Grupo Comercial Chedraui SAB de CV

BMV:CHDRAUIB

Q1-2025 Earnings Call

[Operator]

Good morning to all participants, and welcome to Grupo Comercial Chedraui's First Quarter 2025 Conference Call. Participating on the conference call today will be Mr. Jose Antonio Chedraui, CEO of Grupo Comercial Chedraui; Mr. Carlos Smith, CEO of Chedraui USA; Humberto Tafolla, CFO; and Arturo Velazquez, IRO for the company.

We will begin the call with initial comments on Grupo Comercial Chedraui fourth (sic) [ first ] quarter financial results by the company's CEO, Mr. Jose Antonio Chedraui and Chedraui's U.S. -- USA CEO, Carlos Smith.

[Jose Antonio Chedraui Eguia, executive]

Good morning to all, and welcome to our presentation of Grupo Comercial Chedraui's first quarter 2025 results. I want to express my sincere appreciation for the dedication of our employees, whose commitment to our strategy of offering the lowest price, the best assortment by store and delivering an outstanding customer experience is key to driving our continued growth in market share.

I am excited to share that in Mexico, our same-store sales have outperformed ANTAD for the 19th consecutive quarter, exceeding them by 90 basis points. This achievement is especially impressive given the negative impact of the Easter holiday calendar shift and considering our strong presence in the tourist-heavy southern region.

Our profitability at Chedraui Mexico also saw a notable improvement, with our EBITDA margin reaching 9.5% in the first quarter of the year, an increase of 19 basis points. At Chedraui USA, El Super and Fiesta Mart continue to exceed our expectations with strong same-store sales growth.

At Smart & Final, our marketing and pricing strategies for perishables initiated in the second half of 2024 translated into positive same-store sales growth this quarter, driven by a strong increase in customer count of nearly 4%. Overall, we're pleased to report a 2.8% increase in same-store sales in dollar terms compared to the first quarter of 2024, margin for consecutive quarters of positive sales trends.

Finally, I am excited to share that the transition of our legacy distribution centers in California to our new RCDC is nearing its completion in line with our expectations and will be fully operational in the second quarter of this year.

Please turn to Slide 4, where I will highlight key achievements of the quarter. Consolidated sales saw double-digit growth, driven by positive trends in Mexico and in the U.S. Retail Mexico same-store sales growth of 1.2% for the first quarter surpassed and adds for the 19th consecutive quarter.

Chedraui USA same-store sales posted an increase of 2.8% in dollar terms, which represent the fourth consecutive quarter of growth. Consolidated EBITDA grew 8.8% compared to the first quarter of 2024 and 12.8% without our RCDC transition costs.

Consolidated EBITDA margin of 8.4% and 8.7% without RCDC transition costs. Net debt to EBITDA stood at 0.03x. We continue with our organic growth strategy as 15 stores opened in the first quarter in Mexico. In the following slides, I will comment in more detail on these key highlights.

Turn to Slide 5, please. In the first quarter of the year, consolidated sales grew by 14.8% in Mexican pesos, reflecting positive performance across all businesses and a favorable currency impact on Chedraui USA sales. The positive currency translation resulted from a 20.3% depreciation of the Mexican peso compared to the U.S. dollar.

Consolidated EBITDA for the quarter grew 8.8% to MXN 6,256 million compared to the first quarter of 2024. EBITDA margin of 8.4% was impacted by RCDC transition costs and Smart & Final's pricing strategy. Excluding transition costs, consolidated EBITDA would have totaled MXN 6,481 million with a 9.7% EBITDA margin compared to the 8.9% in the first quarter of 2024.

On Slide 6, consolidated net income continued its positive trend, despite transition costs of the new RCDC. Over the past 4 years, net income's compound annual growth rate has been 20.8%, when excluding transition costs, net income compound annual growth rate was 23.8%.

Our return on equity was impacted by RCDC transition costs and Smart & Final pricing strategy. However, even when accounting for these items, our long-term strategic focus has driven ROE improvement, rising to 13.5% in the first quarter of this year. This highlights our commitment to creating long-term value for our shareholders. In the following slides, we will review the main highlights of our businesses in Mexico and the U.S.

On Slide 7, same-store sales growth slowed in the quarter, which was explained by softer economic activity in Mexico and the negative Easter calendar shift. Despite this, we continue to gain market share for the 19th consecutive quarter, even when considering our strong presence in tourist areas in Southern Mexico.

As mentioned, same-store sales exceeded ANTAD's results, growing by 1.2% compared to the 0.3%. Our MiChedraui loyalty program continues to offer our clients a strong value proposition by delivering tailored promotions across all store formats and strengthening our understanding of customer preferences and needs. We continue to increase customer participation in our MiChedraui loyalty program, as evidenced by the 5.6% customer growth in the last 12 months to 13.3 million members. This allowed us to recognize 75% of our sales from loyalty program customers, a new record level for the company.

Please turn to Slide 8. Positive same-store sales and a 3.5% increase in sales for area drove sales growth of 3.7% compared to the first quarter of 2024. Chedraui Mexico's EBITDA for the quarter reached MXN 3,183 million, increasing by 5.8% compared to Q1 of 2024. EBITDA margin grew by 19 basis points to 9.5% of sales due to improved inventory and promotion management, which offset higher labor costs.

I will now turn the meeting over to Carlos Smith, CEO of Chedraui USA for his comments on our U.S. operations. Please, Carlos, go ahead.

[Carlos Matas, executive]

Thank you, Antonio, and good morning, everyone. I'd like to start by providing an update on the status of our distribution center in Rancho Cucamonga, California, also known as RCDC. As of the first quarter of this year, we successfully closed 4 out of 5 legacy distribution centers, and we are on track to complete the transition process during the second quarter of 2025.

The new RCDC is now responsible for distributing both dry and frozen products, and we are currently working on completing the transition of perishable products. As mentioned in previous meetings, RCDC is critical to support our long-term store growth strategies. The total capital investment in our RCDC will be approximately $120 million.

I would also like to give an update on the perishable pricing strategy launched in the fourth quarter at Smart & Final. This initiative aims to increase customer traffic, and we're seeing positive results as evidenced by a 3.8% increase in customer count and positive same-store sales for the quarter. As commented on in previous calls, we believe this pricing plan is the right long-term strategy for Smart & Final, and we expect margins to gradually improve and realize the expected efficiencies at RCDC.

Please turn to Slide 9. Chedraui USA same-store sales in the quarter increased 2.8% versus the prior comparative quarter. This growth was driven by better-than-expected performance El Super and Fiesta and an increase in Smart & Final same-store sales. It is important to note that this is the first increase in Smart & Final same-store sales in the fourth quarter of 2023, and is driven by higher customer count resulting from our perishable pricing strategy, which more than compensated for a decline in the average ticket.

Chedraui USA sales increased by 4.7% in U.S. dollar terms supported by both same-store sales growth and a 1.7% sales floor expansion over the past 12 months. The depreciation of the Mexican currency against the U.S. dollar by 20.3% contributed to a sales increase of 25.9%.

Please turn to Slide 10. The pricing strategy at Smart & Final, combined with RCDC transition costs continued to impact operating leverage. However, this was partially compensated for by El Super and Fiesta's positive EBITDA performance, resulting in a 6.8% EBITDA decline in dollar terms.

Chedraui's USA's EBITDA in Mexican pesos grew 12.2% and 20.4% without RCDC transition costs, driven by favorable currency translation effects. The EBITDA margin in the U.S. stood at 7.5% and 8.1%, when excluding RCDC transition costs.

El Super and Fiesta Mart continued to achieve strong results, with EBITDA margins of 9.3% in the quarter and 9.8% when excluding transition costs, compared to 9.6% in the prior comparative quarters. Our unique perishable offerings at El Super and the completion of Fiesta store remodels continue to deliver these favorable results. Smart & Final's EBITDA margin, excluding transition supply chain costs and expenses, was 6.5% for the quarter.

We are confident that the ongoing pricing strategy initiatives and the efficiencies for RCDC will contribute to its recovery in the coming quarters. We are committed to having the RCDC fully operational in the second quarter and aim to achieve the planned synergies for El Super and Smart & Final by the end of 2026.

This concludes our report on U.S. operations.

[Jose Antonio Chedraui Eguia, executive]

Thank you, Carlos. We now turn to the consolidated financial results on Slide 11. Consolidated sales amounted to MNX 74,441 million, a 14.8% increase year-over-year driven by positive sales trends in all businesses and a positive foreign currency translation. Gross profit rose 15.4% and 1.8% without RCDC transition costs, mainly due to favorable inventory and promotion management in Mexico, which compensated for RCDC and Smart's & Final's, pricing strategy at Chedraui USA.

Gross profit as a percent of sales stood at 23.4% in the first quarter and 23.7% without transition costs, compared to 23.3% in the prior comparative quarter. Consolidated operating expenses, excluding depreciation and amortization, increased by 19.3% and 19.2% without the supply chain transition costs. This increase was mainly due to higher labor costs in Mexico and the U.S., higher store count in both countries and the depreciation of the Mexican peso.

Consolidated EBITDA increased 8.8%, which represented 8.4% of sales, and a 12.8% increase after adjusting RCDC transition costs. The EBITDA margin, excluding these costs, represented 8.7% of sales. Financial expenses increased by 36.8% to MXN 1,458 million, explained mainly by higher interest expense due to the capitalization of new property rents in accordance with IFRS 16, and a decline in interest income from our cash position in Mexico due to lower interest rates.

Consolidated net income totaled MXN 1,567 million and represented 2.1% of sales. This result is once again explained by the impacts of RCDC transition costs. When eliminating this impact, net income totaled MXN 1,729 million and represented 2.3% of sales.

Finally, please move to Slide 12. We closed the year with a net debt position of MXN 640 million, and our financial leverage was 0.03x, compared to the minus 0.1x in the same period last year. CapEx invested for the quarter reached MXN 1,340 million, equivalent to 1.8% of sales, and is below the previous year, given the investment made in the new distribution center during 2024.

Now please allow us to move on to the question-and-answer section.

[Operator]

[Operator Instructions] Our first question is from Bob Ford with Bank of America.

[Robert Ford, analyst]

And just can you comment a little bit on the ramp of new or improved functionalities at Rancho Cucamonga? And any specific enablers of further improvement for Smart & Final and knock-on benefits from El Super? And I was just curious, if there are any long-haul implications for operations in Texas and how you're thinking about existing logistics there.

And with respect to Mexico, [indiscernible], maybe can you comment a little bit about the relative performance between large and small box concepts in Mexico? How you may be changing merchandising to respond to more sluggish consumption, higher price elasticities as well as your expectations over the balance of the year, please?

[Carlos Matas, executive]

Bob, Carlos here. I guess I'll start with your first question. Yes, so excited to let you know that this is our first week operating the RCDC fully integrated. So all 5 DCs -- legacy DCs are now closed and we're operating fully at RCDC. I think I've mentioned this before, but this facility is going to allow us to change a lot of the things that we're doing from a purchasing standpoint.

So we've got a lot of common SKUs that we sell at both chains and then some unique chain SKUs. Certainly, the private label strength that we have at Smart & Final will bleed into our operations at El Super, which I think will be beneficial from a cost-to-good standpoint as well as from a sales standpoint. So we're excited about that.

There is no ability for us to long haul into Texas from the RCDC. So our Texas operation has its own logistics operation, very unique. But that doesn't mean that we don't use our leverage as Chedraui USA, when it comes to dealing with our vendor partners. As we continue to grow in Texas, we'll be evaluating what our own distribution looks like rather than relying so heavily on our wholesaler partner.

[Robert Ford, analyst]

And Carlos, you touched on produce saying that's yet to come, right? Can you talk a little bit about in-stocks, shelf lives of produce as being part of a -- kind of a more integrated central infrastructure, I guess? And what the implications of that are for Smart & Final relative to the value proposition that exist today?

[Carlos Matas, executive]

Sure. I think that you touch on a great point. We're fully integrated with produce as of this week. So we have -- it's common purchasing, which certainly brings value. Freshness is a key component. I think our quality standards are improving at -- and certainly will impact both chains.

And when we extend a little bit further from producer, and let's talk a little bit about dairy and deli. There's a tremendous amount of focus on use by dates, so that the level of freshness and quality standards at both chains' increases. So win-win here for both chains and obviously for our customers, which is our primary focus.

[Robert Ford, analyst]

Good to hear. And any estimates in terms of where, I don't know, maybe wastage wise or other elements of shrink and how that might have an impact for the business?

[Carlos Matas, executive]

Yes. So obviously, the fact that we're buying on a combined basis out of this facility product is moving in and out quite fast. So that should definitely have a positive impact on our perishable shrink. Now going back to another one of your comments, let me give you a data point. Right now, our in-stock position at Smart & Final is probably the best it's been in years, since we migrated the dry portion into RCDC. So very positive news there.

[Robert Ford, analyst]

Good to hear.

[Jose Antonio Chedraui Eguia, executive]

And Bob, about first -- and about Mexico, well, it is clear that we are seeing -- besides the high comparison basis of last year where we were able to grow same-store sales close to double-digit numbers. And the calendar effects of losing 1 day in February, plus the Eastern that was move to April. Besides that, we are seeing consumption slowing down since last quarter of last and it was actually very bad for ANTAD that reported in December, for example, negative comps on the self-service or supermarket segment.

Again, January was negative again. So -- and the same thing for February, that including, of course, the day that we lost. So it is clear that we're seeing consumption slowing down and weakening. We are being probably one of the most successful retailers to be able to grow besides this particular situation. And the format -- talking about the formats that you were asking about.

The Selecto is the one that it's delivering the best comps for us at the moment. But if you see the regional growth, you'll clearly see that probably we would be the most affected ones because in the southern region is where ANTAD is reporting negative comps for the whole quarter, for example, of course. We were not expecting, but that's our weakest region at this moment.

[Robert Ford, analyst]

Understood. And just as a follow-up to that, Antonio, are you seeing much difference? I mean, are you seeing a migration towards smaller concepts and greater frequency within your footprint in Mexico?

[Jose Antonio Chedraui Eguia, executive]

Well, yes, but that's also support because we are expanding faster on the smaller formats. We see that proximity is a huge opportunity. We are seeing that the consumer is giving a lot more value to proximity than they were giving to that factor in the past. So we are growing faster there, but we are also investing more in those particular formats. At the moment, we see positive trends about the Supercitos and Super Che's that we have in operation at the moment.

[Operator]

Our next question is from Antonio Hernandez with Actinver.

[Antonio Hernandez, analyst]

Congrats on the results. Just a follow-up on net consumer slowdown that you're seeing in Mexico, in the U.S. and what you already commented were adding regional format perspective. But how much of maybe the private label strategy, how much of importance as it gain in this context? And maybe if you could provide an update on that for both Mexico and the U.S., that will be helpful.

[Jose Antonio Chedraui Eguia, executive]

Thank you, Antonio, for your question. Well, yes, we're seeing a slowdown in consumption in Mexico, not necessarily in the U.S., actually in the U.S., as Carlos already shared, we are exceeding our guidance or if not exceeding at the moment, but we think we would exceed our guidance because we are on the higher end of our guidance that we set up at the beginning of the year. We were able to grow 2.8% in dollar terms.

So we're seeing a positive trend in the U.S., and we are happy to show positive numbers on our Smart & Final [ negation ]. About private label, it is very important at the moment, it represents 8% of our sales in Mexico and close to 30% of our sales in the U.S. Our private label in the U.S. is, I would say, very well developed. They produce an extraordinary brand, not only one brand, but 3 brands that we are already taking advantage of that and importing those brands into Mexico with extremely good results, particularly in the higher-end formats.

In the lower end, we're more focused on the basic guidance such as beans, oil, rice that we present in the -- for example, Supercito format, close to 30% of our sales.

[Antonio Hernandez, analyst]

Okay. That's very helpful. Is there any target that you have -- for example, for the Supercito format, especially within this consumer environment in Mexico? Any target in terms of private level penetration?

[Jose Antonio Chedraui Eguia, executive]

We -- I think we have a very high penetration at the moment, at least 30%, but we are more focused in developing exclusive items, products that our focus to serve the needs of the particular consumer that we service in terms of presentation sizes, packaging, flavors, focusing more in that particular customer that have -- has a different consumption occasion, I would say, than the typical customer that we service in our bigger formats 3 times a month or 2 times a month. So we're focusing mostly in those exclusive items more than private label.

[Operator]

Our next question is from Alvaro Garcia with BTG Pactual.

[Alvaro Garcia, analyst]

My first question is for Carlos. I was wondering, I was trying to sort of picture or envision the end of -- or the potential end to the price investment in Smart & Final. I'd imagine it can be pretty addicting as you start to see this recovery in traffic which congrats, by the way, on that recovery in traffic. But how should we think about when this might -- this price investment might normalize? What sort of key KPIs you look to say, "Hey, we're comfortable where the value prop is now?" And any color on timing would be appreciated.

[Carlos Matas, executive]

Sure. I wouldn't look at it as an end to a -- to our pricing strategy. I think -- it's important to recognize that our goal here is to position Smart & Final properly from a price perspective, so that we can grow our customer base, okay? And that's going to happen throughout. We're going to continue making the right calls in terms of having the right price in the right market to be competitive and to position Smart & Final, so that it becomes a first choice for many consumers rather than a fill-in trip. And we do that by positioning our produce and fresh categories in such a way that it creates additional traffic. So that's our goal.

Now, price -- initiating a new pricing strategy takes time, right? And we're seeing the fruits of that investment. As you know, our traffic grew at Smart & Final by nearly 4% in the quarter. We're seeing continued traffic improvements in the early stages of Q2. I want to point out, as you already know, 30% of our sales are what we call business customers at Smart & Final. In March, our business customers traffic count increased by 6%. And in April, it increased by 8%. So some very, very encouraging trends on the top line. And what we're doing also is tweaking some of the investments that we're making in price by market, understanding what has worked, what hasn't worked.

And obviously, working with our vendor partners because our volume has increased 6% in the first quarter and that's a tremendous benefit to our vendor partners as well, and we're partnering with them. And we're seeing some important improvements in our gross margin towards the tail end of Q1, and we expect that to continue and to improve in Q2, Q3 and Q4. So I think this is an important strategy for Smart & Final as a whole in terms of how we want to position the company in the future.

[Alvaro Garcia, analyst]

Great. That's clear. Just one -- a second question on Mexico. On the loyalty program in Mexico, your numbers continue to track higher there. I was wondering sort of what you're envisioning Antonio is the next steps for that platform in terms of data analytics, investment in that platform and how you can leverage that a little bit better to target consumers better, and to sort of have a better value prop via that loyalty program.

[Jose Antonio Chedraui Eguia, executive]

Alvaro, we're very happy with our MiChedraui program, we think it's a lot more than a loyalty program because we believe that it's a tool that allows us to know our customer better, offer them to their needs and particularities, the best of what we have in terms of merchandise promotions, but also it's a very good communication to that it's allowing us to reduce costs in advertising. And it's also a very important tool for us in the future that will allow us to sell probably advertising to our vendors.

So it's a lot more than just a loyalty program and to have more than 13 million customers with their names and data, and being able to explore them the way we are, at the moment, at least on the sales side, where they already represent 75% of our sales. I think it's a huge asset for Chedraui. So it's more than a tool. It's an asset that will allow us to deliver value to our customers and efficiency to our operations in the near future. That's what we see, Alvaro.

[Alvaro Garcia, analyst]

And is it fair to assume like incremental investment into that platform going forward to sort of get to that advertising, let's say, future you want to see or to leverage data a bit more? Or are you comfortable with the level of investment you've seen up until today?

[Jose Antonio Chedraui Eguia, executive]

When you mean investment, you mean CapEx on the technology side or?

[Alvaro Garcia, analyst]

Correct. Tech and talent to sort of manage that business.

[Jose Antonio Chedraui Eguia, executive]

I think that at the moment, its already producing great results, keeps growing 75% -- represent 75% of our sales. So we believe that we're on the right track. But if there would be any need of extra CapEx to achieve the goals and the projections that we have, you can be sure that we'll be ready to put money behind that project, because we think it's a very, very valuable asset that we have developed route throughout a long period of time, and we are now ready to expose.

[Operator]

Our next question is from Froylan Mendez with JPMorgan.

[Fernando Froylan Mendez Solther, analyst]

I wanted to dig a little bit into the competitive dynamics in Mexico. What are you seeing in terms of pricing and promotional efforts from the competition and how this compares to yours? If you're seeing a trade down to private label, to smaller formats, to hard discounts between what you see in your regions. A little bit more color on competitive dynamics would be appreciated.

And lastly, your thoughts on overall guidance, you already mentioned that in the U.S., you could be ending in the higher end, if not a little bit even higher. How do you feel about Mexico and margin guidance at this point?

[Jose Antonio Chedraui Eguia, executive]

Thank you, Froylan. Well, even though we're seeing consumption slowing down, that will probably -- you would probably think that the pricing strategy and the competition would become a lot more aggressive. You have on the other hand, pressure on the labor expense and other expenses that has made, I would say, a more cautious competitive environment. We recognize that there will be aggressive competition, but with certain limitations.

The labor costs and the expenses growing as fast as we have seen are clearly a wall that will probably contain the aggressiveness of the market that as we have seen in the past. The Southern region, we're seeing a weakening market trend are probably with more aggressiveness that we've seen in the rest of the country, and in certain cities with a little more competitive pressures, but always, as I said just before, we have certain limitations due to the expense increases that I have already explained. That's what I see about consumption and pricing strategy.

On the other hand, about the trends to private label or towards -- private label or proximity format. It's clearly in certain part of the consumption metrics, we're seeing pressures on the consumption side. And yes, private label is growing. And these low-end formats are expanding. But on the other hand, we're seeing a very, I would say, -- not very aggressive, I would say, less affected consumption on the higher-end consumer. So we're seeing the Selecto's growing quite strong compared to the rest of the -- our performance that we operate.

[Fernando Froylan Mendez Solther, analyst]

And on guidance, how do you feel on -- that?

[Jose Antonio Chedraui Eguia, executive]

We feel that we'll be able to achieve our guidance. We've always thought that probably the most challenging quarter was this first one. We achieved -- actually exceeded our goals in some metrics. We'll probably miss the same-store sales, but not by far, we expected a complicated first quarter, but we exceeded expectations on the EBITDA margin. So we believe that we would be pretty much in line with our guidance and projections, and we don't think there will be a need to change that.

[Operator]

[Operator Instructions] Thank you. There are no further questions at this time. I would like to hand the floor back over to Antonio Chedraui for any closing comments.

[Jose Antonio Chedraui Eguia, executive]

I just want to thank everyone for joining, and I'll be talking to you the next quarter. Thank you. Thank you, everyone.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.