Lojas Quero-Quero S.A. (LJQQ3) Earnings Call Transcript

Good morning, everybody, and thank you for holding. Welcome to the earnings results conference for the third quarter 2025 of Lojas Quero-Quero. I am Igor Sehn, Financial Planning and IR Management. With me today are Peter Furukawa, the CEO; and Jean Pablo de Mello, the CFO and IRO. We're going to begin with the presentation on Slide #3. As part of today, first of all, we're going to speak about our pillars, followed by the topics of expansion and projects. Ensuing this, we will present the quarter results and then go on to the Q&A session. [Operator Instructions]. We will now go on to Slide #4, and I'll give the floor to Peter.

Good morning, everybody. It is a pleasure to be with you today and share the results of the third quarter '25 in a business environment that unfortunately continues to be challenging, but we continue to act with discipline and our model. First, we'll speak about our pillar. First, market gains. We had a difficult semester with very high interest rates compressing revenue and restriction in credit. We had a drop of 2% in same-store sales with an 11.6% decrease in the 9 months of the year. We had a growth in the third quarter of 10%. We opened 5 new stores in the quarter, and this reinforces the confidence in the regions where we have and confidence in our business for the long term. Secondly, we have credit and collection excellence. We're working with control delinquency ending with 11.7% in our overdue VerdeCard portfolio. These are sold particularly in the south of Brazil. Now the high interest rates and the macroeconomic scenario have impacted this category. A percentage of the income of the consumer is now taken out by the cost of interest rates vis-a-vis the past. Our credit portfolio grew by 14%, but we continue with a default under control of 11.7% for the period. Our profit totaled BRL 226 million, reflecting a drop in sales and because of the increase in funding costs, we were able to control selling expenses, which increased by 5% and administrative expenses increased by 4% below inflation in the third quarter. We're still working with operational adjustments to align our cost to the new market reality. Now regarding the pillar of digital retail and innovations, this represented 25% of our sales in line with the plan. And we concluded the creation of the new stores with a new environment. Now this is a commitment that we have of offering a new experience in our digital store. If you visit our site, you will be able to see the changes in how interesting it is. In high performance. We trained 16 store managers, 23 store managers are undergoing training. And we have 339 employees that are part of our manager development program. We always believe in hiring good people and training them so that they can grow in our company. This shows our continuous commitment and the meritocracy that we price in the company. In the next graph, you can see the evolution of the number of stores. We are at 584. We had 19 new stores opened. The new stores were in Rio Grande do Sul and Paraná, and mainly in the smaller cities. We also refurbished 22 stores, 6 in the last quarter. We continue to focus on the expansion of smaller stores and municipalities with 100,000 inhabitants or in 56% in cities with lesser inhabitants. I will now give the floor to Jean Pablo Mello, who will speak about our financial results. Jean?

Thank you, Peter. Good morning, everybody. I'm going to go into detail on the results of the third quarter and go on to the next slide to speak about revenues. As was mentioned, it's important to keep in mind our background last year, we had a sales growth after 2 very difficult years 2022, 2023. In the second and third quarters last year, we had steep growth because of additional demand that arose from the flooding in Rio Grande do Sul, especially in electro-electronics and furniture. We began the year with 2-digit same-store sales growth in the second semester, we have a high base of comparison. We had a drop in same-store sales. And now in the third quarter, we see 2 factors that have impacted this drop in sales. First of all, as mentioned by Peter, the high base of growth, 11.6% growth last year and a highly challenging macroeconomic environment. In this third quarter, we began to see the impact of the increase in interest rate. And as our products have a higher average ticket and depend on credit and depend on the macro situation, we observed these 2 impacts leading to a negative same-store sales. So we had a drop in sales, but revenues from financial services and credit cards continue to grow in levels similar to previous quarters. I will speak about the default level subsequently, but we have had growth in these 2 business activities. We have a drop of revenue of 4% in the retail in the first half, but accrued up to present. We have grown 4%. In the next slide, we will see an effect that was already taking place in previous quarters, a compression of our margins because of the situation for 2 reasons. In the retail environment, the drop in income, leading our margin to 22.2%. We had 22.5% margin over net revenues. Of course, this below previous periods once again because of the highly competitive macro scenario. And in financial services, we have an increase in the cost of capital, exerting pressure in financial services. We also see that the margin has become stabilized, seems to be recovering and going forward, when we have a drop in interest rates and the cost of capital. Here, we have 28.6% of gross margin over revenues. With a stable situation vis-a-vis the previous year. In the following slide, it's important to highlight the work that has been carried out in the last few years, a work focused on pillars to maintain our expenses under control. Here, you see the total growth of expenses was up 2% for the quarter. We have expenses with sales growing 4.6%. Now despite the expansion with the 19 stores, we have inaugurated expenses with sales have grown 4.6% in this quarter, below the accrued inflation of the period and SG&A growing 4.3%. Now as Peter mentioned, we're working towards controlling our expenses. This is a continuous process, and we will continue with this going forward to maintain a well-balanced company structure. In the following slide, now once we have controlled expenses, the drop of sales leads to a drop of EBITDA and adjusted EBITDA. Accounting EBITDA ends with BRL 35.4 million, a drop vis-a-vis the BRL 58 million of the previous year. And this drop due to the drop of sales in the retail sector. And in adjusted EBITDA, BRL 151 million, a drop vis-a-vis the same quarter and a slight improvement compared to the second quarter of this year. To go on to the next slide, we see that this drop of EBITDA along with the present scenario and the level of interest rates increases pressure in our financial results. We have an adjusted net income, a loss of BRL 26 million. And in terms of accounting until the new months -- in the 9 months of 2025, we have BRL 43.4 million assets over the RCLL that we have not acknowledged in accounting terms. As soon as there is an improvement in the scenario, we will recognize this asset. So we have a scenario with loss in net income. But within the levels we observed in previous quarters. Let's go on to the next slide. Although this drop in the retail market and this challenging macro environment are there, one of the company pillars is to maintain default under control. We have a growth in our portfolio, but we have maintained default under control. The portfolio growing 11%, interest increasing 4% and the 90-day default is 11.7%. So the same delay that we signed in the second quarter and highly aligned with what happens in the second half of the year. The portfolio continues to grow. We see a growth of revenue, as I mentioned previously. But what is important that all of this is happening with a default under control. Macro situation is difficult, but the default is under control, especially in the retail segment and the stores that maintain this portfolio very robust. Now this growth of portfolio has had a continued use in the VerdeCard credit card. They're being used in the store on us and of the store of us, it's become the main means of payment in the company. And it maintains a very good relationship with our customers. So we observed this growth in the third quarter. The volume was 70% and 22% for the 9 months of the year, up to present. We have more than 4.2 million credit cards issued, and part of these continue to be active because our product has a lower periodicity of use through time. We go on to the next slide, we carried out investments totaling BRL 12.9 million in the third quarter and BRL 38.9 million for the year so far. This includes the opening of 19 stores and the refurbishment of additionally 22 stores. Now the store opening has decreased. We normally open 20 to 30 stores. We have already opened 19. We are going to comply with our guidance for the year. We focus on the use of our cash flow, highly aligned with the macro environment as demand continues to be weak in a challenging macroeconomic environment, we tend to decrease the store opening quarter-on-quarter. Here, you see our cash management. We ended the third quarter with BRL 531 million of gross debt and adjusted net debt. Now we normally consume cash in the first half of the year and consumption of cash in the second half of the year because of the natural sales process in the retail segment. We carried out 2 debenture issuance of BRL 396 million with 5- and 6-year terms. Now we are maintaining our present day spread, and this will lengthen our corporate liabilities. We ended the third quarter with BRL 145 million debt in the long term. We will now go on to the next slide. And I would like to return the floor to Igor, who will moderate the question-and-answer session.

Well, thank you, Jean. We will now go on to the question-and-answer session. [Operator Instructions] The first question is from Vinicius Pretto from Itaú BBA and will be answered by Peter.

Which has been the sales performance among different states and categories? Is there a change of trend at this beginning of the fourth quarter?

It's good to be conversing with you again. I have not observed significant differences in October vis-a-vis previous quarters. Now between the states, of course, the greatest drop in figures is in the state of Rio Grande do Sul because of the flooding last year. It seems that the drop in that state is greater. But in truth, it has grown more. Santa Catarina and Paraná grew more, and there are some stores that are maturing. In Rio Grande do Sul, that impact is less. I think it is worthwhile speaking about an initiative that we put in place at the beginning of the year. We carried out 7 tests going in different directions of price, product, plans and much more. And 2 of these tests basically gave us good results. We were able to increase the sales considerably with our Elo card through the card activation. This is very important for us as it brings customers to the store. The second test, I'm not going to go into details, but it -- the tests have shown some leverage. I don't know if this will apply to all of our stores to leverage them, of course, but this does represent a positive piece of news at the end of the year, dependent on the macroeconomic scenario. That is what I can tell you about that question.

The next question is from Vinicius Pretto from Itau BBA and will be responded by Jean.

If you could speak about the main driver for cash consumption in the third quarter? And how are you thinking about expansion going forward with a weaker consumption and high interest rates?

I hope you're well. Now for the short term and focusing on the third quarter, we have a very strong impact in the short term. And in the very short term, when there is a drop in sales, of course, we presented a lower sales volume in same-store sales because of the macro environment and because of a more difficult comparison base with third quarter '24, which means we're consuming more working capital. Once we have an improvement, we should have a better cycle in working capital, and we will generate more cash. Of course, this is what we tend to see because of the seasonality of quarters. And it is somewhat different because of the drop in sales in the third quarter. But all of this is under control, and we will maintain a debt lower than the one we're operating with at the end of the year. Now this is what we historically see in terms of cash consumption. Alongside with this, when we speak about cash and expansion, this year, we had a specific guidance. And as I mentioned, the pace of opening of stores per quarter has decreased. If the scenario continues to be difficult with high interest rates, as we have done historically, it's very possible that we will make adjustments in our pace of expansion, waiting for better moments to make investments in store openings. We don't have guidance or a projections for 2026. Everything will depend on the macro environment. Should there be an improvement, we will be interested in open stores. If it continues to be difficult, the store opening will decrease.

The next question is from Vinicius Pretto from Itaú BBA and will be answered by Peter.

Which is your initial expectation regarding the program Reforma Casa Brasil, Reform your House Brazil. And we have another similar question. Which is the stance of the company because of this new government program for the refurbishment of houses?

Well, we're taking a stance with all of our strengths brought together for this new project. Now I think it's worthwhile underscoring, Pretto, that in the past, we were one of the most important representatives of the construction card from Caixa Econômica Federal in the south of Brazil. We asked all of our managers to visit the banks in their cities and to bring the managers from the bank to our store to explain how that loan would operate. We had a very positive response to this. We held several events at our stores because of this. We're getting ready with a more aggressive basket of products to gain market through this government program. We still don't know how much money, which is the amount that will be released, but we want to make the most of this opportunity. We might have a positive response. The programs from the government in the past were not very successful, but we can't speak about the results. Perhaps going forward, we can comment somewhat more about what is happening in this segment. However, we're quite enthusiastic about this, working arduously to implement a large number of initiatives to achieve a large amount of these loans offered by the government. That is our stance.

The next question from an investor will be answered by Jean.

You imported in the third quarter '25 with a delay index very similar to the second quarter. Now what explains that in this very challenging macroeconomic scenario?