Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to RD People, Health, and Wellbeing Conference Call to discuss its 1Q21 results. The presentation can be found on RD's Investor Relations website, ir.rd.com.br, where the audio for this conference will later be made available. We inform that all participants will only be able to listen to the conference during the company's presentation.
After the company's remarks are over, there will be a Q&A period. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on beliefs and assumptions of RD management and on the information currently available to the company. Forward-looking statements are not guarantees of performance.
They involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of RD and could cause results to differ materially from those expressed in such forward-looking statements.
Today with us are Mr. Eugênio De Zagottis, Investor Relations and Corporate Planning Vice President, and Mr. Fernando Spinelli, Investor Relations and Business Development Director. I'll turn the conference over to Mr. Eugênio De Zagottis. Sir, you may begin your conference.
Hello, everybody. Welcome all to the Raia Drogasil 1Q20 conference call. I'd like to start by saying that we're very happy with this quarter. This was not an easy quarter in terms of the comp base that we faced. Let's not forget that last year in the first quarter, this is exactly when the pandemic started. We had a huge surge in demand in the first quarter last year as people were getting ready to social isolation.
Indeed, in April, we saw a huge social isolation taking place all over Brazil. If you look back 1Q20, our top line grew 25%. The comp base we had to face this year was very high. This is true in terms of sales, but this is also true in terms of expenses, expense dilution results, et cetera. In the end of the day, despite this huge comp base, I think we got a great first quarter, which shows tremendous momentum, and I think it's a very good start for a year that's starting to become a promising one.
We ended the period with 2,319 units in operation. We opened 40 stores, we closed 20 in the quarter. Our market share grew 30 basis points on a national basis. We reached consolidated revenues of BRL 6 billion, 14.9% growth. Again, 14.9% top-line growth over a comp base in which we had grown 25% over 2019. Exactly because the 2020 numbers are now becoming a roller coaster, huge first quarter, very low April, May, and June. We also start to look a lot on two years' stack figures.
If you compare our top-line growth versus the 1Q19, we did a 43.9% growth, which is an acceleration versus previous quarters. We reached a contribution margin of 9.7%, 10 basis points margin expansion, and an adjusted EBITDA of BRL 416 million, 7% consolidated margin with 12.6% of growth. Finally, the net income reached BRL 178 million, 3% of net margin, and a 10 basis point expansion versus last year. Finally, we posted negative BRL 132 million free cash flow with our BRL 126 million cash consumption over the fourth quarter.
This is related to seasonality. The fourth quarter is always a good quarter in terms of cash flow, and in the first quarter, we stockpiled inventories in order to leverage the inflationary gain on inventory. On a 12-month comparison, we had positive cash flow generation, but when you compare the first quarter, which is March versus December, the seasonality generates such pressure.
Talking about our expansion here. We opened 40 stores in the quarter and we closed 20. This rate of closures is abnormal, and this reflects the fact that last year, because of the pandemic, we minimized the store closures and we closed less stores than it would have been normal. What happened is that the pandemic shifted demand from one store to the other.
Shopping malls were initially closed, then shopping malls had restriction periods to open. The downtown stores lost volume because of smart working. Neighborhood stores gained. It was very difficult last year to read our sales per store in order to take long-term decisions related to store closures. We only closed stores in extreme situations. By the end of the year, as the sales normalized, we recovered the visibility, and then we could reassess store closures.
We closed in this first quarter a lot of stores that should have been closed last year under normal terms. We get back to normal closure of stores. We get back to historic pace. If you look here in the quarter, 32% of the stores are still undergoing maturation, and we are also reiterating the guidance of 240 new stores both for this year and for next year.
Here we have some color on the expansion, and I think the main point here is the number of new cities we are occupying. We have here a four-year time series, and it's obvious how the pace of new city entering are accelerating. We entered in 54 stores during the year. This is way more than we have done in previous years.
This points to the fact that our expansion today is more marginal and less cannibalizing than it has ever been. Obviously, in the past, when we're opening a lot of A-class stores in densely populated areas where we had a lot of stores already, the cannibalization was much higher than it is today, when many of the stores are taking place in new markets.
Even the stores that we open in existing markets, they'll be more concentrated in peripheric regions, more outside of the greatest store concentrations that we have. If you look at the store composition, it's diversifying as a result of that. In the last 12 months and in the quarter, premium pharmacies account, like A-class stores, accounted for only 12% of our expansion, while hybrid stores have been the bulk, 60%. They serve the diversified consumer bases.
Finally, C-class pharmacies, they accounted for 29% of the expansion. Our expansion is popularizing more and more. Obviously, our aggregate base of stores still has 34% of premium stores, more than the popular. The trend, as I pointed, is completely opposite from that. We'll see more and more growth here and maybe here, and we'll see a slight compression here as we get national and as we get more diversified geographically and economically.
This is the Brazilian map with our occupation per state, and there are a couple of interesting messages here. The first message is that we now have both banners with more than 1,000 stores. Raia opened the store number 1,000 during the quarter, so Raia now has more than 1,000 stores, and obviously Drogasil has 1,300 stores.
If you look in terms of revenues, we own both the number one and the number two player in the country. Obviously, there are other chains that have more stores than Raia alone has. I mean, the Droga Raia brand, not the Raia Drogasil company. On a revenue basis, Drogasil is the number one banner in Brazil, and Droga Raia is the number two banner in Brazil.
When we look at our footprint, I would like to point to the fact that we had only three states where we didn't operate, and actually we still don't operate, but we already have contracts signed for these markets. We are entering in Amapá and Acre in the next quarter, and we also have contracts to enter Roraima, which we should enter by year-end.
By the end of this year, we will have operations established in all states in the country. Some highlights here. We already have in the Northeast more than 300 stores. We have 303. We are the leaders already both in Salvador and in Recife. We are becoming the leaders also in the state of Bahia and Pernambuco. Either we already are or will become in the next months because of the inertial growth from maturation that we already have contracted for those markets.
This is a really successful operation in terms of sales, in terms of expansion base, in terms of profitability as well. When you look at the North, the North has been another highlight. This is our most recent market. We entered both Amazonas, and especially the city of Manaus and Rondônia recently. These are the two most recent states.
In the whole northern region, we already have 60 stores. I would like also to stress the southern region, in which we have already closer to 150 stores. We recently opened our DC in Porto Alegre, and this DC will be instrumental to allow us to further expand here in the state. You see that Rio Grande do Sul is a state in terms of potential, slightly larger than Paraná, and we have less than half the stores we have in Paraná. Santa Catarina is a much smaller market. We have more stores than we have in Rio Grande do Sul. Our operation in Rio Grande do Sul is an amazing one. It's very profitable. We're very happy with it.
Now we are accelerating growth here, driven by this new DC that opens up the countryside for us, which before was too far away from the Curitiba distribution center for us to fulfill. In terms of market share, I think we have a slight increase here on a national basis and in most markets, and a slight decrease in São Paulo. This has to do with the way that IQVIA does these calculations.
The numbers that IQVIA use to calculate market share, they come from actual demand numbers informed by the larger chains. Chains like us, we inform IQVIA how much we sold month by month, store by store. But in the case of smaller players, they don't have direct access to that. What they do is they get sell-in data from the wholesalers.
Wholesalers like Profarma, Santa Cruz and others, they will tell IQVIA how much in merchandise they shipped to each independent pharmacy or small chain over the month. This is a calculation that mixes up sell-out data, demand data with sell-in data. The first quarter of the year is a moment in which every retailer in Brazil is getting ready for the price increase in order to get inflationary gain on inventories.
What happened in this moment is that the selling increases, and so there is a distortion in this calculation. IQVIA informs also, the share only on a sell-out basis. Obviously, this is a part of the market, not the full market. In the part of the market that gives sell-out information, we recorded a 1.7 percentage point national gain with a 60-BP gain in São Paulo.
I believe this is much closer to the reality than this number here. Talking about our top-line growth. We reached in a quarter close to BRL 6 billion in consolidated revenues. If you look at our retail business, it grew 14.4%. On a two-year basis, it has grown 43.4%, while 4Bio grew 22.6% with a two-year stack growth of 55%. If you look at the mix, OTC has been the fastest growth category exactly because of the pandemic.
All categories related to the pandemic are here. I'm talking about COVID tests, I'm talking about hand sanitizers, masks, et cetera. We had moderate growth here in generics and HPC, and we have lower growth here in branded. The most important figure, I think of the quarter is in this chart, which is our comp. Let's not forget that we're comping versus a first quarter last year, in which we had grown top line 25% and mature stores 11.5%.
These comp base of the 1Q is a completely abnormal comp base because people were stockpiling products at our stores before locking down. By the time they locked down, we saw in the second quarter, -7% mature, 6.3% total. This is now a roller coaster, and this is why we start looking at two-year stack figures for us to understand where we are. When you look there, it's clear that the comps are accelerating. We came from 36% to the third quarter, 40%, and now close to 44%.
We are also publishing the April data exactly because of the second wave of the pandemic, for you to get a better grasp that this is different from last year in which people were really locking up at home and not buying much. Demand has been normal. We look at 41.6% two-year stack growth, but with a negative calendar effect of 1.2. If we look on a calendar-adjusted basis, this is very similar to the first quarter.
We're maintaining this great momentum. In the case of the mature stores, 14.1, if you add that 1.2, in calendar effect, we are at 15.3, even slightly better than in the first quarter. The structural growth momentum for the company has been great. Looking at the mature store growth on a one-year basis, 4.6 plus the calendar effect, this is 5.8.
This is strictly in line with inflation, despite the fact that it's coming on top of an 11.5% abnormal comp. I read last night many of the sell-side notes about our result, and most analysts were talking about good as expected. I have to tell you that for us, this is everything but expected. We never expected to have inflation-adjusted comps in line with inflation over this huge comp base.
This was never our expectation, and we have done way better than our budget to be very candid here. In my view, this highlights how strong, in our view at least, this quarter was. I think another great news here is the digital penetration. In the second quarter last year, when people really locked up at home, we saw a peak of 7.6.
Customer traffic started normalizing, this had receded somewhat, but still, we were by year-end much better than we had started. We're happy to see that in the first quarter, we started growing the digital penetration. We got to a new record, which is 7.7, and the best news here is that the March figures and the April figures are even higher than this. It's been really within the quarter we have seen this growth. There's a great trend in increased digitalization for the rest of the year.
For me, this is very important. I mentioned before, we don't see digital as an end in itself, as a business in itself. Digital is only a means to increase customer engagement, frequency, spending and lifetime value. We have measured that the people who have adopted digitalization, they spend 20% more than they spent before.
As people get digitalized, the total spending grows and this sustains the comp growth. The only reason why we have a comp growth like this, is exactly because digitalization is driving an increase in customer spending. We believe we will be able to sustain real mature store sales growth for the foreseeable future, exactly because of digitalization.
When you think about digitalization, it's important to mention that we have increased a lot the infrastructure to support this service. We have ship from stores from only 72 stores by the beginning of last year. We have increased this number and added more and more stores through the year, and now we have a new jump to 354 stores with motorized ship from store.
This comes on top of the fact that 100% of the stores do click and collect, and 100% of stores, they do neighborhood deliveries, which is customers who live in the immediate neighborhood. They send WhatsApp to the store, they order through WhatsApp directly from the store, and we deliver with the existing store personnel in the immediate neighborhood. Neighborhood delivery plus click and collect, which are very low-cost services for us, they represent more than 50% of our digital demand.
Ship from store is less than 50%. The economics is very good also because of that. Finally, we reach a total of nearly 10 million cumulative app downloads in the quarter, and this is a number that has to keep growing. Let's not forget also here that we have two new businesses that we are developing, the marketplace and the health platform.
These business are fully digital businesses. They depend on the digitalization that we're able to do through the new pharmacy to feed them. It's exactly these 10 million customers who have downloads today. In the future, I hope there will be 12, 15, 20 or more, who will buy from the marketplace and who will use our health platform.
This is why digitalization is so important. Talking about gross margins, we had a slight pressure here, 20 basis points over last year, 30 basis points on a sequential basis. When you look on an annual basis here, 10 basis points is due to the net present value adjusted, which is really a non-cash effect related to interest rates. 10 basis points relates to promotional intensity to drive customer digitalization.
We have been very aggressive with coupons in the store, especially smart coupons, because they drive the digital onboarding of the customer. Net from other gains, they accounted for a 10 basis point gross margin pressure. In terms of the cash cycle, we had a flat cash cycle versus last year. Obviously the first quarter level of the working capital is always higher than the fourth quarter.
It's a big increase over the fourth quarter because we have stockpiled inventories to get ready for the forward buying. We are in a similar level, both in cash cycle and in inventories versus where we were last year. Selling expenses were a great highlight here, despite the fact that the mature store growth was below inflation and only on a calendar adjusted basis was in line with inflation.
The normal thing to see would have been a slight pressure, but we are getting more efficient and we got a 40 basis point dilution in selling expenses. When we net this gain selling expenses from the gross margin pressure, we still get to a contribution margin increase of 10 basis points. This is a very important figure because this is where we understand the quality of the operation, how we are doing structurally.
I mean this because as we are investing in digitalization, marketplace, health platform, we have a lot of G&A that the company is absorbing in order to deliver those businesses. Depending on when we look, it's possible that we see pressure because of the G&A. I think these should be temporary pressures because this investment is being done with the goal of growing and creating value.
Longer term, they will be compensated, but in the short term, they could be, depending on the quarter, a source of pressure. Despite what happens on the G&A, this is where we see the underlying strength and profitability of the operation because we factor out the G&A out of this metric. Still, G&A increased by 30 basis points.
20 basis points here of this G&A base are directly related to the digital execution, but there are more effects from digital, like corporate overhead, management team, et cetera, that are not factored into this number. This is what explains the increase in G&A. Let's not forget that we once had a G&A of 2.3. We now have 2.8, and this is a choice.
We are adding developers, we are adding people in analytics, designers, and a lot of management structure in order for us to deliver this new strategy. This is part of the process, but happily, the core business has been so strong that we have been able to offset this G&A increase with the contribution margin growth we have recently seen.
Finally, our EBITDA was 7% in line with the first quarter 2020, only 10 basis points lower. Despite the fact that we had a huge tailwind here from the pandemic and also from the calendar, because we had in 2020 a leap year. Having a similar margin from last year, I think it's an amazing accomplishment, because for us, this was a quarter that looked from the outside a very challenging one, but we're very happy to deliver very strong results here.
Our accounting EBITDA was BRL 432 million. We had no recurring gains, mostly tax gains from other periods. The adjusted EBITDA is below this, BRL 416 million. Obviously, if you look on an account EBITDA, it's a huge increase, but these tax credits, they're related to previous periods. We're not factoring them in this calculation.
We always look at a normalized figure, and I think this is the right thing to do. Finally, we had BRL 178 million in net income, 10 basis points higher than last year, despite the huge comp base that we had seen. Finally, in terms of cash flow, we had pressure both on free and total cash flow because we are comparing March with December, which are very different cash cycle points because of seasonality. If we were comparing March with March, this would have been a positive cash flow generation.
This is only related to seasonality, but still, net debt EBITDA stays at 0.6, which is somewhat lower than we had seen last year. Our share price was pretty much constant, only 0.1 increase year-to-date. The index was slightly down, there's a positive alpha of 2.3%, and an average trading volume of BRL 155 million. Obviously, the compounded return, total shareholder returns since they're higher than they are always very high.
The good thing is that quarter-over-quarter, year after year, we maintain this kind of figures. Making here a summary of what we talked. This is a great first quarter for the company. We're very happy about it. We had huge comps because of the pre-pandemic demand surge because of the leap year last year, but still, on a calendar adjusted basis, mature stores were in line with inflation.
We have more and more to look at the two-year stack figures because the one year become a roller coaster, it's high now, it'll be very low in the second quarter. We are sequentially accelerating, reaching 44%. Digital penetration is an all-time high of 7.7 and growing. As I mentioned, March and April are higher than this figure.
The transformation of the business, we talked a lot about the digital, when you think about the healthcare, which is the other element of the new pharmacy, we have performed since May last year, nearly 2 million COVID tests. In the first quarter alone, due to the peak of the pandemic, the second peak, 1 million COVID tests. This is huge figures. You can compare these figures to the public-listed lab companies like Dasa, Fleury, et cetera.
I'm not saying they're higher, but they are very meaningful, and we are in the same conversation, at least when you talk about COVID tests. Obviously, very healthy margin in line with last year, slightly higher on the net margin, slightly lower on the EBITDA margin. Very good performance overall across every metric. When you look for the year, this is also a very positive outlook as well.
We have sustained similar comps on a two-year basis for April, 42% year. If you consider 1.3 negative calendar, we're talking nearly 43%. Obviously, on a year basis because of the roller coast, it's now very high, but this is artificial. Digital penetration increasing, as I mentioned. We had a very healthy price cap increase, which I think sets a good perspective for the year, even considering that we have an increasing inflation, but this price increase will allow us to absorb that.
I think we are expecting overall a very good year across every metric because of this strong start and also because of the price cap increase. Here, I would like to provide a highlight about the marketplace. It's too early for us to start issuing GMV figures. We will come to that point sooner rather than later, but we still consider our marketplace in a pre-operational stage. We started a pilot in November, only in the Droga Raia website. In January, we launched the marketplace in the Droga Raia app, so it shows how recent this is. We currently, by end of the quarter, feature 84 sellers, 18,000 3P SKUs .
It's increasing versus the 4Q when we had 12 sellers and 1,200 SKUs. The sellers that we're adding, they not only expand our offering to new health and beauty verticals, but they also expand the mix in existing verticals like beauty, for example. One of the best news here is that 39% of the marketplace orders had a 1P order coming together.
This shows the synergy between the marketplace and the new pharmacy, just like there will be a synergy between new pharmacy marketplace and the health platform. The view here, the focus here is increasing the customer lifetime value. We have 40 million customers. They have higher frequency, probably we're the highest frequency channel in Brazil. We believe that, obviously, new pharmacy, marketplace, and the platform, they have their own P&Ls, but the beauty is the synergy between them.
We digitalize the customers through the new pharmacy, and then the customer experiences the marketplace, then the customer experiences the platform. The customer who starts using the platform on a regular basis to take care of their health, they will, as a consequence, use more frequently, buy from the marketplace and buy from the new pharmacy.
The marketplace customers, by the time they understand that we have a one-stop shopping offering in healthcare, they come more frequently, they also buy more 1P. The view is way beyond one plus one plus one. We're multiplying these different businesses. This times this times this, I think we change the customer lifetime value in a very meaningful way with a success. This is what we're looking at. The construction of the platform will continue through 2021. 2021 is still a soft opening year.
We're currently negotiating with over 150 sellers. We have more than 1,000 sellers under prospection. We have strong focus on onboarding them in a correct way, activating them well within the platform, taking good care of them. They become customers of the company. The company starts having the individual, the customer, the seller as a client as well, and we have to treat them like that.
Taking care of the customer experience and the seller experience is very important. Right now, the full logistics is done by the seller. Over time, we have to absorb more and more of the logistics, start integrating for this. In the end of the day, having the pharmacy as a logistical hub. We have 2,300 pharmacies all over Brazil.
We serve 90% of the A-class within a mile. We can get a seller who's based in São Paulo and get their products in the countryside of Amazonas in a couple of days and let the customer do a click and collect in the store with a zero or very low delivery cost. By using the store as a hub, we improve service to the customer, we improve the capillarity and the service and the profitability of the seller.
This is what we do that no one else is able to do. When you think about the large platforms, they have done an amazing job, but they don't have the capillarity that we have to do a quick and cheap logistics like we can. Our customers don't expect one day, two day for their deliveries. They expect one hour, two hour, four hours with the 1P.
Even with the 3P, it's only one hour, four hour because the inventory will not be sitting there, it will be one day, two day, something that is very difficult to the large platforms to do. It's important to mention that Drogasil is still not integrated into the platform because we are switching the version of Magento for Drogasil. We believe that in the third quarter, Drogasil will have a marketplace as well, which right now only Raia has. It shows how incipient this is, how promising this is as well.
Finally, just before Q&A, we have recently unveiled to the market a lot of changes to our governance that I think improve and strengthen the governance. We have a new strategy that's a much more complicated strategy. We're shifting from a regular expansion-driven retail strategy to an omni-channel strategy, a strategy that relies on a platform, relies on an ecosystem.
The first good news here that we recently unveiled is that the majority shareholders have signed a new shareholder agreement for 10 years, which will enter into effect in November this year. Until November, the current agreement stays into effect normally. In November, the new shareholder agreement starts. It will last for 10 years. This is involving the three long-term shareholders of the company, the Galvão, Pires, and Pipponzi families. These three families together, they own 30% of Raia Drogasil. We have a long-term commitment from these shareholders who have been with the company for a very long time.
It's always important to mention that this group of families include both the founding family of Drogasil, which is the Pires family, who founded Drogasil 85 years ago, and the Pipponzi family, who founded Raia 115 years ago. These families, along with the Galvão family, who has been in Drogasil since the '70s, will be around for at least another 10 years to provide stability for the company to deliver this new strategy.
As a function of this revamping of the governance, we have expanded our board from nine to 11 members, and we have increased the number of independent members from three to five. This new board has already been voted on our general assembly that happened one or two weeks ago.
On top of the six board members who are appointed by the shareholder agreement, we have five independents, and we have very complementary capabilities being added to the Board, exactly in line with this new strategy. Marco Bonomi, he was already in our Board. He's now the Vice Chairman of the company. Marco comes from Itaú. He's a Board member of Itaú.
He was an ex-General Director of Itaú, and he was the guy who led Itaú Unibanco's digital transformation. He's entering his second term in our Board. These other board members are all new board members. Silvia Leão, she was already working with us on the People Committee. She has an extensive experience in retailing, so she's a very valuable addition here. We have three board members who bring completely new competencies that are required in this new stage of the company.
Denise Santos, she's the CEO of the BP Hospital, Beneficência Portuguesa Hospital. Very knowledgeable of healthcare and someone who can help us along our strategy here. We have Cesar Gon. Cesar Gon is the Founder and CEO of CI&T. This is a company who assists incumbents in doing digital transformation. He understands every nut and bolt of the digital transformation we're trying to do. It's a very valuable addition to help us on this very, very difficult path.
Finally, Philipp Povel, Co-Founder and Board Member of Dafiti, who is very knowledgeable about platforms, who also brings a new perspective to the board. We have a much stronger board with much more diversified know-hows, and a governance who adds to the company, and help us deliver this very ambitious strategy that we have ahead of us.
There are other ESG improvements, like the five statutory committees, strategy, finance, people, health, and sustainability. We have a permanent fiscal council. Something that's very important, we are unveiling on May 18, 11:00 a.m. Brazilian time, with simultaneous translation, the new sustainability commitments of the company for 2030. We have very detailed goals for our sustainability aspiration, and we will unveil this on this day and on this time with simultaneous translation.
We will have the members of the Board, we will have members of the Management talking about our sustainability view and about the specific comments. I would like to invite everybody to attend, because this is a very important date for us. For the first time, we as a company have a sustainability agenda that's very aligned to the business agenda. I think we can talk more about this in this event. These were our prepared remarks. I'd like to open now for Q&A. Thank you.
Thank you. At this time, we will begin the Q&A session. Mr. Joseph Giordano from JP Morgan would like to make a question. You may proceed.
I was on mute. Sorry. Hi Eugênio, good morning. Thanks for taking my question. Congrats on the results. A couple questions here. The first one is on the expansion plan. Now, the company will be present in all states of the country. I'd like to understand how should we think going forward about the strategic acquisition. Basically, maybe a bolt-on deal in one of the new states or even existing states that would make sense for you.
If you guys evaluate that. The second one, still on the expansion, how should we think about the dual brand strategy, on the expansion plans for the company? We have a two-brand strategy, basically in São Paulo. In Minas Gerais is a two-brand strategy with very limited overlap. If you could think about, okay, we have a very high density on Drogasil.
Eventually, we introduce Raia and vice versa. If it is something that makes sense for you guys in the short term. The second question goes into the digital strategy. We see a very relevant focus and you guys are investing much more than peers on this front. Here, I would like to think, how are you seeing the evolution of the platform in terms of engagement with the client?
We saw the introduction of several content platforms taking place in your app. I'd like to understand how is this evolving and how it's increasing your monthly active users in those platforms. The second aspect is how do you think about the role of the consolidators we have in the market? We have iFood, we have Rappi, now we have Cornershop, among others.
How do you see those guys playing out, and how do you think the industry will shape out to actually embrace those guys, right? At the end of the day, they are the ones that hold the client, not you. How to conquer this market and avoid this potential competition? Thank you.
Okay, Joe. Thank you for the question. First of all, happy birthday. I know today is your birthday, I wish you all the best as you're approaching your 40 year of existence. You made several questions here. Let me start with the expansion/M&A part. As you mentioned, we'll be by year-end in every state in Brazil.
In the end of the day, obviously, these new states that we added, they are very small states, they're not very material in terms of the total expansion. I think it's a nice symbolism that we'll be everywhere. Obviously, in the end of the day, we'll be able to have, I don't know, 10 stores, five stores, depending on the market. The aggregate sum is a good sum. Our strategy is an organic strategy. Obviously, there are a lot of M&A opportunities.
We look at them, we analyze them, but in the end of the day, I'm very skeptical about drugstore M&A. In the end of the day, it's very difficult for us to find assets that have a reasonable store quality, that have a reasonable price, and every day it becomes tougher because we become bigger in those markets. The overlap is bigger.
The performance of those stores is even worse as we enter. I think the chance that we will do any moves, I think it's very unlikely. If you look, we have been successful in every market where we entered. These more recent markets and more further away markets where we have more vulnerable competitors versus the ones we face, for example, in the South, in the Southeast, these are our best markets.
If you look, the sales performance, the profitability performance state by state, our best performances are the Northeast, North, and Midwest, where we have these more fragile competitors. It doesn't make any sense to buy anyone. As we get bigger and bigger, the overlap increases and the sales performance of those stores that we could buy goes down, and they become less and less attractive.
I wouldn't say it's impossible. After all, we bought Onofre not that long ago, but I think it's unlikely. You mentioned the dual brand strategy. We have a meaningful overlap in São Paulo. This is the only place. In Minas Gerais, we have Raia in the capital, Belo Horizonte, only in the capital, and Drogasil, only in the countryside. We have Drogasil North, Northeast, and Midwest, and we have Raia in Rio de Janeiro and the South.
São Paulo is the only real overlap that we have. We also have to take into account that São Paulo is the native market of both Raia and Drogasil. Raia and Drogasil are iconic brands in São Paulo. We'll maintain two brands in São Paulo. We inherited those brands. We had some pilots in some markets trying to build an overlap. We tried this in Goiânia, we tried this in Brasília for a while.
We feel that, with the exception of São Paulo, where we have the luxury of owning two such strong brands, the best model in the other markets, having one brand and investing to make that brand stronger. In Goiânia, we closed the Raia operation, we migrated stores to Drogasil. Same in Brasília, same in some cities in the countryside. For example, Piracicaba, we had Raia and Drogasil, it became only Raia.
In Presidente Prudente, countryside of São Paulo, Raia became Drogasil. Wherever it made sense to consolidate on a single brand, we did, but we will carry on São Paulo with the two-brand strategy. Having two brands is amazing, as long as those two brands are very strong. Building a second brand from zero is very difficult and we will no longer try to do that.
Okay. This was the dual brand. You asked me about the digital. Right now what we have in terms of the digital is the new pharmacy gaining a lot of steam. When you think about 7%-8% digital penetration, this is very significant. Not long ago, this penetration was dismal and it's growing. It grew initially during the pandemic, then it receded, now it's starting to grow again.
This is very important because when we think about the marketplace and the health platform, these are 100% digital solutions. We will have as many customers as we can onboard digitally through the new pharmacy. This is why this is such a high priority for us.
I think we are evolving well. I think the new pharmacy already changes the engagement of this customer, the frequency of buying, the loyalty, just because we have a much higher convenience through omnichannel than we had before. I believe the process will intensify as the marketplace becomes relevant and as we launch the health platform. We will launch the MVP of the health platform still this year. I think it will take time for marketplace and health platform to start making a difference.
Right now, the focus is building the new pharmacy and digitalizing the customers in the new pharmacy, doing the onboarding and building these new businesses, so that by the time we have more and more digital customers, this business can feed from these customers, this whole synergy that I mentioned can take off.
Finally, in terms of you asking me the role of companies like Rappi, that do the last mile delivery, I think they have a role in the market. I think they do a tremendous job in terms of getting fast service with a very good customer experience. Our strategy is open-ended. We work with Rappi, for example. They're a good partner. In the end of the day, we want to have as much as possible the direct relationship with the customer.
In our case of the digital sales, 90% are directly executed by the company. 10% come from Happy and these other guys. Yes, they have a role, but we are not dependent on them. In the case of pharmaceuticals, their mission is very difficult. Obviously, if you need a shampoo, if you need a deodorant, and even OTC medicine, they're very convenient, and they can deliver it very fast for you.
When you think about prescription, you need a more specialized execution. You need digital prescriptions to be processed. You need that you accept that we have a lot of partnerships with manufacturers with special programs. We have partnership with payers, health insurers, companies. It's a very specialized fulfillment.
There are a lot of categories, there are a lot of molecules, like controlled medicines that we cannot do through a platform like this, you can only do directly. In my view, the specialization of the channel makes it very difficult for these generalistic channels to be competitive on the prescription side. On the OTC and OTC, I think they can do a good job.
Our mission in terms of our fulfillment is to be as good as them, as fast as them. The fact that we have 2,300 stores, that we have 90% of the A class in Brazil within a mile of our stores allows us to be as quick as they are. Right now, I think they have a better experience than we have in terms of the app.
I think our app has evolved tremendously, but I have to be frank to say that our app today is not a state-of-the-art app yet. Rappi is, Magalu is, Mercado Livre is, another guy, Nubank is. Our aim is to get there in two years. We are investing resources. We have a large number of squads working on. We are converting our systems to microservices.
We have data scientists within the company. We are in the journey. These players started the journey much before us. In my view, by the day, we have an experience in the app that's comparable to this guy, that our ship from store that today is mostly four hours become mostly one hour. I think we can have the most compelling neighborhood operation all over Brazil.
Our next question comes from Mr. Gabriel Simões from Itaú. You may proceed.
Raia. I'm sorry, guys. I was on mute here. Eugênio, thanks for taking my question. It's actually about your store formats. In the past few quarters, you have entered an important endeavor to reach lower-income customers, right, as we see in the profile of your recent store openings. You've been very successful doing so.
I would like to know if this change in opening profile is mostly related to your expansion into new regions and if we should see a profile change going forward in any sense. Also, if you could pinpoint the main differences between the higher and lower-income formats, that would be very interesting as well. Thank you.
Okay, Gabriel, thanks for the questions. You're correct. We are diversifying a lot our growth. Our growth is more and more not only geographically diversified but also in terms of income profile. Obviously, when you grow this much in the northeast, north, and these are not as affluent areas as São Paulo. Think about our operation in Pernambuco or Bahia.
We have 70-plus stores there, especially Bahia. If you think about Bahia, maybe we have, what, 15, maybe 20 A-class stores there. The A market is very limited there. After we did those initial stores, immediately we had to start going down in terms of income profile. We started opening hybrid stores, and now we're opening a lot of popular stores. Yes, this large number of popular stores are related to these new markets.
They are related to a lot of small cities that we have entered, but they are also related to large cities like in São Paulo. If you look our footprint in the A areas of São Paulo, it's an amazing footprint. We have a tremendous coverage. If we open a store in Jardins, Itaim, Moema, et cetera, cannibalization is huge, and the capacity of the store to add marginal demand to justify the cost of capital is not that easy anymore.
This is why the number of stores in the state of São Paulo is reducing quarter by quarter, and the number of stores in the city of São Paulo even more so. If I am not mistaken, I think we have opened last 12 months something like 12 stores in the city of São Paulo. 10 stores. It's a very small number.
Even the city of São Paulo, these 10 stores, most of them are in more peripheral areas that complement our existing footprint. Our growth has never been more accretive than before. In the past, we were doing a lot of store in existing areas that had great sales but a lot of cannibalization. Still, they made sense on a net basis. Right now, cannibalization is very low from this program, and we are still driving tremendous revenues for store in the growth.
If you look today, the internal rate of returns on the expansion is the highest we have seen in recent years. We always target that 20% real internal rate of return. We are in mid to high 20s right now, exactly because there is limited cannibalization, and we always look at these returns net of cannibalization.
A store that sells BRL 800,000 a month, it doesn't matter. It matters how much it adds to the pie. If it sells BRL 800,000 but it cannibalizes BRL 300,000, only BRL 500,000 is new, and the returns calculation is based on the BRL 500,000. A store in a new market that is selling BRL 600,000-700,000, zero cannibalization, BRL 600,000-700,000 in marginal.
This is why the internal rate of return is also growing. Finally, you asked me about the differences in formats. In the end, we're talking about the same business. These are the differences in execution, things related to store look and feel, to promotion density, to generic mix, to the materials and fixtures we use in the store.
The upscale stores, they are way more sophisticated. They have a more upscale mix. They have a nicer and cleaner store look and feel. The popular stores, they are way more promotional, way more signage, way more generics in the mix, simpler fixtures. In the end of the day, it's the same business. End of the day, it's the same economics.
Our next question comes from Mr. Gustavo Senday from XP Investimentos. You may proceed.
Raia, Eugênio. Thank you for taking my question. I have two questions here on the service front. First, if you guys plan to expand the service portfolio you offer in stores in the short and medium term, and if you do, what kind of verticals are you looking for? The second, is there a sales conversion metric or average spend for clients that go to your stores to take COVID tests or use some kind of other service, for example? What can we expect on this front? Is the average spending in line with the company's average? Higher? That would be great. Thank you.
Okay. Well, thanks for the question, Gustavo. Obviously, when you think about the new pharmacy, there are two direct elements. One is the digital, the other is the health element. We have a lot of new things that we are developing for our health hubs. We have an existing service infrastructure in the stores with vaccinations.
We added COVID tests, but we will start piloting health hubs that I think have a much more comprehensive service than that are digitally integrated with the app, so you can schedule anything to the app. You can get the exams that you do, either the COVID test, point of care, whatever that is, you can get the results and store that on the app. There's a huge digital and healthcare integration that we are planning to take place on those health hubs.
Still this year, I think we'll have some of these health hubs up and ready. Obviously, we have figures related to the health hub usage, but we're still not making them public, especially because the full health hub that we're launching is not up there yet. What we have today is an extension from the past. The full health hub, I think it'll be much more compelling in my view. At that point, we already measured economics, but right now we don't share the economics. Maybe in the future, as the health hub becomes more important and prevalent, we may decide to share those numbers.
The next question comes from Mrs. Irma Sgarz from Goldman Sachs. You may proceed.
Yes, hi. Just a quick follow-up on customer acquisition costs. I think you've said in the past that your stores are actually a relatively cost-efficient way of acquiring customers, given that you ultimately acquire your customers through the stores and then they transit to become omni-channel customers.
I was just curious to what extent you're already seeing, now that you're sort of strengthening, and I know you're in the beginning of what's going to be a multiple-year journey, but to the extent that you're strengthening yourselves as a vertical go-to place for health and sort of the broader vertical ecosystem, to what extent do you see already customers sort of going directly to your platform and not even having been customers of your store?
I don't know, you're very well penetrated across the country and already have an impressive market share. There's obviously still some 80% of the market out there. I was curious if it to some extent, if there's even already examples of where it is becoming more relevant that you're getting customers that are coming directly online to you digitally and that can maybe even inform part of your store build-out, or is that just sort of not necessarily that relevant? Thank you.
Okay, Irma, that's a really good question. I think, the store is a hugely efficient customer acquisition machine. Let's not forget that we have a business that is 93% physical. We open a store, the customers come, and they come to the store to buy like they have bought for the last 100 years in our stores on a physical basis. They learn in the store that we have our app.
The digital onboarding happens in the app. They start using these new channels, omni-channel, click and collect, ship from store, et cetera. What this means is that the cost of the store, the investment of the store, is already fully absorbed by the regular business. All of a sudden, we have two new business for us to further monetize this customer.
I think the dynamic is not really, okay, us going to Google or Facebook and acquiring a customer and then the customer from digital going to the store. I think the other way is way more effective. I think people come to us because of the store, then they get digitalized, and then they start buying through the app. They find out we have a myriad of sellers there, so they become users of the marketplace.
They learn that we have a digital health platform that can help them have better living, prevention, health promotion, disease prevention, et cetera. For me, this is how it works. Obviously, we do some Google, Facebook, et cetera, but in the end of the day, it's through the stores that the customers will come. This is the differentiating factor of everything we do.
Most digital businesses, they have a nightmare acquiring customers. They may have a great product, excellent solution, experience, even the margin outside of the customer acquisition cost is pretty good, but by the time they put the customer acquisition cost, it becomes a nightmare. We have an example at home. We bought TechFit, which is becoming like the chassis for our health platform. I mean, amazing startup, amazing digital solutions, amazing understanding of the customer experience.
The problem is getting customers for them was a nightmare. We already have 40 million customers of whom we interact. With these existing customers, we do the digital onboarding, and then we will transfer them not only to buy from the new pharmacy, but also from the marketplace, but also to consume the health platform. This is the winning combination.
Everything that we are doing here relies on the store. The store is the customer acquisition machine. The store is the fulfillment machine. 85% of the transactions, the digital transactions happen through the store. The store will be the hub for repeat deliveries in the marketplace. Imagine the value of you buying something in the marketplace and collecting in one, two days in the store, without a shipping cost.
Using this existing infrastructure to deliver at home at a lower shipping cost and faster time than what you're used to. This is something that the large platforms can do. Customer acquisition for them is not that much an issue because they have a huge spectrum of categories, so obviously they spend money, Google, Facebook, et cetera, but they dilute over a large scope of business.
This kind of fast fulfillment, only with the kind of capillarity that we have, it's possible to do. Comparing to any pure-play vertical platform, in the past, we had e-pharmacies, like Netfarma, even Onofre, and a couple others. This has been a huge failure because the customer acquisition was a main barrier for them. The fulfillment cost was very high because they didn't have the kind of capillarity we have.
The store is absolutely central to the business model we are developing. Finally, you asked me about market share. We have a market share of, I think, 14%. Just with store maturation and couple more years of expansion, we are sure to get to 20%. I think there is way more opportunity, not only because I don't think the expansion ends in two or three years, I think it goes on with full steam.
I think it's clear how we have reinvented expansion, how we have learned how to access popular markets, enter smaller cities. I think there's still a tremendous opportunity for the expansion, and I think the combination between digital and expansion will drive faster share gain than we were getting before.
There appears to be no further questions. Now, I will turn the conference over back to the company for the final remarks.
Okay. Thank you all for attending our conference call. Just to sum up of some of the things we mentioned, this was a huge challenging quarter for us because of the abnormal comp base of last year, in which we grew 25% top line, not only because of the surging demand before the social isolation , but also because of the leap year. Still, when we look at our mature store sales on an inflation-adjusted basis was absolutely in line with inflation despite this huge comp base.
For us, there was nothing like as expected in this performance. I think it was a huge surprise for the company. We are way above budget. The good thing is that this sets an amazing momentum for the year. The comps have been very good. The digital is accelerating.
The price increase will allow us to do very well with inflation, with the G&A increases we're doing to support the new strategic program. I think the business is really structurally, it's on a very strong pace and this is poised to be a very good year as a result of that. I think the most important thing is not the year, it's not the quarter, it's the long-term business that we're building. It's the combination of the new pharmacy with the marketplace, with the health platform.
We are only in the beginning. I think we start to see the early effects of the new pharmacy. What supports this kind of amazing comps is digitalization. No doubts about it. We're already harvesting what we planted on this regard, but I think we are only planting when you think about the marketplace, when you think about the health platform.
This is still year zero of the marketplace. I don't know how next year will be. Maybe next year starts to make a difference. This is only almost pre-operational. I have no doubts that the marketplace will be very meaningful for our future. There's a tremendous optionality there. There's a tremendous optionality from the health platform.
Obviously they'll have their own pockets of profitability. Rather than look at the vertical profitability of separate businesses, the beauty lies in putting all this together. In the end, this is all about increasing the customer lifetime value. We have 40 million customer with the highest shopping frequency in Brazilian retailing, and by adding the digital, this frequency and the spend is further increasing. By adding more and more products in the marketplace, it will spend more and more.
People start buying in the marketplace without even knowing they are in the marketplace. They don't have to know we are in the marketplace. They just come to us because we are a high-frequency channel. They find out we have this amazing offering, and then they find out they are to repeat, and then they find out we are in the marketplace.
This is a cycle that happens, but the marketplace frequency will sum up to the pharmacy as well, just like the platform frequency will sum up to the marketplace and for the pharmacy. In the end of the day, despite of what we can achieve on a vertical basis on each of these three businesses, the combination is hugely synergistical, and in my view, this is a game changer for the company. This is not an easy strategy to execute.
This is not a cheap strategy to execute. We have the financial commitment to do what it takes. We are enhancing our team. We are enhancing our digital area. We are enhancing our governance to support all this effort, but we are very optimistic with what we can achieve.
The previous 10 years of the original shareholder agreement have been amazing in a more traditional retailing side. We still will build upon this traditional retailing site, but now we are adding a lot of platform elements to them that I think will be transformational in the future. Thank you all for attending the call, for your support as shareholders, and our IR team are available whenever you need us. Thank you very much.
The RD People, Health, and Wellbeing conference call is now finished. Thank you very much and have a very nice day. You may disconnect now.