Wal Mart de Mexico SAB de CV

BMV:WALMEX

Earnings Call Transcript 2019-Q3

[Pilar de la Garza, executive]

Good afternoon. This is Pilar de la Garza, Head of Investor Relations for Walmex. Thank you for joining us today to review the results for the third quarter 2019.

Today, with me is Guilherme Loureiro, President and Chief Executive Officer for Walmart de México Centroamérica; and Olga González, Chief Financial Officer. The date of this webcast is October 23, 2019. Today's webcast is being recorded and will remain available at www.walmex.mx.

Before we start, let me remind you that the content of this webcast is property of Wal-Mart de México S.A.B. de C.V. and is intended for the use of the company shareholders and investment community. It should not be reproduced in any way. This webcast may contain certain references concerning Wal-Mart de México S.A.B. de C.V.'s future performance that should be considered as good faith estimates made by the company. These references only reflect management's expectations and are based upon currently available data. Actual results are always subject to future events, risks and uncertainties, which could materially impact the company's actual performance. And now it's my pleasure to introduce our CEO, Guilherme Loureiro.

[Guilherme Loureiro, executive]

Thank you, Pilar, and good afternoon, everyone. Thank you for joining us to review Walmex third quarter 2019 results.

We are making progress with customers and associates and feel good about where we are heading. I will discuss more details on our third quarter performance in a minute, but I'd like to start by sharing with you that during the quarter, we reached an important milestone in our business transformation. As we shared with you during our Analyst Meeting, we recognized that what got us to be the company we are today won't necessarily get us where we want to go in the future. Therefore, this year, we embarked on our journey to transform our organization to become even more customer-centric, foster innovation and be data-driven.

Our business transformation is based on 4 pillars: becoming more customer-centric; evolving our way of working and developing end-to-end thinking; developing data and analytics capabilities; and satisfying and inspiring our associates. In line with this, we've restructured our merchandising team in multifunctional tribes to put together team members from several areas with different expertise and backgrounds. To drive this structure, we'll allow our merchants to deliver value to our customers fast and often, and they will receive end-to-end process to speed up decision-making and infuse customer centricity into everything we do.

We are very excited about the future and the transformation we are undergoing. We are getting to reimagine retail and our business from a position of strength. We know it will be a long journey, and our associates, customers and shareholders will benefit from it. Now let's move to our third quarter results. I will begin by discussing sales performance, and then I will cover the financial results for the quarter. Please consider that when I talk about Central America, I'm making reference to figures on a constant currency basis.

During the third quarter, total revenue grew 4.9%, 5.2% in Mexico and 2.6% in Central America. For the first 9 months of the year, Mexico grew total revenue by 5.8% and Central America by 3.2%, which resulted in a 4.9% consolidated revenue growth. Sales performance continues to be driven by same-store sales growth. During the quarter, same-store sales in Mexico grew 3.8% and decreased 0.2% in Central America. The 2-year stack for same-store sales growth in the first 9 months of the year was 12.1% in Mexico and 3.1% in Central America.

We drove growth across all regions in Mexico. The North and South regions had the highest same-store sales growth, followed by the Center and Metro regions, which delivered softer growth due to the competitive dynamics and macro conditions in those regions.

Looking at the performance by format. Sam's continue to be the format with the highest same-store sales growth. Members are at the center of the decisions we make, and there are several ongoing efforts to deliver value for them. During the quarter, we had the online shopping days event where we continue to make progress with integrating digital efforts to transform how members shop and interact with our clubs.

As a result of our focus on improving customer experience, in Walmart Supercenter, we've reinforced special exhibitions at our stores for a creative challenge where associates competed among stores for the best exhibition. I'm very proud of our associates who strive for excellence and execution skills. Seasonal events, such as the summer campaign, Rebajas para Todos, were key to the format's performance in the quarter as well. In Superama, we implemented summer day's event with a strong focus on Fresh. This is an important category for our target customer and a key traffic driver for us. This type of events are allowing Superama to differentiate itself from competitors, while capitalizing new purchase occasions.

In Bodega, we carried out another edition of our Morralla campaign. This price point program is now considered the largest promotional campaign in Mexico. Morralla is a great way to drive traffic to the stores by offering our customers great merchandise at unbeatable prices. Now looking at the performance by merchandise division. Our core division, Food and Consumables, had the highest growth, followed by General Merchandise. The team did a great job of preparing and executing the back-to-school season. A sustainable price advantage across categories, a broader assortment and great execution at the stores were key to improving our customers' experience and to driving double-digit growth during this season. Apparel sales were impacted by operational difficulties that stemmed from the issues we experienced with the merchandise imports at the beginning of the year.

We are dealing with adverse and uncertain socioeconomic circumstance in Mexico. Our business is resilient, but our customers are concerned about a less favorable outlook and becoming more cautious. The resilience is our business comes from the path Sam Walton established with our Every Day Low Prices philosophy. Customers trust our brands and know that we can save them money, so they can live better, which is why our philosophy becomes even more a competitive advantage in these times. All of us at Walmart will continue to work hard to strengthen even further our price position and deliver for our customers. In Central America, Nicaragua delivered the highest same-store sales growth, followed by Honduras. Sales performance in El Salvador, Costa Rica and Guatemala reflect the unsupportive macroeconomic dynamics in the region.

We continue to grow ahead of the market, despite the unfavorable conditions that we are facing. During the quarter, we focused on improving our price position even further. We launched new and exciting private brand products in order to provide great value to our customers, and we continue to reinforce our price gap by including more items and competitors to the measurement. We also implemented events, such as Mother's Day and Independence Day, where we are able to drive traffic to our stores by leveraging the value proposition of each format. Now let's talk about omnichannel. Our priority is to win in on-demand, a convenient solution for our customers that allow us to increase shopping frequency, while leveraging our unique assets. Currently, we have 12,000 General Merchandise items, plus all grocery and everyday consumer items available for same-day delivery.

We also compete aggressively in extended catalog. Our Bodega and Walmart Stores are equipped with 740 kiosks where our customers can find a much broader assortment from our 1P and marketplace operations to complement their shopping experience. Regarding the marketplace, we have now over 1,000 sellers offering a differentiated assortment to expand our reach to new customers in an asset-light weight.

During the quarter, eCommerce sales growth accelerated to 65% and GMV growth to 79%. eCommerce represented 1.4% of total macro sales and contributed 0.6% to our growth.

Looking at our performance versus the market. During the quarter, we outpaced the self-service and clubs segment measured by ANTAD by 60 basis points. With this result, we have led the market's growth for 19 consecutive quarters. Our associates are focused on running great stores, and our customers are rewarding us with their loyalty. Moving to new store growth. We continue to invest in the region, and we are making progress with our expansion plans, despite an uncertain environment. During the quarter, we opened 36 new stores with 29 in Mexico and 7 in Central America. New stores contributed 1.9% to total growth, which is within the guidance we shared for the year.

We want to become the most trusted retailer, and we are making progress on this end. For the fourth consecutive year, we were included in the FTSE4Good Emerging Index for our performance in environmental, social and governance related topics. We received the Éntrale 2019 Award for our outstanding policies, practices and programs in favor of labor inclusion and our commitment to create an inclusive work environment. Every year, this award is granted only to 1% of the 450 companies and 50 allied nongovernmental organizations, which demonstrated their commitments to the inclusion of people with disabilities. We also ranked second in the list of the 100 companies with the best corporate reputation, prepared by the Corporate Reputation Business Monitor, MERCO.

With that, I wish you a happy holiday season, and I turn it over to Olga, who will cover the financial results for the quarter.

[Olga González, executive]

Thanks, Gui, and good afternoon to all of you. In order to provide the investment community a better view of the underlying performance of our business, we're including a retroactive estimation of the effect the adoption of the IFRS 16 would have had on the 2018 financial results. These pro forma 2018 figures are not audited, but are based on the 2018 audited reported results and adjusted with our best estimates to show the effects related to the adoption of the IFRS 16. Please note that all the reference that I will do to last year results are based on the 2018 pro forma figures. In Mexico, total revenue grew 5.2%. Gross profit increased 6.6%, and we expanded the margin by 30 basis points to 23.3% driven by cost of goods savings initiatives and by an improved markdown management. SG&A grew 5.7% driven primarily by higher electricity costs and marketing spend during the summer promotional activity.

Operating income grew 8.9% and EBITDA 9.5% to achieve an 11.6% margin.

In Central America, total revenue grew 2.6% on a constant currency basis. Gross profit margin contracted 10 basis points to 24.6% mainly driven by the commitment to price leadership.

General expenses increased 2.2%, below the total revenue growth on the back of a very disciplined expense management.

Operating income grew 2.5%, and EBITDA margin expanded 20 basis points to 10.4%.

On a consolidated level, total revenue grew 4.9%. Gross profit expanded 30 basis points to achieve a 23.6% margin, and expenses grew 5.2%. Operating income increased 8.1% and EBITDA margin expanded by 40 basis points to reach 11.4%. As a result, net income grew 10.4%, ahead of total revenues growth.

Now let's review the results for the first 9 months of the year. For the first 9 months, revenues increased 5.8% in Mexico, gross profit grew 5.8% and gross profit margin remained stable at 22.7%. We achieved 20 basis points of expense leverage as SG&A grew 4.7%, 110 basis points below total revenue growth. Driving a strong Every Day Low Cost mentality and focusing on productivity to reinvest in our business will continue to be one of our main priorities.

Operating income increased 8.3% and EBITDA grew 9%, resulting in a 30 basis points margin expansion.

Regarding SG&A in Mexico, we're focused on driving productivity to leverage base expenses and fund our strategic initiatives. We reduced our operating expense by 31 basis points. Expenditures related to store remodeling and maintenance reduced by 3 basis points. And we invested 18 basis points in new stores and eCommerce. Central America continues to deliver strong results, amid a very challenging macroeconomic environment.

Total revenue growth was 3.2%. Gross profit grew 2.8%, and gross profit margin remained at 24.2%. Expenses grew 2.7%, and we achieved 10 basis points of leverage. Operating income grew 3.9%, and EBITDA grew 5.6%. In summary, during the first 9 months of the year, consolidated revenues grew 4.9%. Gross profit increased 4.8%, and gross profit margin remained at 23.0%. Expenses grew 3.8% below total revenue growth. Operating income increased 7.4%, and EBITDA grew 8.0% to achieve a 10.9% EBITDA margin. Net income posted a double-digit growth of 10.6%.

Now moving to the balance sheet. As we grow and reinvest in the business, our financial strength increases. We closed the quarter with MXN 20.6 billion. Our cash position decreased 37.8% given that in August, we paid a dividend of MXN 0.58 per share, twice the amount paid in August 2018, as this year, we reduced the number of dividend payments from 4 to 3 to get returns to our shareholders faster.

Our inventories increased 13% as we received the merchandise for the holiday season. And during the quarter, we opened 11 more stores than in third Q of 2018. Cash generation increased 8.5% versus last year, reaching MXN 64.3 billion. After investing MXN 21.6 billion in our business, we returned MXN 37.7 billion to our shareholders in the forms of dividends. In closing, all of us at Walmart are pleased with the progress we're making and the great work of our associates across the region. We're also excited about the actions we're taking in terms of the business transformation that are setting us for the long-term growth. The holiday season is upon us. Our associates have been working hard all year to prepare, and we're ready to surprise our customers with the best value on great merchandise at the stores and online. Thank you very much. And as always, we will make ourselves available to receive your calls and answer any questions you may have.

On behalf of the management team and our associates, we thank you for your support this year, and we wish you a happy holiday season.