far from the €800,000,000 that you had in 2019 when you were on an adjusted basis at breakeven point in terms of EBIT. So I understand that your online business is much more profitable than the other channels. So if we have to take a picture of your company back to €800,000,000 what would be potentially the profitability that GEOX could deliver? If you can share maybe if you could maybe not the number, but a few considerations about how to build that kind of scenario. Thank you, Marco, for these two questions. So first of all, the perimeter effect on our U. S. And franchising network, You're right, we expect 63 additional closures, out of which 17 franchising and on DOS. As far as the perimeter in DOS is concerned, we are assuming today that the new openings and the conversion, because 31 is net of these two actions, will be in any case able to balance the negative perimeter effect. So in my opinion, DOS will be able to deliver a good performance at the year end without being materially affected by these additional closures. On the other side, we will experience the reduction in franchising. It is EUR 2,400,000 in the Q1, and it is expected to be in the region of EUR 5,000,000 to EUR 7,000,000 at year end. The second question, you are right, we today, we think that we will be able to hit the consensus regarding the top line. As I said, we are really hard working in order to not to be the same company in 2023. So with the less revenues, the profitability should be better. Our plan is to do our best this year because it is a little bit difficult to fix a clear indication in terms of profitability. But for sure to be at breakeven next year as operating results without the same €800,000,000 level of turnover experienced in 2019. And then in 2020, it should start again a story of growth and profitability. For sure, the level with the positive EBITDA, I hope in the region of it's difficult to say today because but I would say need to high single digit EBITDA in 2023. For sure, the commitment is to do better in case all our projects regarding brand revamping, regarding the increase of the real advance for our final customers and also the merchandising boost, I mean, the new project under the support of Bostar Consulting will start to drive results, and maybe we can do that. For sure, what we are really far into the process is the reorganization process. I want to disclose some additional information. So we started the real reorganization in Canada and we have been able to exit from the process. So now Canada this year is 2021 is at the breakeven for sure because all the remaining 20 DUS are either with a really important discount or on a variable basis regarding the rent. And in addition, the state is really giving support to the company. In U. S, we exited from brick and mortar retail. So we have been able to really cut the losses. And within June, also U. S. Will exit from the restructuring process. In Europe, we have been really successful in doing an out of court restructuring process in U. K. So we closed 3 stores without no penalties. And now there are 4 stores open, out of which a couple under only variable rent on turnover and the other 2 with a 50% discount. And now Germany is under the same process with a really tough negotiation with the landlords. Going to Asia Pacific, we decided to change the business model in Japan. We are going to liquidate the subsidiary and we have to have distributors in Japan that is placing the orders for spring for winter 2021 and spring summer 2022. So also in Japan, we will substitute the loss with a profit. So the 2 countries where we are investing and we are going really fast is China, but China for us unfortunately is a really, really a small country. Eastern Europe is getting really good results and in Russia, the like for like, we decided to invest in Moscow and Saint Petersburg. And the like for like is really brilliant also in this period. What I want to underline is that in any case, the improving profitability must come from the core markets, especially Italy, France, Spain and Germany. It is clear that our project for 2021 is focused on the core, investing in the core markets, especially in advertising to have immediately volumes that will improve the profitability. And then starting from 2022, bigger and better. So boost on these core markets, but also having the first sign of additional improvement in China and in Eastern Europe. Thank you. When you talk about EBITDA, you obviously are referring to the pre IFRS 16 margin, right? Sorry, unfortunately. Yes, because We are saying that on this year to disclose the EBITDA before Yes, for sure. The next question is from Francesco Brili with Intermonte. Please go ahead. Good evening and congratulations for the developments of results and thanks for taking my questions. The first one is on the online channel. If you can share with us some additional granularity on the KPIs of the online channel? In particular, can we have a sense of the average order value that you are experiencing in the online channel? And do you think that the conversion rate has reached what is the goal for the mid period in conversion rate for the online channel? And the second one is that on the working capital and the evolution of the net financial position, what we should expect for the coming quarters in terms of a bit evolution absorption, in particular for the inventories for the next couple of quarters and the net financial position, if you can share with us the landing point that you're expecting for the full year of the net financial position compared to full year 2020. And okay. Thank you. Okay, Francesco. So I'm lucky today there is Giulio. So for e commerce, I can rest a little bit. Yes, of course. When it comes to e com, about the average order value, we are very close to €100,000 So that's the average ticket we recorded in Q1. The conversion rate is slightly below 2%. So in terms of opportunity of still increase the conversion rate, I really believe in the future we'll be able to keep increasing, especially for the main project that even Livio mentioned about, for example, the merchandising optimization, we are working in order to have a much higher availability of products that's crucial for us. And of course, everything related to the optimization of the interface, which is for us a continuing project. So we are trying to keep building on the website. In terms of additional KPI, I can even mention the return rate, which is about 20% and is absolutely stable, I would say, slightly better than last year. So the combination of increasing traffic, increasing conversion rate and keeping stable the return rate, it's the good way for us. Thank you. As far as the working capital and net financial position are concerned, before this 3rd wave of lockdowns, I would have said that our goal was to reduce the debt compared to December last year, where we hit the €100,000,000 that we disclosed in July November. Today, our goal due to this, as a matter of fact, a lockdown that is impacting the cash generation in January, February, March April, Our target is to be in the region of 100, 100 and 20 just to be prudent, but we will do all our best as we have been able to deliver last year to improve this guidance. Thank you. Maybe if I may, and a follow-up question on the online channel. If you can share with us the some additional color on the difference in profitability between the two channels? For sure, you're right. At this stage, web online is more profitable than our DOS chain because there is really a volume effect in economy of scale. For sure, ecom has the most of the cost variables. However, and it is a little bit more promotional, but the profitability is really important. We wanted to improve the profitability of the e com. So the target of Giulio and also of our supply chain is to be able to be more efficient, especially in the supply chain and the fulfillment of this channel. We say one channel, the reality is that maybe we should talk about 4 different channels. If you Giulio, if you want to elaborate a little bit on this. Yes, of course, today we just mentioned direct sales coming through web. Of course, we have a lot of wholesale partner. So that's the first one. We consider the first channel, web. The second, we have some partnership with our strength than others. So basically, they are wholesaler, but we manage some part of the value chain like content, like merchandising, so on and so forth. We recently also launched the so called marketplace project, which is the e concession business model. And the preliminary results are really satisfactory for us. The road map is to launch many new platforms during this year and even 2022. Okay. And what about the U. S? For sure, in any case, brick and mortar should deliver better profitability. And the main reason why I believe that we should be able to deliver better profitability is the fact that we are to increase the percentage of sell through during the full price season. And this is really important and this can only come from a different merchandise approach, what I call merchandise and from a different relevance of our brand and of our products in front of our final customers. So the 2 strategic, in my opinion, main projects are the strategic and marketing approach with the customer centric strategy we have now starting from 9 months ago. And Sarica is really a clear example. We made this project we created this project planning the success and we have been successful because there is really a sync of all the function in the companies to be ready when it was needed. So we have seen the first way the first new way to communicate the value of the brand after starting from April last year, really deep surveys regarding our final customers, what is important for our target personas, which are our target personas and the other customers closer to these in order to be able to increase the range of customers. And then we have really fine tuned the values of the brand. We have been able to build the new brand narrative and now also to create a really important media reach because as you have seen, we have been in TV, television with Sperica, but also on the social, but also with really many, many advertorials. And consequently, today, we have seen for the first time since many quarters the fact that people, notwithstanding the lockdown, is going to our stores and is asking for the product and it is really an easy to sell product. So to give an example, today we are at 50 2% of sell through full price, completely full price. Notwithstanding the fact that France is still closed and Germany is still closed. So maybe we did some mistakes in terms also of buying, but we invested 200,000 payers, wholesale and retail and web on this project. And it is really a pleasure to see that we've been too much prudent having seen the results after the windows. And then when we decided to create the windows, the sales improved 4 times and after the TV campaign, 10 times. So it is really a different way to manage the business. For sure, it would be important to invest much more to have really ramping of the brand, but this is not the time. Maybe next year, it is now important to rationalize the business in order to free up resources for the CapEx and also regarding the business model transition and also later for to invest in marketing. Thank you. Gentlemen, there are no more questions registered at this time. Okay. Thank you very much for your time. Feel free to contact Simone or myself for any doubt we might have for any clarification or additional information. Keep in touch and see you in July for the first half. Thank you very much. Bye. Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.