Lojas Renner S.A. (LREN3) Earnings Call Transcript

Good morning, everyone. Let's begin the Lojas Renner S.A. video conference call. With me today are Fabio Faccio, our CEO, and Daniel Santos, CFO. Before giving them the floor, I'd like to make some announcements. This video conference call is being recorded and translated simultaneously into English. We will show here the presentation in Portuguese, so for those following the call in English, the English version can be downloaded from the chat and from our IR website. Questions from journalists should be directed to our press office through the number 11-3165-9586. Before proceeding, let me mention that forward-looking statements relative to the company's business perspectives, projections, and operating and financial targets are based on beliefs and assumptions and on information currently available. They are not a guarantee of performance, as they depend on circumstances that may or may not occur. During the Q&A, questions may be asked live. With that, I turn the floor to Fabio.

Good morning. Thank you all for joining us. Our Q3 was more challenging than the first half of the year and much more challenging than we expected, with our consumers being even more selective, greater pressure on household income, and increasing household debt. At the same time, we had increased competition, mainly from international platforms. Retail net revenue was down 1.6%, minus 0.7% in apparel compared to Q3 '25. Our sales performance was very positive relative to our expectations until the end of May. In June and July, we saw a sharp slowdown. I'd like to remind you that these were FIFA World Cup months. During the quarter, August and September, we saw some improvement leaning towards the end of the quarter in September, but still way below our projections. For us to adapt to the current consumer and competitive landscape, we have adjusted our product offering, both in terms of assortment composition and pricing -- price pyramid while preserving the brand positioning and the attributes of fashion, quality and differentiation we -- we have more items that are at an entry level of the price pyramid and with more competitive prices and differentiated quality. Even though sales fell short of our expectations, we continued our structural progress. Even with greater commercial intensity, we had another quarter with record gross margins for retail and apparel. Our gross profit decreased by 0.9% and earnings per share decreased by 7.8% for the quarter, but with a 5.8% increase over the first 9 months of the year. We had another quarter of sequential growth in last 12-month ROIC, which reached 14.8%, up 0.4 percentage points. In the first 9 months year-to-date, with the interest on equity resolution and share buyback, we distributed about BRL 1.2 billion to shareholders or 128% of our net income. We have seen significant volatility and a high degree of uncertainty in the macroeconomic and competitive landscape. In our view, this type of environment reinforces the need for a prudent approach to projections. In this context, we decided to discontinue our net revenue growth guidance, both for the year 2026 and also for the period from 2027 to 2030. It is important to highlight that all other projections remain unchanged because they are supported by our continued focus on improving operating efficiency, disciplined investments and the structural opportunities that we have identified to strengthen profitability and returns. Among the major highlights of the quarter, we had the launch of the spring/summer collection at Renner and the integration of fashion, culture and influence. Our new collection brought unique materials, contemporary tailoring, premium and technical fabrics featuring the latest fashion trends. In addition to launching the new collection, we also achieved strong brand visibility through limited editions, licensed and collabs, which in addition to visibility, generated a very high sell-through level by combining signature fashion, desired products and affordability. These initiatives strengthened our connection with consumers and reinforced Renner's relevance as a fashion brand. Youcom also strengthened our connection with young audiences, influencers, creators and all communities. We had in-store activations in specific stores during festival season, which generated foot traffic and engagement in social media. And the jeans change campaign also reinforced the brand's positioning as the go-to destination for jeans, highlighting quality, durability and more sustainable processes. In our digital channels, we maintained a consistent trajectory, outperforming brick-and-mortar stores, reinforcing even more our omnichannel approach. We have an increasing number of AI-based features in our websites and apps such as photo and content creation, product recommendations, image search, the virtual fitting rooms and fashion assistance. These tools personalize our customers' shopping experience and drive higher conversion rates. During the quarter, we stepped up promotional activities to support product sales as well as some onetime off initiatives to drive traffic on digital channels, particularly during double date events. We made progress also on social commerce initiatives, which are very key to drive engagement and conversion rates. Examples of these actions were activations and live streams on TikTok Shop with very favorable results. In fact, yesterday, we kicked off a 48-hour Renner marathon. In August, we launched our new Realize card, which further strengthens our connection with our customers, offering a simpler, more phygital and integrated experience with integration into major digital wallets. This is an important evolution for Realize for our retail customers. After the pilot phase now in the fourth quarter, we began to roll out activations in all new stores, bringing us a rollout to the entire customer base is expected throughout 2027. We continue to make progress on our physical expansion. To date, we have opened, in 2026, 30 new stores just this year: 9 Renner stores, 17 Youcom stores and 4 Camicado stores. We remain on track with our plan that we disclosed in the beginning of the year to open 50 to 60 stores in 2026, adding all brands, 22 to 30 Renner stores, 23 to 25 in Youcom and approximately 5 Camicado stores. Most of the openings are concentrated now in Q4. And we expect to end the year of 2026, not only within the range of store target that we disclosed, but most likely closer to the upper end of this range. We've also made progress on store renovations with the completion of 5 major Renner stores in Q3 delivered. This year, we've renovated 23 stores across all brands. These renovated units initially reduced sales when they're being renovated. But once they are reopened, we have seen an average increase of 5% to 10% in productivity per square meter in these renovated units. In addition, we've been able to be more efficient in using CapEx, both for renovations and for new stores, which improves even further the return on these investments. All the initiatives that I've mentioned here, just as an example of focus on gaining market share while increasing profitability. And this is the path, the guide and the journey we have now and ahead of us for the coming years. Now I'll turn the floor over to Daniel, who will give us more detail on the third quarter.

Thank you, Fabio. Good morning, everyone. This quarter saw revenue decline by 1.6% and apparel revenue by 0.7%. This reflects a reaction to the impact of the World Cup, which we mentioned in our last earnings call, but also more challenging competitive environment in consumers who are now much more price sensitive. The competitive environment also remains challenging, primarily due to cross-border pat. Given this consumer and competitive landscape, we have taken a series of initiatives related to product assortment and pricing strategy, seeking to expand our range of entry-level items and to adjust our core offering with a more versatile and accessible concept. We have also strengthened our commercial initiatives such as progressive offers and bundled deals. All of these activities aim to tailor our offerings to this more challenging consumer environment while respecting our strategic brand positioning and our fashion attributes in our collection. As for our other business units, Youcom posted 14% growth. This is significant growth given an increasingly competitive environment in the youth segment. And I'd like to highlight the contribution of the expansion of new stores to this growth. They contributed a lot to Youcom's growth in this period. Camicado grew by 1.5%, which -- for this category, home decor category is a strong commercial performance. Of particular note is the increase in market share for the Home Style brand, which was key for this growth. It is also worth highlighting our growth in the digital channel. It continues to grow at a rate above the company's average, with 4.7% growth and digital penetration of 17.5%. As for our gross margin performance, we closed the Q3 with a 0.4 percentage point increase in the retail gross margin, which reached 55.5% and a 0.3 percentage point increase in the apparel gross margin, which achieved a mark of 56.5%. The expansion in total margin as well as in apparel margin is the result of the efficiency of our operating model, coupled with a positive impact of exchange rates, which allowed us to balance all of these promotional initiatives and commercial activities, which I mentioned earlier. Even in this more challenging sales environment, we acted quickly to adjust our product assortment. We managed to end the third quarter with total inventory growing 6% in value and just 2% in pieces. The average age of inventory was higher than in Q3 '25, but still at healthy levels in our view. This shows that the company was able to respond and adapt to this more difficult sales period. Youcom recorded gross margin of 58.7%, a decrease of 1.6 percentage points year-over-year. And this was largely due to the promotions and markdowns necessary to balance the total inventory levels of Youcom. Camicado meanwhile, reported a gross margin of 58.3%, an increase of 2.1 percentage points. This increase reflects the success of the company strategy and commercial execution, which was focused on its private label Home Style, which now accounts for about 90% of Camicado sales. As to our expenses, in the third quarter, our operating expenses decreased by 1.1%, with a 1.3% increase when we exclude the effect of the lower provision for the profit-sharing program, PSP. It is worth noting that if the company had grown considering inflation plus expansion of area, Renner would have increased expenses by approximately 6%. Thus the 1.3% increase reflects our disciplined approach to expense management as well as the progress made in implementing our efficiency plan, either through initiatives on various fronts, including renegotiating contracts with suppliers and achieving productivity gains in store operations, logistics and administrative functions. I would also like to highlight that 75% of our stores are equipped with self-checkout. This initiative enables greater productivity in our brick-and-mortar stores while also providing a much smoother and more satisfactory shopping experience for our customers. The company reaffirms its commitment to achieving cost dilution of 2.5 to 3.5 percentage point by 2030. As for our total retail EBITDA, total retail EBITDA was BRL 530 million. This represents a 3.2% growth, resulting in an EBITDA margin of 17.5%, up 0.8 percentage points. Specifically, this quarter, our operating revenues contributed a positive nonrecurring impact from the recovery of PIS and COFINS tax credits. Now moving to Realize. As for Realize's earnings, we ended the quarter with an operating result of BRL 40.7 million. This figure is 49% lower than the previous year, but in line with our expectations for Q3. This result reflects stable revenues, driven primarily by a higher quality portfolio with lower overdue revenues. Expenses growing at a rate below inflation and a 13% increase in losses. But this is largely due to a shift in the seasonality of the portfolio's write-offs, which shifted from 360 days to 540 days after we complied with the new resolution of the Central Bank Resolution 4966. There was a 1.9 percentage point increase in the share of past-due loans and a 1.7 percentage point increase in Stage 3 loans. Stage 3 loans reflect first, a 1.5% drop in the loan portfolio and secondly, the maturation of previous loan cohorts compared to lower origination of performing loans. This next slide aims to reinforce our trust, our confidence regarding the quality of our portfolio. On the left, we have the evolution of short-term delinquency of Realize. We can see that it remains at healthy levels with little change over the period shown. The chart on the right reflects the quality of our new loan originations. The over 30 indicator shows that new originations continue to have low delinquency rates, reflecting what we expect a more selective credit granting process focused on medium and low-risk profiles, and that's why we are operating this way. As for the net income for the period, the company reported net income of BRL 246 million. This is 1.8% lower than the same quarter of the previous year. Our earnings per share was 7.8% lower year-over-year. It is important to note that this quarter, Q3, the company distributed BRL 415 million considering interest on capital and share buyback. And for the first 9 months of the year, this total reached BRL 1.2 billion, representing approximately 128% of net income accumulated for the period. To date, the company has executed 50% of its share buyback plan announced in December of last year. It is worth reiterating that the company maintains its capital distribution guidance unchanged at between 50% to 80% of net income for the 2026-2030 period. As for capital allocation, the company is proceeding with its store expansion plan. Over the past 10 months, we have opened 30 stores, including 9 Renner, 17 Youcom and 4 Camicado stores. As a reminder, as previously mentioned, just as an example, the 2024 cohort of new store openings, that's a period that marked the start of a more concentrated expansion into new markets in the case of Renner. Well, this cohort is already showing operating margins slightly above the company's average. This is an indicator of the success of the strategic capital allocation choices made in this new expansion plan. Last 12-month ROIC increased by 0.4 percentage points, reaching 14.8%. It continues above the cost of capital. This continued growth in ROIC is driven by margin gains, profitability gains and higher asset turnover fueled by inventory productivity as well as working capital discipline and management. All these factors reinforce the company's confidence in achieving an ROIC target of approximately 20% by 2030. With this, thank you very much. And I'll turn the floor back to Fabi to move to the Q&A.

[Operator Instructions] question from Luiz Guanais, BTG.

I would like to follow the theme you mentioned in the beginning, Fabio, about initiatives to recover sales throughout the quarter. Could you give us more color on what has been done so that we could see the end of Q3 slightly better than in the first part of Q3. I know that there's a calendar effect that had an impact, but I would like you to elaborate more on these initiatives. And do you see any room to continue to improve the gross margin, which again was a positive highlight. Can we expect a further improvement in gross margin looking ahead after everything you've captured so far?

As regards to initiatives to recover sales, I think that there are 2 factors explaining this improvement throughout the quarter. One is more external. At the beginning of Q3, we still had the World Cup effect. The other effects continue. But the second effect is related to some initiatives that we adopted as well throughout the quarter. One of them was that we reinforced higher demand items. We have seen greater basic items and a greater demand for entry level. So we have been making some adjustments, and I want to make this clear. We are performing well in both high and low. I think fashion items are selling well, but with a lower volume and lower seasonality, lower entry-level items are performing better as well. I think that we felt a less opportunity for the intermediate items that were performing a little less. So we made fine-tuning bringing more of these entry-level items. And I think the strategy worked. We still see opportunities there. Adjustments will continue throughout Q4. We don't want to compete in prices with the international platforms because that's the game. They have a fiscal situation that we do not enjoy, but we compete with quality, fashion, renovated products and bringing our value proposition to a more attractive price so that we can be more competitive at this moment. So the actions continue in Q4. We made some additional adjustments to perform a little better in the months of November and December. As for room to grow the gross margin, I think that structurally, we do have room to grow the margin if we look to the medium term and long term. At this specific moment in Q4, we do not have an expectation to grow the gross margin. We believe that we are dealing with a more promotional moment. The month of November has many promotions. In addition to these initiatives, we are being more promotional now in the month of November. This Black Friday coming up and all of the related events in digital in our expectation for Q4. In Q4 of last year, we had a significant gross margin. So our expectation is that gross margin will remain in line with last year. Structurally, looking ahead, we do have opportunities, but it depends on many variables. We have to see what's going to happen in terms of inflation and cost. But other than Q4, which is more near term, in the future, we do see some opportunities to improve the gross margin.

Next question from Eric Huang with Santander.

I guess my first question is looking -- considering sales, you talked about some improvements and so on and so forth. But if you could help us understand, looking at the stores, where we started the quarter, where we ended to get to this average of 2.5%. Have we actually become positive? I just want you to help us think about future expectations. And my second question, looking at capital allocation and actually capital structure, given that 2027 is expected to be a more challenging year for retail and consumption in general. How should we think about payout given that the market is a little more difficult and that leaves the expansion part of the guidance was maintained. We should see a payout close to the lower range or if there is some room, would you be comfortable being close to the top of the range as has been the case throughout this year.

Thank you, Eric. About the trend in Q3, I would say that it was a growing trend. Like I told Guanais, it was not just the actions we had. We also had a different comparison basis. June still has effect of the World Cup. And the other effect, market, the economy, consumption, well, these effects of they remain, they intensify more or less every month. But since July had the additional effect given the World Cup was the worst month. And after that, we saw a gradual improvement during the quarter. But our expectation was that recovery would be even greater to have a stronger quarter, but it did post a growing trend with the positive month of September. And regarding sales growth, we mentioned some points in the earnings release, but I want to make it clear, there are some nonrecurring factors there. We mentioned the tax replacement, the fiscal tax regime for beauty items in the state of Sao Paulo. This had an effect of 0.4 percentage point impact on revenue growth over the quarter. And as we mentioned, we executed many store renovations throughout the year, specifically in the quarter, considering closed areas while renovating the stores, plus one major store that we closed because of a fire at the mall, not in our store. So if you put together these 2 factors, that add another 0.6 impact on quarter. So 1 percentage point of our sales were impacted by the tax change the in the state of Sao Paulo does not impact the gross profit and also those closed of areas due to renovation or due to that higher end mall. So these are onetime effect. So next year, we'll have a comparable base regarding the taxes and the renovations, we have practically finished that part, and we have many stores to open over Q4. I'll turn the floor to Daniel to speak about the payout.

Eric, thank you for the question. Now speaking a little about capital allocation. I think there are 2 important points to remember. First, when we look at what we have done so far until September, we have distributed BRL 1.2 billion, BRL 500 million related to share buyback. 700 million in interest on capital. This distribution practically exhausted the results we had for distribution, and they were possible given the cash position, which remains strong because we cash cow and a cash cow so far. Looking forward, first, let's talk about capital allocation. The general capital allocation strategy remains the same. We're talking about the expansion. I mean this continues to be an adequate allocation of capital. We have store openings the renovations and some digital investments, and we'll be making some special investments related to automation and some productivity gains to say by working hours or working days. And of course, 2027 is expected to be a challenging year, and we'll define the pace with which we will open the stores and renovate stores. And as for capital distribution during this call and also in the advisory to the market last night, we are reaffirming that we are maintaining the range of 50% to 80% range, reminding you that 80% is not a cap. We can operate higher than that. But it will depend on our ability to maintain a strong cash generation as has been the case so far. We're confident in our ability to manage working capital and to be able to maintain the company in a strong working capital management discipline. And so it's possible we'll operate above 80%, but we'll see how 2027 will unfold.

Next question from Vinicius Strano with UBS.

I'd like to speak about consumer finance, Realize. We see a slight increase in the past due portfolio. So I'd like to understand what are you thinking about the coverage ratio today? Are you considering reinforcing coverage in the future? And I'd like to understand the shift in seasonality for Realize. Does it make sense to think that Q3 should be a little lower. And because of the seasonality, we could expect an improvement in Realize? If you could elaborate on that. And if I might ask another question about e-commerce. There was a deceleration, a slowdown. How are you thinking about investing in digital marketing, online price strategy? What has been the TikTok Shop experience? And how can you use e-commerce as a sales driver and as a way to compete with cross-border platforms?

I'll start with Realize okay? And then Fabio will speak about e-commerce. Well, thank you for that question. Speaking about Realize it is what I think is important for us to observe and it is related to what I said before. Realize earnings came lower quarter-on-quarter, but kind of in line with our expectation. Why? Because we mentioned before, even in individual one-on-one calls with you and in the last earnings call that we have a phasing thing. When we migrated from 360 to 540-day portfolio, the write-off did not happen between Q1 and Q2 and started happening in Q3. So from now on, Q3 will be a quarter where the result will be lower when we look across the year. This is exactly what happened. And even Q1 was much stronger than it normally is. So there was a shift in the phase and the timing, but this will be the rule from now on. As for coverage, let's talk a little bit about delinquency, okay, default. We see that despite over 90-day past due loans have increased. This is the result of a portfolio that is reducing 1.5% and also a result of the maturation of the former or the old cohorts because origination pace is lower than in the past. So the portfolio changes because of these reasons. Looking specifically at coverage, we see coverage at adequate levels. We don't see a fluctuation. We don't see the need to reinforce our provisions. We follow the same criteria in prior years that takes into account the expectation of recovery of each one of the loans, depending on the status of delay. And every quarter, we review this compared to recoverability. When we do that analysis, the level of provision we have today is adequate. There is no need to reinforce our provisions.

Okay. Let me add something to what Daniel mentioned. He had it clear, but just have it even more clear. The write-offs that used to happen in Q1 are now happening in Q3. This is related to a higher volume of sales that we have, which happens in Q4 of every year. In Q4, that's where we sell the most. So we sell at 30 or 60 days. So when we write it off 360 days, the greater volume of write-offs would happen in Q1. Now it's happening in Q3. That's why there was a shift in seasonality. So Q1 was stronger. Q3 came lower and weaker. That was expected. From now on, we'll start to have a comparable basis. And that seasonality, as you asked, remains. Q1 will tend to be stronger than in the past and Q3 weaker in historical comparisons, but then we will have a more comparable basis. As for e-commerce, I think that we have been investing a lot. We have seen an improvement in conversion. Conversion rates have improved. Now foot traffic was lower than we expected. So we are adapting our actions. We are calibrating these actions all the time to bring in more foot traffic. Some actions are related to onetime of investments like we mentioned, social media, social commerce, having more and more actions there and they're giving good results. This is a matter of deciding where to invest and how to be more assertive. It's not more investment. It's more assertive investing to attract more foot traffic and increase conversion rates. And then you have the actions in general products, for example, some more promotional products and sell some products that did not sell that well. So November is a very important moment for this, particularly on e-commerce. So the actions we talked about in terms of investing in the platforms, AI, reinforcing conversions, greater assertiveness and attracting foot traffic and all actions applied to products will be applied for brick-and-mortar stores and for online. It's an omnichannel approach. And our goal is to increase conversion rates.

Next question from JPMorgan, Joe Giordano.

I'd like to explore the theme of capital allocation and understand what you expect in terms of returns. So my question is, first, I want to understand how you think the results of the new store openings are just the renovations as you mentioned. And I would like to understand the regional performance of these stores. I want to understand smaller cities, larger cities to understand how store openings will continue looking forward as you maintained the store opening guidance.

Thank you, Joe. Well, the results of the new stores, we're very happy with that. I'm very pleased. I think that the total results of the company is below what we expected. But when we look at the new stores on average, they are outperforming the average, particularly in terms of profitability. There is some dispersion. Yes, there's some dispersion among the stores. And this is not really related to this or that region. Most of the stores are opening in the South, Southeast and Midwest of Brazil. And there are some specific projects, but I think that we have learned from these dispersions and they're always looking for the best options. So we've been having good capital allocation. We should meet the store opening target for this year. We always give you a range, of course, because opening stores entails licenses and civil works. So the process can be delayed. But at this moment, our expectation is to have all openings scheduled between 50 to 60, closer to 60. There are many stores in preoperational stage. I'm not sure we spoke about that, but these are areas that we will be adding to the stores, and they will start selling. In Q3, they were just putting pressure on our expenses. But still, we see expense management efficiency, although we have an important volume of stores at the stage of pre-opening and in the stage of being pre-operational.

Let me answer that, Fabio. We treat every store as a project. When we explain the rationale of these stores, we always say there is a CapEx, a CapEx, which is a store model that has a CapEx that matches the size of the store at the cost to operate the store, leasing and labor. Leasing normally is cheaper than the base that we have. And there's another asset that we do, for example, with Realize. When we're going to open a store, we do a campaign together with Realize. And then Fabio kind of touched on this before. We have the new Renner card that is being offered at the new stores. So all new stores that we're opening now between November and December. So, they are already offering the new card, and we see the card with a higher-than-average share. We see that the volume ramp-up of these stores because the stores in a new store, there's lower competition. The store becomes almost like a fashion mall in the city. So the store matures faster. So we're pleased. And when we look at the profitability, and we follow that periodically, the 2024 open stores operate with an EBITDA margin slightly above the company's average, which means that 2 years after, we can already have an EBITDA margin slightly above the average. In previous renovations, we couldn't achieve that level of EBITDA margin so quickly. So the stores are giving us the expected return, and that's why we will maintain capital allocation to expand the footprint. We will calibrate the pace because you see, it will surely be continuous success, but we will execute this over the 5-year period, respecting our analysis. In the end of February, when we announced the Q4 earnings, we'll make it more clear the level of CapEx and the pace of store openings that we will execute in 2027.

Next question from Pedro Caravina.

Just a quick follow-up on store opening. If you could give us more visibility about store openings in the quarter. For instance, in general, you opened 30 stores. So you're expecting about 8 new ones. I understand that the concentration won't happen in the mid to the end of the quarter. And you also mentioned competition of cross-border platforms. What have you seen in terms of the competitive landscape with local players? It drew my attention, both you and one of your competitors reported earnings and expanded gross margin even in a more challenging competitive landscape. And both you and your competitor mentioned that you're offering promotions at some points of the price pyramid. I'd like to understand local competition as well.