Earnings Call: Q3 2023

Oct 26, 2023

Summary

Q3 sales rose 15% and same-store sales 8.9%, with gross-margin expansion and 28.4% EBITDA growth against a comparison that included a prior-year extraordinary expense. Management planned 6–8 store openings in 2024 amid labor-cost and election-year uncertainty.

Good morning, everyone, and welcome to La Comer third quarter result conference call. Before we begin, I would like to remind you that the information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties, 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, Yolotl, and thank you everybody for being with us today. We are going to have the presentation of the third quarter results, and I am going to share with you the presentation. Sorry. The highlights for the third quarter results are the same-store sales growing at 8.9% and increasing the total sales of the company of 15%, the gross margin reaching 28.7%, and EBITDA margin of 10.6%. As you can see in this graph, again, we are having a certain spread versus the market. We are growing in same-store sales above, and that number, that is a self-service and ANTAD numbers. In all the history of La Comer, we have reached a growth that has been above the market in general, with the exception of the quarters after the pandemic, that we had a big increase during the pandemic, much higher than the market. By comparison basis, we had a hard comparison during those quarters in which we grew a little bit less than the market. But during the last quarters, we have recovered, growing above the market, and having an increase in market share during the last quarter. This quarter was exactly the same. We have a spread versus the growth of the market. All the formats, region, and categories have positive numbers. In general, by product categories, we had a big increase in prepared food, bakery, and tortillas, and after that, above the average growth in perishables. By region, the western region presented the highest increases in same-store sales. During this third quarter of 2023, we had the Temporada Naranja that was during July and August, some part of August, that was performed with good results. Every year, we are consolidating this Temporada Naranja campaign. Every year, we have more consolidated, and the customers are more related with this campaign. Additional to that, after we finish Temporada Naranja, in August, we started with a relaunching of our exclusive brand, Golden Hills. It is our brand for many different categories of products. We launched a campaign promoting the quality and the fair price of this brand, Golden Hills, and it has had very good results. Every time, we are growing a little bit more in our own brand, in Golden Hills. During September, we launched our French campaign, C'est la Vie. In this French campaign, we are offering in our stores more than 1,000 products that are only present in our stores, that are not sold in any other place in Mexico. Our exclusive products that we brought directly from French suppliers to offer to our customers a new experience, to have more alternatives for our customers, and to present to our customers a more improved shopping experience in our stores, with a good quality and good assortment of different products of French origin. These are the participation of e-commerce in our sales. As you can see, we have a stable participation of La Comer en tu Casa. That is our own solution for e-commerce. It is between 7% and 8%. It has been more or less in the same range of participation from the last quarters. It has remained very stable. This is the participation of the aggregators. That is, at this moment, it is Cornershop and Rappi, and they are around 5%, a little bit less than that. It has remained more or less in that percentage of the total sales. In total, it is more than 11.5% of the total participation of e-commerce if we add our own solution, La Comer en tu Casa, plus the aggregators. We continue improving the experience of our customers in e-commerce. We are trying to offer a better experience in this part of the business, and we are improving all our indicators in this business. The percentage of orders that we deliver on time and the percentage of product that we deliver, all these indicators have been improving. It is a part of the business in which we need to put a lot of effort into maintain a good service and to maintain a good participation in the market. If we see the gross profit, we have an increase in the gross margin of 70 basis points. It is a good improvement in gross margin. Some of the factors that have an impact in the gross margin is an increase in the participation of prepared food that usually has a higher gross margin. In addition to that, we have a change in the mix of products that were more differentiated products. Every time, the part of our sales that are gourmet or in some way differentiated are a little bit above the previous periods. It has been increasing the participation of more differentiated products in general. In addition to that, we have a good improvement in logistics, and we have maintained good management of the inventory. The level of shrinkages is at a very good level, and we have maintained those healthy levels of shrinkage of inventory and manage of the inventory. Something important to mention in this part is that we believe in a good relationship with suppliers. We believe that the relationship with all the suppliers has to be a win-win relationship, long-term relationship in order to improve the performance of our company and from the suppliers at the same time. We maintain a good relationship with them, being very fair in all the negotiation with the suppliers. If we review the EBITDA, we have a big improvement in EBITDA margin and a good increase in EBITDA, 28.4% of increase in EBITDA. It is important that we remember that we had an extraordinary expense in the third quarter of 2022 of MXN 61 million that we had in expenses last year, and the base of comparison, it was easy because of this extraordinary expense that we had the previous year. We had some pressures in expenses. It has been more or less the same story during the year, that we have some pressure in expenses on salaries because some changes in the laws, the vacation stay that was increased by law in Mexico, as well as increasing the contribution to the Social Security that was increased for Digis. The participation of the employer was increased, and it had an impact in our expenses in salaries. In addition to that, some pressure by increases in the minimum wage in Mexico that has impact some of our expenses here. In addition to that, we have other expenses that have grown in a significant way, was expenses related with IT, because we need to increase the cybersecurity of all the systems of the company. Additionally, we have increased our expenses in La Comer en tu Casa, all the expenses related with La Comer en tu Casa, with that part, the e-commerce part of the business. We have seen some pressures in some increases in the expense of electricity during the quarter. The highlights for the accumulated numbers of La Comer is an increase in same-store sales of 10.3%, an increase in total sales of 14.7%, a gross margin of 28.5%, and an EBITDA margin of 11%. We have seen more or less the same pressures in expenses during the accumulated numbers of this year. The same improvements in gross margin because the change in the mix of products and because some efficiencies in logistics additional to that. These are more or less the results of the company. Additional to that, we opened two stores during last May, during the second quarter, and we expect to open two more stores in the rest of the year. One La Comer store in November, and another La Comer store in December. We expect to open two new stores the rest of the year. For addition to that, we expect to have a total remodeling of a new store in Querétaro, one La Comer store in Querétaro that we are remodeling completely. Additional to this, just to have an expectation of 2024, we expect to open between six and eight new stores during 2024. We have a very good portfolio of new projects for the next year. It's more or less, there are stores of La Comer, some Fresko, and some City Market. We have a more mixed portfolio of projects of the different formats of La Comer. As always, we mentioned our contribution to the sustainability and social responsibility. We continue using organic and ecological friendly packages in all our stores. We are contributing to several foundations and charity organizations. We are contributing to the Fundación Mexicana para el Desarrollo Rural. That is an organization that helps in the education of people in the agricultural fields in Mexico. We contribute to improve and educate people in agricultural areas in Mexico in order to improve the performance and the productivity of the field in Mexico. We contribute to Pro Bosque de Chapultepec. That is a foundation for helping in El Parque de Chapultepec in Mexico City. We help with a contribution in food to Un Kilo de Ayuda, Banco de Alimentos, Cáritas, and Un Granito de Arena. All these are charity foundations that help poor people, and we contribute generally with food or contribution to all these organizations. During this month, in October, we launched our pink store, La Tienda Rosa. That is an initiative to help breast cancer organizations, that help women with breast cancer, or the early detection of breast cancer, additional to economic contribution to this FUCAM foundation. That is a foundation that help in breast cancer detection. Additional to that, we provide exploration of breast cancer for more than 3,000 customer women that we have during the months in this campaign. This is very important. We have been contributing to this campaign of breast cancer for the last 15 years, and we are going to continue with that. It's something that is very related with our customers. Most of our customers are women, and we contribute with this detection. I think that's all what we have. Let me- Thank you, Rogelio. We are ready to open the microphone up for your questions. We have a couple now. We have Fernando Herrera. Please, Fernando, just open your microphone. You're- Yes. Hi. Hi, guys. Well, congrats on the results. I just have a couple of questions. The third one is related to the growth in same store sales that we are seeing. It's coming from traffic or for ticket? Also if you are seeing some down-trading trends or something like that. Second question will be related to some pressure that we could see the next year, in terms of labor due to the possible revision to the law to reduce working hours. Any information in that front could be super useful. Okay. Yes. I think this quarter we have an increase in traffic and in ticket. We have growth mostly in traffic, but it's not very, how to say? It's not easy to identify the change in the behavior of the customers because what we are seeing is that we are having more, how to say, small tickets. For example, more tickets in the coffee and in our store that usually is a small ticket, and that increase a lot the number of tickets that we have. We have had more or less that behavior. We haven't seen a clear downtrend in the consumption or in the behavior of the consumer. We haven't seen very clear signs of downtrend in that respect. Regarding the pressures in labor, yes, we have had most of our pressures in labor this year has been because of the changes in legislation that increased the cost of labor in Mexico. It's something that is common in all the Mexican companies that hire people in Mexico, and we are living with that situation. If there is some changes in the law that diminish, for example, the number of hours in a week for labor, of course it's going to have an additional pressure in our expenses. We are working very hard in trying to improve productivity in our stores in order to diminish that effect, but anyway, we are going to have an effect because these changes. Something that is very important for us is not to diminish the level of service in our stores. For us, La Comer has a very clear strategy of differentiation, and for us it's very important to maintain a very good level of service. The service of our employees in the store has to be substantially different and better than the service with other players because it's a very clear part of our strategy and our value proposition to have a very good level of service. We invest a lot in the people and in our workers. We train them very well, and we need to continue paying them well in order to provide good service. But we need to conciliate that part of be sure of provide good service with, at the same time, trying to be more productive with the people in order to minimize the impact of changes in the law in Mexico. Thanks, guys. Thank you. Once again, congrats. Thank you, Fernando. Please, Camilla, open your microphone for your next question. Hi, hello to Rogelio. Congratulations on the result, and thank you for taking my questions. Rogelio, you said you expect to open six to eight stores next year. If you could give us a color of which formats are those stores. The second question would be if you could update us on the competitive environment in Mexico, maybe by region, that would be very helpful. Thank you. Yes, at this moment we have 8 projects for next year. Some of them could be delayed, but we expect that all of them could be open during 2024. We have 3 La Comer projects, 3 City Markets, and 2 Fresko. What we have seen is that sometimes some of them could be delayed, and that's why we expect to open between 6 and 8 new stores during next year. Regarding competition, we participate in market that all of them are very competitive. There is a lot of competition because all our stores are located in dense populated areas with good purchasing power and good economic level. In those areas, of course, it's a very attractive market for all the participants, and we compete very hard with all of them. We have seen a lot of campaigns from all the participants in the market trying to be aggressive and gain new customers, and it's something that it happens all the time. We are used to compete in this kind of environment with the hard competition all the time, and it's business as usual. This summer, we notice, especially during this summer, because we have the Temporada Naranja campaign, and it is very important for us. What we notice is that more participants in the market had some kind of summer campaign trying to reach customers, and we noticed more competition during that period, during the summer. Many other players participate in some way with some campaigns during the summer. It was more, how to say, more difficult to launch the campaign, but anyway, we are very happy with the results of the Temporada Naranja campaign. I don't know, Camilla, if I answered your questions. Yes, you did. Very clear. Thank you, and congrats again. Okay. Thank you, Camilla. Luis, please open your microphone. Hi, Rogelio. Luis. How are you? Just a big question on e-commerce. I'm sorry. I don't know if it's big, but it's on e-commerce. Online sales penetration have remained stable around 11%, as you put in your graph, 7% in La Comer en tu Casa, 4% aggregators for quite some time now, at least more than a year and a half. The question is, when you think more long-term on your e-commerce operation, are you planning to do any relevant strategic review or something to change or increase penetration, or are you okay with the levels that we see today? The question goes for both La Comer en tu Casa and for the third-party aggregators. That's it. Thank you. Yes, we have been growing the total sales of the company at a very good level, 15% or something around that. The growth in e-commerce has been more or less in this. If we maintain the participation, it means that the growth in e-commerce has been growing at the same rate of the company as a whole. When we think in e-commerce, we want to provide to all our customers with a very good solution in e-commerce and be ready to manage all the demand that our customers have for e-commerce. We want to grow as much as our customers want to move toward that channel of e-commerce. Yes, all the time we are making new initiatives trying to maintain, to retain customers in e-commerce. What we expect in the future is a gradual increase in participation, but it depends on how much the market wants to move toward that channel as how much our customers demand that channel as a way of moving toward the behavior of purchasing. All right, so it is more waiting to see how the market moves rather than making a big push to increase that penetration, right? As we do not have a special or magical plan to do in order to increase dramatically our participation, we are making improvements and trying to maintain or increase the participation, but it is not something specific that we are doing to increase dramatically that. Cool. Thank you. You are welcome, Luis. Thank you, Luis. Please, Alvaro, can you open your microphone? Improvement, because those 10%-12% developments. Hey, Rogelio. Luis. How are you? Hope you are well. those will occur over the next few years. Hello If you think of the Two questions. The first unit is the outlook for food and beverage inflation. provider for Facebook that they buy stable laptop, so they pay a stable Sorry, somebody else is. Here is the next shareholder you are getting to choose from. speaking. The point that I want to make is. One second. Rogelio. if you were recycling stabilize to buy stabilize, then you could say One second you're going to sell at a cap rate of 8, and you're going to buy stuff at 6.5, then where's the value in that? But if you sell stuff in markets at 8, 10 It's a question on food and beverage inflation, the outlook for same store sales into next year. I don't know Then that generates appreciation. If you can hear that. How we perceive the same store sales of next year? The future is always very difficult to predict, but we are continuing seeing a good level of demand in Mexico. The consumption is very strong. We haven't seen very. Of course, if you see the long-term, you could see some moderation in same store sales in the market in general, but it's still a very healthy level at this moment. And if you measure in real term, it has not been very clear that it has been a diminishing in the level of growth in same store sales in the market in general. We can mention that until now, we haven't seen a clear signs of moderations of diminishing in the levels of consumption. All next years are uncertain because specific situation. In this 2024, we have an election year. It could have some effects. It could improve consumption, or it could have an impact in the economy. We don't know. We expect something. We are, in some way, moderate optimistic or something moderate could happen or continue having good levels of consumption during next year. But of course, there are some uncertainties about the next year performance. Great. Then just one more. You mentioned six to eight, maybe there's potential delays. We've lived through some of these delays in the past, and I feel like typically it's been real estate-related, real estate delays, permitting delays. Do you think it's still a real estate thing, or is it maybe labor shortages in some regions? I'm just curious if maybe you're seeing some labor shortages, or is it more of a real estate delay. What's the scope for those potential delays? That's it. Thank you. Yes. We are having some pressures or some hard time trying to get people in some regions, because the labor market is very tight at this moment in Mexico. Anyway, we saw that situation, it's a little bit more difficult to have staff for some of our stores. Monterrey, specifically, it is a little bit difficult because there are a lot of work opportunities for people there. But it's something that has some impact in our labor cost, because you need to be competitive, but it's not something critical that delays our, the opening of our stores. All the reasons why we delayed some of our process is because, or permits, or because some issues about the real estate. It has been always the case. I don't expect that labor is so tight that we are not able to get people for opening new stores in next year. As I mentioned, we are in some regions in the central part of Mexico, Guanajuato, Querétaro, and Monterrey, the labor market is a little bit difficult at this moment, but it's not something critical. The most that could happen is have some pressures in the expenses of labor and no more than that. Great. Thank you very much, Rogelio. Yolotl. You're welcome. Thank you, Alvaro. Miguel, please open your microphone. We don't hear you, Miguel. Maybe you can write it in the chat. Let's wait a couple of seconds so he can. Meanwhile, if there is another question, please raise your hand. Golden Hills penetration. The participation of Golden Hills. During August, we launched the campaign of Golden Hills. It's our own brand. It has many different categories of products. The total participation of our own brands, it's still very low. We see the total sales of our company, because we have a big proportion of our sales is perishables, prepared food, bakery, that all of them doesn't have a specific brand. But in the categories in which we participate, in the specific product or categories in which Golden Hills participate, at this moment it's reaching very good levels of participation for 7% or 8% of participation. In some cases, more than 10% participation in that specific category. We have seen very strong growth in the sales of our own brand, in the sales of Golden Hills brand. We have seen, in some cases, several times the sales of previous year. The campaign has reached very good results, and we are improving a lot our participation, our sales of Golden Hills. Do you have an initial estimate of the. Sorry. What was. Do you have an initial estimate of the potential increase in minimum wage for- For next year. We don't have a specific. Every time there are changes in the law, of course, if we do nothing, we could have an arithmetic measure of how much it's going to affect if we do nothing. Usually, we take measures in order to improve or minimize the effects or changes in the law in order to be more productive or diminish. In this case, for example, the changes in minimum wage that we had in the previous year, of course, we cancel all the. We had some employees that were partial employees. They didn't work all the. Were partial employees. We cancel all the partial employees in order to not be affected by the minimum wage. Of course, every year, according to the changes in the laws, we take some measures in order to minimize the impact. But of course, a big increase in minimum wage is going to have an impact or a pressure in our expenses. Additional to that, if we have some major changes in the labor laws in Mexico, we could have an effect of increases in the expenses of labor in our numbers. Hey, Rogelio. At this time, there are no more questions, so please proceed to closing remarks. Okay. Thank you everybody for your attendance to this conference call. If you have any additional question, please reach Yolotl with your questions, and thank you for your interest. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day. Bye.