OVS S.p.A. (0OV1.MU) Earnings Call Transcript

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the OVS First Half 2020 Financial Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Stefano Beraldo, Chief Executive Officer of OVS. Please go ahead, sir.

Good afternoon and welcome to this conference, which, from my side, would be as shortened as possible given that when things are doing well, it doesn't worth it to spend too much time in self congratulating. So basically, I think that we must be happy also as a signal of the country resilience to the pandemic crisis that from the day of the opening, as of this -- I can say, as of today, sales level has remained more or less in line with last year. So the second quarter generated this minus 18% that corresponds to the days of lockdown, and also August and September with some internal differentiation. But overall, generated positive sales, slightly positive versus last year. Even more important, but I think that the resilience of sales in this moment is probably the most important signal. That means that the company perception continues to be the perception of a brand that deliver goods, which are somehow indispensable, not only discretionary, consumption-related, but also basic product that people needed to solve daily family issues, which is exactly the positioning of OVS as a family brand. Worthwhile to notice that contrarily to water some time, some people think, which is that OVS is not developing an appropriate online strategy, I believe that the growth, which has been experienced, and, by the way, which is continuing in these days, even if at a lower pace compared to the 86% that we posted during the third quarter, demonstrates that once people needed to buy digital, they go OVS. They buy OVS. Once people don't need it, doesn't need to buy digital, they go in the store, given that we have more than 1,000 stores in the country. Profitability-wise, 2 elements that was being underlined a great discipline in avoiding fighting with other brands in markdown. As we announced, even to our competitor this time during the lockdown period, we were not supportive of a strategy of a heavy markdown after the reopening. And we remained consistent with this declaration, cautious that people that were stopping -- they're buying for 2.5 months, where we're subject to be requiring new goods independently from the price, and this happened. So this is the first reason why we had much better gross profit, coupled with the decision to postpone the sales to August, which has been another good decision because I can tell this now that not only we posted a much higher gross margin in July, but also in August, the dynamic of the top line has been so healthy that in spite of higher markdown compared to August this year, obviously. The absolute margin generated has been in line with the one generated last year, which is, in my opinion, a good demonstration that the postponement of the sales has been very fruitful. Then obviously, cost control at any level, only small part generated by cash integrity owners or by the state, and in the biggest portion generated by a lot of actions like reduction of the timing of opening the store. We had many stores which has been opening 1 hour or 1.5 hours less compared to the normal because we didn't want to over-deliver a level of service to our customer and trying to do this, the impact of the sales reduction has been very modest, but the cost of labor reduction has been really material. Then hovered reduction, then rent reduction, et cetera. So all the cost lines has been interested by this exercise. And finally, as we said, I believe that even if we were conscious that we should have received the new financing from the state because we had all the condition to justify, to legitimate these assumptions nevertheless, we decided to be extremely conservative in the working capital management. And last, by managing the payables and cost in a very prudent way without incurring in any kind of tension with our suppliers, and we must be thankful to their relation with us, thanks to which we didn't experience any trouble in either services or delivery of goods. On the other side, I think that it was also underlining the capacity that we had to activate flexibility in the way we manage our sourcing by reducing in seasonal order so -- and this is only because as some of you might have been -- might have the patience to listen. We activated more and more in season buying in season order and we have been able to stop and/or delay deliveries in the month of May, June to the advantage of the inventory. In fact, the inventory increase has been extremely low compared to the potential effect on the inventory, which has been -- which should have been generated by the lack of cost of goods sold, basically, the lower sales level generated by the lockdown period, more than EUR 200 million should have implied almost a highly 90 -- EUR 100 million of higher inventory. And finally, we didn't experience such a big increase and inventory increase has been only, I think, EUR 40 million something like that. I think that our presentation is giving you a lot of evidences of the main driver of -- for the main results of the actions, which I summarized. Maybe it was only to add a couple of points, we wanted to introduce a couple of slides relating our physical and digital customer experience by saying that we believe that in Italy, still, the demand for value product acquired through the online channel is very limited. There has been a strong increase during the lockdown, reported by Sita Nielsen, et cetera. And we enjoyed a very high increase during the days of the lockdown. But according to our sources, once the lockdown has been over, even the growth rate of this market has been very modest. As of today, according to the last figure, the market in July, August is growing by 15%, 20%, and we are growing by 50%. And this probably is also driven by some new feature that we introduced in our digital experience. We believe that in this moment, we are very well positioned in order to be able to enjoy, if any, material growth of the digital market will characterize our country. And in the 2 pages, we tried to provide you a summary of all the services that we are opening to our customers. And once we compare, which I'm doing regularly, with other international players, which are very active in the e-commerce. I don't think we are second to them. I don't think it's very important, but Corriere della Sera yesterday or 2 days ago reported OVS as one of the most interesting or best website. As you can see, after pulling beer and a few others, we are #6, better than Bershka, Stradivarius, Zara, H&M, et cetera. I don't pay too much attention to the statistics, but at least they don't consider the website of OVS as the last or the worst in class. Another important aspect that I -- we didn't mention in our press release is also maybe giving to the one of you that might have a curiosity an answer. I ask to myself every month, is it still interesting to open new stores in this challenging environment? And the answer is, yes, to the extent that the new stores are located in very attractive catchment areas that, in many case, are second-tier catchment areas now with a lower competition or to the extent that they are the result of a kind of, call it, cleaning of our network. We are continuously trying to improve the quality of the existing network. And so if in one side we are opening still some store, we are also involved in a plan of reducing the number of stores. And in this moment, there is such a huge availability of space at very attractive rate in the market that we gave 30 notice of termination to lenders at the aim -- with the aim of -- in part of that, just negotiating better the rent. But in most of them -- because we really want to stop these operations because we want to relocate in other stores. With this activity, we will close -- we foresee that we will close about 30 stores in the next 12 months for a total turnover of EUR 20 million, and the EBITDA, which is related to these stores, also after the pandemic crisis, is going to be 0. So some of the stores were losing EUR 20,000, EUR 30,000, EUR 40,000 each. So very small amounts. Some of the stores we're making, EUR 20,000, EUR 30,000, but we are not interested in keeping stores with EUR 20,000 store EBITDA. So basically, this activity will generate a better quality in the profile of the store network. And we've improved -- we generated a bit of an accretive effect on the EBITDA by reducing the working capital involved. Maybe as a last couple of comments, already I told something regarding the sales in August and September. The sales, as of today, August and September as subsequent events, are slightly positive as a combination of a very good August, a very good start of September. Then with the exception of the last 3 days, we had a negative performance only generated by 2 aspects, in our opinion. Up to 3 days ago, weather was very warm in Italy. And after the first decade of September, normally, customer buy only if weather is supportive, start maybe raining or summer for the day. But even most importantly, the delay of the school and the confusion with the school start, that created a sort of disorientation in the customers. But in the last 3 days, sales are up versus last year, again, because the weather is normalizing and getting a bit colder. Also, I remember that last year, September was a very, very good year. So it was a difficult comparison. A couple of words about Piombo. As you might have seen from the press Piombo corner has been opened. And this is a very important step for our company. I think it is the first time a company value positioning like OVS is cooperating on a structural way, on a systematic way with the designer, not making just capsule, but creating the condition for a permanent cooperation and the typical customer to which we aim to be able to discuss these with you guys. So people which are between the 30 and the 50, people which are either lawyer or bankers or commercialista, professionals. So basically, people who have the need to dress well, but not necessarily with the passion to spend crazy amounts like managers or myself are doing. So we hope that with this strategy, we will be able to attract millions of Italians, which maybe yesterday were only looking at Boggi or I don't want to say other names. So I think in this moment, OVS, an adult or a young adult can find an excellent combination of quality and style at incredibly affordable prices. And for the time being, that's it. So happy to receive your questions.

[Operator Instructions] The first question is from Domenico Ghilotti with Equita.

A couple of questions. The first is related to the trend in the gross profit. You were commenting, you were explaining that cost -- the price discipline was key. Should we expect -- so the gross profit to continue to be up year-on-year also in the second part of the year. So are you sticking to this price discipline? And the second question is on the top line performance. So if I'm not wrong, so your guidance of around EUR 1 billion should suggest much more of a prudent outlook for the second half. So I wonder if you are -- say, what are the reasons why you are sticking to this guidance? Or why don't you think that the current, say, stable, flattish performance or even slightly positive you're commenting is more a reasonable guidance for the second half?

On the gross profit, I think that if we have no surprises from the market, which might force us to change our strategy, we will continue being very disciplined in the markdown. So we heavily reduced our total intake since the period of the pandemic. So we decided to be prudent to stop some order. And so we are starting the second half with a lower merchandising compared to last year. And as you remember, the portion of the merchandising that we didn't order is just the -- what we call the reward. So product that was already in the inventory last year, which has been included in the planning activity as new. So basically, there is no reason in this moment why to believe that we have to increase markdown compared to the price strategy. During the Black Friday, the idea is not to be very aggressive. And an increase in markdown would only depend from a very bad performance in the months of October, November and December, in which case we should be forced to increase much more in January. But in terms of strategy, we don't expect to change this approach to markdown. Nicola, are you suggesting me something regarding -- Nicola, do you want to mention?

The second half is to reach EUR 1 billion. That is the guidance. So last year, we performed EUR 720 million sales in the second half. If we consider embedded sales in the first half, it's about EUR 675 million to reach 1 billion sales.

Which means EUR 50 million less, which means out of 727% lower sales. I think that given the number of -- given the numbers of the epitome in Italy, still now it's -- I think it's prudent to continue assuming this. And this is also our assumption in terms of intake. So we have acquired goods in order to comply with this expectation. If the market will enable us to do better, this will be extremely healthy, not only in terms of top line and gross margin, but also in terms of inventory because the total intake we committed to buy for the second half is coherent with these assumptions.

The next question is from Luca Bacoccoli with Intesa Sanpaolo.

Two questions from my side. The first one is on the top line trend during the first month or better in the second quarter, which was really positive, and I was wondering if there's any trading down explaining the flattish sales in the second quarter, which could also have some positive spillovers also in the next 2 quarters. And the second one regards the cost-cutting measures. On the slides, you mentioned EUR 25 million savings, cost savings. I was wondering to what extent those EUR 27 million savings can be replicable also in the 2 next quarters, given that the Cassa Integrazione is going to be probably lower. And if these things are okay, you should provide an increased service to the customer.

To be honest, I think I missed understanding the first of your question.

Well, I'll try to rephrase this in this way. For sure, OVS offering is for -- has a low session content. And so people buy OVS plans or within brand because they need it. So I was wondering if, in addition to that, there are some customers which are falling down. So they are asking for stuff which cost less because of the uncertainty of the economy. And so if this is the case according to you, because this is really, I think, difficult to understand, to continue also in the coming 2 quarters.

Yes. Now I got the meaning of your question. It's difficult to predict in which amount in this extent, the sales that you risk to lose because of the crisis will be compensated or more than compensated by trading down effect. For sure, the introduction of things like Piombo are giving an answer exactly to the expectation that there will be in the market a need of trading down from a part of our customers. How much this has impacted the second Q? I believe that this depends more from the fact that we are -- our position is less fashion-sensitive, less even kind of macroeconomic trend sensitive because, basically, a material amount of the stuff that people buy in OVS is in between a fashion item and a commodity, and we try all the time to provide to commodities the fashion touch. This is our mission. But we don't miss realizing that once we sell kids, for instance, we sell things that mother needed to buy because the kid has born or because the kid is changing size. So basically, what we have seen in the second quarter has been a decrease of traffic, a heavy decrease of traffic and a very high level of franchise from our customer because less traffic and much higher conversion rate, much higher ticket means that we didn't meet people that had just a pleasure to make it work and to have fun when they buy, but also that we satisfy the primary needs. So I think this is a bit coherent with our positioning. What we try to insist doing is to put kind of a twist in the quality of what we do in order to convince also people which are looking for something which is nice, to buy it, and this is the trading down maybe effect. But on the other side, I believe that the biggest explanation in the second quarter dynamics is that OVS is the brand of Italians, most of Italians, when they have to make a choice, once under pressure because of the unemployment, the risk, they want to increase the rate of savings, and they want to be more disciplined in what they buy. They know that if they buy OVS, they buy quality. They buy prices, good prices. They buy a reliable brand. So I think that this is the most important explanation of the dynamic in the second quarter. And as far as concerning the saving, even here, not easy to tell how much of the total saving will be permanent. There will be some of them that will be permanent. All the headquarter reduction, say, EUR 2 million, EUR 3 million maybe, is going to be permanent, for a total year effect of about EUR 10 million. While another important rate of the savings has been generated by the reduction of the time shift, less hour paid in the store personnel, and we hope that this reduction will be temporary because we hope that with the recovery of the market, which we assisted, for instance, in August, we will bring to the benefit of the profit and loss a higher top line and gross margin, but we will also have some labor cost increase linear with the performance of the sales. In other words, in the second quarter, I think that we reacted to the sales reduction in a way that we don't want to maintain forever because, otherwise, it would mean that we are not providing an appropriate level of service. But let's say, as follows, if needed, we will continue to activate a similar cost reduction because, as I said, the impact of Cassa Integrazione benefiting the second quarter has not been very, very important. And all the other cost reduction measures will be continued, if necessary, and gradually released, if not necessary.

The last question is from Francesco Brilli with Intermonte.