Earnings Call: Q4 2023

Feb 21, 2024

Earnings release

Summary

Q4 sales grew strongly and gross margin expanded, but extraordinary costs pressured margins. Management plans five to six 2024 store openings and expects future margin gains to be modest.

Good morning, everyone, and welcome to La Comer Fourth Quarter Results conference call. Before we begin, I would like to remind you that the information discussed today may include forward statements regarding the company's financial and operating performance. All projections are subject to risks and qualms, and actual results may differ materially. Please refer to the detailed note on page 2 of the presentation. I would like to turn the call over to Mr. Rogelio Garza, Chief Financial Officer of La Comer. Please go ahead, Rogelio. Thank you, Yolot. Welcome, everybody, to this conference call. We are going to review the results of the fourth quarter of 2023, and we are going to put the presentation. We are going to present the results of the fourth quarter of 2023. The highlights for the quarter is that we growth in same-store sales at 9.3%. We have an increase in total sales of 16%, a gross margin of 29.3%, and during the quarter, we have some extraordinary effects that represented MXN 195 million that we are going to explain in the next slides. In same-store sales, we continue growing above the market at very healthy levels. We have positive numbers in all our regions, categories, and formats. By category, we continue growing in prepared food, bakery, and tortillas. That is the section in which we continue growing very well above the average of the company. In this quarter, we grow more in the northern region of the country and the western region in the country. It is the regions in which we grow more than the rest. Additional, during this quarter, given the situation in Acapulco by the Hurricane Otis, we received the requirement from the federal government to help the federal government with the preparation of a package of foods in order to help the people affected by the hurricane in Acapulco. La Comer participated, among other supermarket chains, participated in this program, in which we were selling to the federal government some boxes of food. This extraordinary sale is around a little bit more than MXN 40 million. It is the part that was executed during the quarter because it is an agreement that is going to continue in January and February. These boxes of food were sold to the federal government with no profit. We were selling at the cost of the preparation of these boxes of food. This is an extraordinary sale that we have that is not part of the regular business. Additional, during the quarter, we participated in the campaign, El Buen Fin, with very good results. After the Hurricane Otis, we executed a campaign of donation together with our customers, in which we asked our customers to donate one box of food, and the company was donating two boxes for each box that was purchased by our customers, and we participated in that process, too. This is the sales of e-commerce. We continue having a very stable participation of the e-commerce business in the whole business. A little bit above 7% of the total sales of the company were through our platform of La Comer en Tu Casa, that is our own effort. Here in the blue line is the participation of the aggregators, that we have some agreement with three different companies that participate in this service to the customers to deliver food to their homes. We can see during the fourth quarter that we have a big diminishing in the participation of the aggregators. This is because of some operational problem that one of the aggregators had during the quarter, but we expect that number could recover in the future. We do not think that is something from some operational problem that have one operator. We expect that number could recover in the future. Gross profit, we have a healthy gross margin. We had a big increase in gross margin of 67 basis points, and a big increase in the generation of gross profit. The explanation for this is more like the same of the previous quarters. One is the change in the mix of products that we continue growing more in categories in which usually the margins are a little bit bigger. Prepared food, for example, is one category that grew above the average of the company. That continue improving our gross margin. Additional to that, we continue with very good efficiencies in logistics and the inventory management. The shrinkages that we have of our inventory are in a very healthy levels. All this with. For us, it is very important to have a very good relationship with suppliers in order to have long-term relationships and win-win situations with them. We are working very closely to our suppliers in order to have long-term agreement that could help the supplier and the company. We continue to believe in these good relationships with suppliers. At the level of EBITDA, we have some extraordinary expenses during the quarter that affected our margins. One, we have in a specific three different situations that were extraordinary expenses that happens during the quarter. We have the demolition of one property that we buy in the past, a property that was a piece of land with a building in it. The idea of the purchase of that property was to develop a store in that property, and we had to demolish the building. In that process, we need to recognize the impairment of the value of the building because we do not have in our assets anymore. We had a big impact because of this situation. Is one of the stores that we expect to open during this year, and we had that impact in our expenses. Additional to that, we have all the expenses related with the donations of the package of food for Acapulco, for the people affected by Hurricane Otis. Additional to that, all the expenses related with the preparation of the boxes that we sell to the federal government in order to help people in Acapulco. We do not have any operations in Acapulco. We do not have any store there. All the transport and the logistics to provide those packages of food were extra expenses that we have during the quarter. But we think that is something in order that help the federal government to accomplish this program of helping people in Acapulco. Additional to that, we have some legal provisions for contingencies. During the quarter, we have some impact because we decided to increase our provisions for legal situations. During the quarter, we have some difference of criteria with the fiscal authorities, especially. We think that we have the reason in how we consider and how we calculated our taxes in the past. This discussion with the fiscal authorities in the past, we have taken the decisions to come to an agreement instead of open a litigation process that could be uncertain. We decided to create a provision for these kind of cases in the future, that we expect that the provision is enough to try to fix this difference with the fiscal authority. We decided to impact the results of the quarter because of this situation. Additional to these extraordinary expenses, we still have a big increase in expenses during the quarter, most of it for the labor. We have some pressures in labor, increases in expenses in labor that have been a little bit above. We have lived with this situation of some pressures in labor during all the last year and even before that because some changes in the labor market in Mexico. Especially during the quarter, we have more expenses in this aspect. We are taking some measures in order to control the increases in the cost of labor. We expect that this big increase during the quarter is going to be controlled in the future. Additional to that, other accounts in which we have big increases in expenses is expenses related with La Comer en Tu Casa that we think we need to continue investing and improving our service in La Comer en Tu Casa. The IT expenses have been growing above the growth of our levels of sales because we continue putting a lot of emphasis in automatization and control of our processes. Then we have some cases in pre-operative expenses. We opened two new stores during the quarter, and we have some increases in expenses because of the opening of new stores and advertising for the new stores. We expect that these levels of expenses during this quarter that were a little bit above what we were expecting and a little bit above the reasonable level, are going to be controlled in the future. The deterioration of margin that we had during the quarter, we expect that is something just of this quarter, that in the future, we are going to continue as in the past with levels of margins similar to what we have had in the past. The guidelines for the whole year of 2023 is that we grow in same-store sales at 10% during the year, a very good level of growth in same-store sales above the market in general, increase in total sales of 15%, a gross margin of 28.7%, and an EBITDA level of 10.2%. We have good increases in gross margin. Some in the EBITDA margin for the whole year is a little bit below the previous year, but anyway, at good level, and we expect to continue good levels of margin. Then for the expansion, the investment project that we had during 2023, we opened four new stores, one La Comer store in Mexico City that we opened in May, and one Fresko store in Estado de México that we opened in May, too. During the fourth quarter, we opened two new stores of La Comer. Both of them are La Comer, one in Estado de México, in Oscar Aleli, and the other in Querétaro, Juriquilla, and one in November and the other in December. In addition to that, we had a remodelation of one store during the year of one La Comer in Querétaro. For this year, we continue having a good portfolio of projects for this 2024 and next years. We expect to open between five and six new stores during the year. We have all these projects in different steps during the process. Most of them are going to be during the second half of the year, but we have a good portfolio of new stores and openings for this year. During the quarter, we launched a campaign in order to support our people affected by Otis in Acapulco. We launched a campaign in which our customers buy one package of food, and the company donated two packages of food for each package that was bought by our customers. Together with our customers, we delivered 138,000 packages of food for people in Acapulco in order to support the people affected by the Huracán Otis. This is an effort that the company do in order to be responsible with the social obligations of the company, with the people affected in Acapulco. We decided to deliver these boxes of food together with several organizations that were operating in Acapulco. We were working with Un Kilo de Ayuda, with Cáritas, and with other social organizations that had operations in Acapulco in order to help the people there. Additional to that, we continue with our donations to the Fundación Mexicana para el Desarrollo Rural and to Pro Bosque Chapultepec. We have donations to that. We continue with all our packages in a sustainable way. I think that's all. We can continue with the questions that maybe some of you have. Thank you, Rogelio. We are ready to open the microphone. If you have any question, please raise your hand. Luis Janse, please open your microphone. Hi, Yolozul. Hi, Rogelio. Thanks for taking the call. Couple of questions. I guess first on the margin side, initially when I look at. I appreciate all the color you gave us in terms of the drivers of gross margin expansion. Just wondering, as we move forward, right now you're sitting at 29.3%, as you pointed out, but given your store opening plans, that will probably benefit you for having a larger scale and obviously a better mix. Where can this margin realistically go? I guess, can you envision gross margins going above 30% in the foreseeable future as the same trends continue, you keep adding stores, you get better scale, and you keep improving the mix? Or are we getting to that point where perhaps around those levels is kind of the sustainable level? We have been, let's say a little bit surprised by the continued growing in gross margin that we have had during the time. Actually, we are reaching very good levels. I think there are some small effects that we have, and at the beginning were the explanation of some part of the improvement in gross margin that we, every time, were more efficient in the management of the inventory, and we were more efficient in the logistics or the cost of logistics and that kind of things. But they have a limit. There is not a lot of room that we can improve in those areas. We think that the company is working at very good efficient levels in that kind of aspect. The aspect that is helping us more in this process of gross margin, in the gross margin, is the change in the mix of products. Every time we are selling more, a bigger proportion of our sales is in some way differentiated and not the same commodities or the same product than other self-service chains. We are selling every time more prepared food, more imported products, more organic, more that kind of product that is a little bit differentiated and in which you don't have all those pressures on price for competition. That trend has happened in the past, and we expect that will continue to happen in the future. But we don't know. We think that the level of gross margin that we already have is a very good level, but what has happened in the past is that this change in the mix of product continue helping us to having better margins in the gross. Better gross margins, at least. Great. That's good to hear. In terms of the extraordinary expenses, and appreciate you gave us a lot of color, the MXN 185 million impact. Just wondering, as we move forward, how much of that was one time and it just happened in the fourth quarter, I guess, for example, the write-off related to the demolition. I'm guessing that's just happening in the fourth quarter, and then you're done. But I wonder, some of the legal expenses that you mentioned, are you comfortable with what you have right now, or can we envision more of those provisions coming into this year? In particular, also the donation side. You mentioned perhaps January and February, you continue to do that, perhaps at a lower scale. So how can we think about 2024 in terms of those extraordinary expenses? Are they going to be meaningful as well, or how should we think about that? No, we expect that, for example, the provision that we have for legal expenses is going to be enough for the contingencies that we have. It's what we expect in 2024. All the expenses related with the impact of extraordinary expenses and the donations for Otis are already put in our numbers in the fourth quarter of last year. Unless something like the Huracán Otis happens again, and the company decided to help society in the same way, but we don't expect a repetition of that. The last issue is that the write-off of this asset, the building that we have in one of our properties in order to open a new store, is something that sometimes has happened in the past, not at this level. It is not something new. Sometimes we decide to open stores in a location in which there is a good location for the store, but there is a building that is in that piece of land, and then we decided to demolish, and we need to recognize the diminishing, or we need to cancel the value of that asset that we buy. Usually, when we buy a property that has a building, we have a valuation for the property, and we have a valuation for the land and a valuation for the building. Of course, we are buying that property just for the value of the land because we are going to demolish the building. But we recognize when we purchase the whole value, a part in the land, a part in the building, and then when we get the permission for the demolition of the building, we decide to, or we just cancel the value of the building in our books. That has happened in the past, not at this level, because this quarter was a big amount of the value of the building, and the impact was more important than in previous years. We could have some impact because of that. From the project that we had, we could have some diminishing the value of the asset because of the same reasons. We have other property in which we could recognize a diminishing value of the building because we buy a property with a building in it. Okay, great. My last question, when you put it all together, clearly, as you mentioned, you had a margin expansion at the gross margin level that may continue, may not, but it seems like it's sustainable, the trends there. You had those extraordinary impacts. Some of them, as you mentioned, especially the demolition, might happen again, maybe at a lower magnitude, but it might happen. Then you had other issues that you did point out, the salaries, IT, et cetera. When I put it all together, and if I look at for the whole year, just to avoid just looking at one particular quarter, when I look at your EBITDA margins were 10.2%, right? A slight compression versus 2022. As we think about 2024, how should we think about that? Is it fair to assume a slight expansion because you have the easy comps of this big hit from the extraordinary expenses in the fourth quarter? Maybe going back to, I do not know, 10.4%, 10.5% that you had the previous year, how should we think about the overall picture? I think the company has been able to improve margins almost every quarter, and the last quarter was the exception of that. I will expect that that situation is more or less an exception. I do not see this like a trend in the future because we are missing the expansion of margin, even without the extraordinary effects in the last quarter. I will expect that is like an exception, and as I mentioned in other occasions, I will expect that the company could maintain or improve marginally in a marginal way. We could have some improvements in the future in our operating margins and EBITDA margins. Not big improvements, but marginal improvements in the future, because we are gaining size and the operating leverage is helping us, and because we are increasing our gross margin. All these factors will help us to continue having improvements, marginal improvements of margins in the future is what I will expect. I would say. Great. Thanks a lot, Rogelio, for the answers, and congrats. You're welcome. on the quarter. You're welcome. Thank you, Luis. Alvaro, could you open your microphone, please? Alvaro? There we go. I figured it out. Okay, great. Hi. I hadn't accepted the recording. Okay, there we go. Nice to see you. A couple of questions. One on new stores. We've noticed new stores are very productive, so the incremental sales from new stores have been very productive in 2023, and my question is if we should continue to expect that to be the case into 2024, given where stores are opening, maybe in more affluent areas or larger stores, or if you could talk about that would be great. Yes. We have a very good portfolio of projects for the year and for the next years, not only 2024, but for the next years. I would say that we have. We are going to try to improve or to increase our number of new stores for the next years. It's difficult sometimes. As I mentioned before, there is a lot of external factors that affect our ability to open new stores in the future. But we are putting a lot of effort trying to increase that process. Actually, we are having a very good portfolio of projects for this 2024. We have very good locations. Some of them are City Markets, or we have very good stores in our portfolio for new stores during the year. I will say that I will expect in the future our growth in new stores is going to maintain, or we are trying to even improve or accelerate the pace of new stores in the future. Great. Just out of curiosity, we saw that dip from the aggregators in the quarter. I was wondering if you saw that traffic go to your platform as their platform struggled, if you saw that uptick. Yes. I think that diminishing in the participation of the aggregators is because they have some operating problems during the quarter. Very identified operating problem that they had. Because, of course, they are trying to recover, and they are trying to solve those problems, we will expect that that situation could improve in the future. But the specific issue that you have if some of those customers go to our platform, I will expect that some of them, of course, they could go to our platform. We have a good participation in La Comer en Tu Casa, but we don't have exactly that analysis. Yeah. But we expect that some of them, if they've had problems with the aggregators, they could have migrated to La Comer en Tu Casa. We are participating very well there. And yes, we're having some interesting projects in La Comer en Tu Casa trying to improve the experience to the customers, and I think those efforts are giving some results. We are measuring the satisfaction of every customers in many different ways, and we are implemented a process of recollecting all the opinion of our customers and taking care of the opinions or the complaints of each customer, then that help us to be very focused in service and quality that is important for us. Great. Thank you very much. Okay. Okay. At this time, there are no more questions, so if there are not any other question. No? Okay. Rogelio, please proceed. Oh, no. Yes. Miguel, please go ahead. Thank you very much. A quick one regarding CapEx for coming 3 years, 5 years' time. How should we think about it? If you are thinking about increasing the pace of openings, what kind of new stores should we expect in the future? I think CapEx, it depends on the number of openings that we have every year, but CapEx is going to maintain at the same level that we have had in the past or increase a little bit if we accelerated the opening of new stores. We have been growing with the three formats, with the City Market, La Comer, and Fresko. Last year, we opened more La Comer. It's only because the projects that we were having were for La Comer format. This year, we have many City Markets, but it's not that we prefer one or the other. We prefer all the formats, and for every specific location, we identify which format is the best alternative for that location and in which format we expect to have the best results in, and that's how we decided the format. We want to grow with all the three formats, with Fresko, La Comer, and City Market. Even we are at this moment analyzing if we start to grow with Sumesa format. That is a format that it's the smallest format that we have, but it's having very good financial results, and we are wondering if maybe we are missing a growing opportunity in that format, in which it's easier to get the authorizations and the location, and maybe we can start to grow with that format. We are open to grow with all the formats. Thanks. That's helpful. A second one, if I may, is regarding inflation in your products in the channel. How are you seeing this beginning of the year? How do you foresee the impact in same-store sales, at least for the first half of the year? Mm-hmm. Yes, the inflation that we see in our stores usually has been very similar to the general inflation. We have followed more or less the curve. At this moment, we are a little bit below because sometimes the part of perishables that is part of the volatile part of the inflation is above or below, or is negative in some cases. At this moment, it has been negative, and then we are a little bit below. But I would say that in the long term, our internal inflation is very similar to the general inflation of the country. We have seen until now healthy levels of growth in sales. We haven't seen a contraction on the demand or something like that. It's a complicated year because all the events that could happen during the year, but we have seen until now healthy levels of growth in our sales. Thank you, Rogelio. Thank you, Miguel. Thank you, Miguel. Hello, can you hear me? No? Yes. Well, Luis. Yes. Hi. This is Héctor Maya from Scotiabank. Can you hear me? Oh. Yes, Héctor. Hi, Héctor. Yes, Héctor, please go ahead. Oh, apologies. I had to connect via phone, so I wasn't sure if you could hear me. Thank you very much for taking my questions. The first one is if you could give us some color regarding the view that you have for the potential labor reform in Mexico. Obviously, we don't know exactly a timeline of when this could happen, but I don't know if you could share some details on how you believe that the reduction in week hours could affect your operations or could eventually become a pressure for your margins. Yes, there are two potential reforms that at this moment it has been discussed in the Congress. One is the reduction of the hours of labor during the week, and the other is an increase of the Christmas bonus that the company has to pay to the employees of 15 days to 30 days, an increase in that. Of course, this is part of the changes in the legislation that have an impact in our pressures in expenses. If those reforms actually are applied in the market, then yes, we're going to have an impact in our cost of labor. But anyway, since the past, we have had these kind of changes in the legislation that have an impact in our numbers, and we have taken some measures in order to improve the efficiencies and the productivity of our people. We are trying to minimize the impact, but of course, if these reforms happens or the changes in the legislation happens, we are going to have an impact, even with all the effort that we are doing to improve productivity. Do you have a projection on how material this impact could be? Yes. Especially the number of hours in the week, the labor hours during the week, it's a bigger impact in our numbers. But of course, we are trying to minimize the impact of that with some measures, but it's some significant impact. It's not something that is not going to affect us if that happen. Of course, our margins are not going to be affected that far. We will continue having efficiencies and other improvements and trying to compensate those increases in expenses. Thank you very much. That's very helpful. The other question I had was regarding some strategic potential changes that could be happening in the sector, because right now we are seeing a lot of dynamism and discussions about hard discounts and private label are very hot right now, obviously, because of certain movements we've seen in the market. Just wondering and connecting that with the comment that you were making about Sumesa. I don't know if you are thinking about potentially having some initiatives to check how you could develop or increase penetration in private label. I know that you don't play that much in the segment, but given the discussion and the conversations about these segments in the sector, I don't know if you are wondering about what you could do in terms of growth in that category or if we could do something related to that in other formats like Sumesa. Yes. During 2023, we launched, after the Temporada Naranja campaign. After that campaign, we launched a campaign in order to improve the participation of our private label, Golden Hills. First of all, we improved the quality of all our products. We improved the assortment of products that we have in our private label. After that, we had a big campaign, promoting private label and with very good results. We have increases in the participation private label that were very important increases in the participation of private label, even if at this moment, it's still a small participation of the whole sales of our stores. Yes, we think that it's important to have a good private label, very well recognized by the customers, and continue growing in that part. La Comer, we have had very good results with our strategy of differentiation and quality and in good service, and we're going to continue in that. In that respect, we are going to continue with this strategy of differentiation. We think that is what we do better. Even if there are other proposals in the market, we are going to continue very focused in our proposal of quality, differentiation, service. That is what distinguishes us from the rest of the participants in the market, and we're going to continue with that strategy. We think that it has delivered good results in the past, and it could continue delivering good results in the future. On that note, could you update us on the level of penetration that you have from private label and if you have a vision of how much that could increase in the future? We still have a small participation of private label from the total sales. We have a lot of participation in perishables and prepared food and that kind of categories that usually is not that big in many other participants or in many other players in the market. Our total participation, it used to be between 1% and 2% of our whole sales, and at this moment it's between 2% and 3% of the whole sales. Do you feel comfortable with that level, or is it something that you could be looking to increase? It's something that we want to continue growing, and it's something that we are making some efforts in order to position our brand very well in the mind of our customers. Excellent. Thank you very much for all your answers. Very helpful. Thank you very much. You're welcome. Thank you, Hector. Hi, Luis. Can you open your microphone? Thanks, again, for letting me ask a couple more. Just a follow-up on one of the comments that you made, Rogelio, about making a lot of efforts to being able to open more stores on a given year. Could you elaborate a little bit on that and whether you've always tried to open a bit more and for some reason, it's always a little bit less. It's still very healthy growth from a base that you do have, but it seems like this year you're going to try five to six. Are you comfortable that this is the year where you can achieve those levels, and what are you doing differently relative to prior years that, learning lessons and whatnot, that you can apply and perhaps now you have better visibility on that? Yeah. Even if we haven't accomplished our plan of opening of new stores in the past, something that we have done very well, I think, is that we have selected very good projects. All our new stores have delivered very good results. We don't have any clear failure in one opening that we said, "We opened these stores and were not successful, and we need to close that store." No, that has never happened in all the stores that we have opened since the beginning of this company. This is because we are very strict in our process of approving new projects. We review all the different points of view, all the different, the commercial, the financial, everything, the traffic for the location. We want to continue being in that way, so strict in the process of approving new projects. We have canceled many projects because some of the aspect doesn't convince us completely. What we are doing, I would say a little bit different, is that we are in the process of creating many more different alternatives in order to analyze more alternatives, maybe some of them are going to be discarded. But we are improving our team of expansions in order to generate more alternatives in order to be analyzed. It's something that the top management of the company is very focused on. It's something in which we very clearly can create value for the shareholders, and we are putting a lot of efforts in that part of the expansion of the business. Great. My last question, which is kind of related to it, I guess in the environment where you're able to open, let's say, seven to eight stores per year, and you get there, clearly the capital requirements are much higher. But so far, even at this pace, it seems like you've been able to grow nicely, four, five, six stores per year. But you've been able to fund that growth with internal cash flow, and therefore, your net cash position still there. I know there was a nice increase in the dividend the previous year, so just wondering how should we think about capital allocation beyond just CapEx requirements, in terms of how should we think- Yes about that dividend or even buybacks at some point? Yes. I think if we increase our number of stores that we open to a level of, let's say, 7 or 8, that is a healthy level that at least we would like to have that level. Even at that level, we think that the company has enough cash and is generating enough cash to finance this expansion plan. If we have an extraordinary year in which we open 10 or 12 or 15 new stores and we require capital, of course, we could be open to have some financing for the expansion of the company and for continue growing. But until now, the limitation in the expansion has not been financial resources, but that has been the operational or the capacity of the company to generate new projects. I would say that the idea is that the company continue paying dividends at the similar levels that in the past or growing gradually. But the major priority of the generation of cash of the company is to continue financing the expansion plan of the company. Great. Thanks a lot for the questions, and thanks for taking the time. You are welcome. Thank you, Reese. Now I think there are no more questions. Rogelio, proceed to closing remarks. Thank you, everybody, for your attendance to this conference call. If you have additional questions, you can reach Yolop. Have a nice day. Bye. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you. Bye-bye.