Arezzo Industria e Comercio SA

BOVESPA:ARZZ3

Earnings Call Transcript 2023-Q2

[Victoria Machado, executive]

[Interpreted] Good morning, everyone. Welcome to our earnings call for the second quarter of 2023. So this call is being recorded, and we'll make the recording available on our IR website after the call. [Operator Instructions] Thank you.

[Alexandre Birman, executive]

[Interpreted] Thank you, Vicki. Good morning, everyone. Once again, thank you for being part of our video conference call about our earnings for 2Q 2023. I have with me Rafael Sachete, our CFO; and IR Manager, Vicki Machado.

This second quarter shows once again what I've always been saying, even since the times -- tough times of COVID. If we analyzed the Arezzo&Co values. Obviously, we always have to have financial statements that are truly grounded, but the biggest value that this company has is its culture. In September, we will celebrate 51 years of constant growth and capacity that we can address any scenario. And we have a very strong team in everything that they do, and one of their main features is passion.

So when we have a company with those characteristics, any scenario is a scenario where we can deliver results. And once again, you can see that in 2Q '23 coming from a very strong foundation since 2021. And in addition, on our team, we have a very high differential in our business models. So our ability to interpret trends and transform that into products take them to market, take them to the stores with a fast lead time and awaken desire and generate sales enables us to have that ability to adapt. And all of that is done in a very consistent manner.

In over 20 years with the sell-in sell-out calendar that's -- that has been having a fixed cadence in those 2 decades, making us turn with a very constant frequency. Our brands are always more desired. Our investments in brands always showing the ability to generate desire at the end. And as I mentioned, not just the differentials that has brought us this far will guarantee our future growth, but we were the pioneers, and we are still very unique in what brings in the high share in our revenues, which is digital.

So we still have over 2-digit growth in e-commerce. And in addition to that, our omni sales is becoming increasingly more robust. Especially through a tool that's in a very high stage of evolution. And on Sunday, August 6, in the sales convention, we launched a new version of our ZZ app, which is how the salespeople contact their customers on an ongoing basis, accounting for the 56% of the 65% of the sales. So 2 million contacts per month. And in that new version, it's more agile. It has an integrated view of inventory in e-commerce, and we just rolled that out.

So now the process to migrate the 7,000 salespeople from women's shoes and bags to the new ZZ app that also has a frictionless payment system will leverage our sales even more. About the figures, BRL1.4 billion in revenues this quarter, a growth of 21.6% year-over-year. And if we compare that to '21 and pretty much inorganic growth with the exception of Paris Texas and no Vicenza because it wasn't integrated yet. We had a growth of 100.8% and compared to 2Q '21.

Before continuing with the presentation, I'd like to give you some highlights about our international market where we still believe in the competitive edge that we have in product and the speed of delivery and change the vector. Even though the total results are not as we expected, we still have great signs of growth in retail. This Schutz store on Broadway 540 is a huge success, selling over $450,000 a month in a moment where the entire market is on sale, and they're still selling full price, enabling us to have a 20.5% growth in the retail channel in the U.S. market and strongly selling full price on e-commerce.

So when you look at the public companies in the U.S., they also had a slowdown in the revenues. So to offset all of that, by seeing that movement, we started our entry in Europe. We decided to go through M&A. And we already have BRL 30 million in the second quarter through Paris Texas. And we've opened many doors in September. We have the sell-in for our brands. Arezzo Schutz, Alexandre Birman in the European market with synergies compared to Paris Texas. So that's a mid- to long-term process.

We do believe in this operation and it's higher than the breakeven for this quarter. So we're very bullish considering these medium- to long-term investments and our ability to execute has been shown to be very resilient.

Now about the outlook of the Brazilian market and the results of our company. 2Q was once again marked by the speed in which Arezzo&Co can read the scenario and adjust the path when we see a better one. As shown, we made some structural changes, reducing some areas that support the business that we're still in the maturation phase and that would not generate the return that we expected. So we decided to leave AB plus brand portfolio which is always the assumption during the pandemic, we tried other product segments, other target segments that did not present the results that we expected.

And since we're agile, we decided to end operations and we're generating some nonrecurrent extraordinary one-off expenses in this quarter but have already showed a lot of leverage for the second half of 2023. Those are my highlights.

About the -- non highlights about the operations. Volume growth achieve of 10.6%, achieving 7.2 million products sold 4.4 million pairs and 2.1 million pieces of clothing and 760,000 bags. Our channels that sell direct to consumer achieving BRL 1.2 billion revenues, 14.7% growth year-over-year. Gross revenues of BRL 1.4 billion and gross margin of 54.9%. Recurring EBIT of BRL 198 million growth higher than revenues of 22.1%, recurring net profit, BRL 114 million and ROIC 26. 3%.

On the next slide, we have solid growth of all of our brands. The beauty of our business, and that has been an assumption since our IPO that dates back 12 years now is that we are definitely a multibrand and multichannel company. Here on the pie charts on the right, you can see relevant percentages and balance out that the main brands account for and especially in our channels. So it does seem like a pizza pie with 4 equal pieces.

So 25% pretty much in web commerce, owned stores, franchises and a little bit more in multi-brand. So we do master the management of our portfolio of owned stores, our e-commerce, the B2B relationship with franchisees that we are very careful with always. We are constantly evolving that area and always having that ability of working side-by-side with our operators. And our multi-brand store owners that distribute our products across many small towns in Brazil.

So we'll have next month the last sell-in here for in São Paulo. Everybody is invited to attend. It's an event for the multi-brand stores. Vicki will give you more details about that and for all our franchisees for high summer and Christmas collection.

Some detailed highlights about the brands. So the Arezzo brand, that's our legacy brand that originated our entire business with a robust growth of 20%. The average of the brand across the year will be from 15% to 18%. Sellout is mirroring what we expect about the continuity of the growth of that. When you look at omnichannel, and web, 29% of web is already omni sales, and Schutz is going through a very important moment of bringing in the lifestyle concept.

We've learned a lot in the past months. On October 20, will inaugurate the definite store according to this concept. We already did some rebranding work. If you take a look at the Schutz Instagram, you'll see that we're starting from scratch. For summer, younger customers and sneakers, that's 30% of sales, so we're going to focus even more on that category. And we're very confident that Brazil -- that Schutz is the brand for Brazil in 2024 in growth.

Anacapri, who after COVID, had a slower pickup but very solid, demonstrating very strong growth in this shoe brand of 28.9%. This brand still has high potential to achieve. And when we compare that to the number of stores of Arezzo, 440 stores, so we're going to work with a new store model. In September, we'll inaugurate a concept will -- Anacapri will have their own headquarters on the Oscar Freire Street. It will be called Anacapri Station in addition to a 40 square meter store. It's a large building. It will also count on a mini-mall experience. It's a coffee shop, cosmetic stores, and others to really have -- feel that experience on the second floor for presentations -- theater presentation plays in our team and the entire Anacapri team will be at that GQ. So they really have huge potential in all channels, not only franchisee -- franchise, but also multibrand in e-commerce.

Alexandre Birman brand, very strong growth, especially in Brazil. We already have 12 owned stores and relevant sales per square meter. Some are over 600 million per square meter per year. And the potential of some stores with high revenues and some expansions and renovations will be done because the stores, as I mentioned, already have very high productivity and the e-commerce for the brand for the first time in July achieved BRL 3 million.

The portfolio of brands includes AR&Co's portfolio and with robust grow more than the scenario at the time of the purchase. And we're still going through rate routes to continue to grow strongly and a gain in market share in the apparel category.

Now speaking about our sell-out. We achieved BRL 1.1 billion, BRL 1.2 billion year-to-date with a 14.7% growth in the quarter. We're very confident of our capacity to generate desire on the consumers and maintaining loyalty of our consumers regardless of the post-pandemic boom and our brands continue to grow, gaining market share.

Speaking about our monobrand channels, the franchise with 19% growth and the sell-in to our franchisees with strong results of our own stores with BRL 327 million in the period. Multi-brand channels in which we have a strong presence and strong loyalty from our customers, a share of wallet at the stores that is very relevant. This growth will be continuing with new brands like Vicenza we have good opportunity in handbags as well, but we also have a market in which we have great penetration in multibrand.

Now I would like to highlight our digital operations. As I mentioned at the beginning, we achieved almost BRL 300 million in pure web commerce in 2Q '23. A traffic of almost 80 million, achieving 78 million accesses to our website. And also, the sales in our apps is important. It's a recurring sale after download and the cost of acquiring a client is much lower than those that enter through the website. It accounts for 36% of our e-commerce sales achieving BRL 78 million in the second quarter.

Now our web tickets also had a strong growth 36.2%. And 5.4 million customers bought at our stores and our motor brand stores in the first half of 2023. This shows the evolution of our customer base, showing that our brands, per se, has -- have been growing the base despite having a strong market share. We have the opportunity to continue growing strongly on our customer base, especially the omnichannel customer. They have stronger recurrence. We already had a growth of 14.9%, buying both the brick-and-mortar stores and at the wet commerce. So this is where we want to offer this digital experience.

I received the message the day before yesterday of a person telling me about a great experience. She wanted to buy something for her daughter. They didn't have her size at the store, and she bought it on e-commerce and received it in 24 hours. So our omni experience, although being very strong and mature, we still have the capacity to invest that might not bring results in the short term, but very important for the future of our business having an omni business that shows our excellent efficiency in managing this part of the business. I'm going to pass the floor to Rafael Sachete, who's going to talk about the financial highlights.

[Rafael Sachete, executive]

[Interpreted] Thank you, Alexandre. Good morning, everyone. Thank you for being with us. At our earnings call for the second half -- for the first half.

This is our financial statement. We have a gross revenue of BRL 1.417 million, considering the base was a growth of 65%. And it includes all the brands. Our gross margin, we had a reduction of 110 basis points, especially because of the North American operation that accounts for the 70% base point reduction. And also the impacts in the quarter.

We gained efficiency of 40% base points in the quarter and gain efficiency and expenses would highlight to fixed expenses that grew 13.7% year-over-year.

We're going to detail even more in the next slide. We achieved 17.7% in EBITDA margin of 0.3 percentage points, and our net income impacted by expenses and earnings. So I'll have different characteristics from last year. In February, we received money from -- for -- and the cash at the end of the second quarter, we have a net margin of 13%. And this funded our growth with working capital acquisitions and opening new stores, showing the strong growth that we had mid-2022 and 2023.

Next slide with details of our expenses, we highlight 2 fixed expenses that grew 13.3%. And it's important to highlight that all the lines of expenses were -- of the part companies already added. So also the expansion of new stores from last year. So we had gains already brought in the quarter with the use and reductions that we did at the beginning of the first quarter of 2023. The occasional expenses are discretionary and variable are in line with our revenue that vary according to our growth.

Now reconciliation of our EBITDA. It's important to say that we saw an adjustments of nonrecurring expenses accounting for BRL 20 million. It's important to highlight the strategic decision that we have of restructuring our corporate team and others that were performing or were aligned with the strategy in the next cycle of the company. These operations were closed in this quarter, bringing costs of lowering -- of writing inventory and layoffs and closing stores.

It's important also to detail the second item, the M&A expenses concluded with operations. As I said, these expenses -- our cut costs with lawyer fees, hiring auditing to evaluate and review the M&A and what is necessary for listed companies to be able to incorporate and capture this company. We don't have operational expenses. We have -- don't have costs linked to buying the company. And we shouldn't have more expenses in this line either.

One important point is that our distribution center is operating since 2022 and strategic decision was to preserve the safety of the operations in the first half of 2023. We work with 2 DCs in parallel. The new DC is already operational. And as of the third quarter, we won't have new expenses there either.

Now our ROIC, we achieved 26.3% recurring ROIC in the quarter. Very important for our accounting. There are 2 pieces of information about our strong growth. In the first quarter, we had impact of inventory suppliers. We have significant improvements in this quarter that had a positive impact in the growth in the NOPAT. It's important to talk about July. We incorporated a company that increased revenue, we look at days of inventory. In the past 12 months, our growth in this quarter was 3 days. However, if we exclude that, we have the same number as before. So it's flat. And these figures show an important improvement compared to the first quarter in which we had a growth of 8 inventory days. That's not our bad performance. We have a lot to improve. And for the next quarter, we expect to see consistent improvement of our inventory line on this item.

About suppliers. In the first quarter, we made a decision of supporting our suppliers for account payable, and we don't have an impact in this quarter. In the third and fourth quarter, we will resume the levels of days of accounts payable that we had in 2022. So for this quarter, that will generate an improvement in cash generation for the next quarters.

Next slide, our net debt business. We have a gross debt of BRL 1.028 million, but -- we have a very consistent cash flow, which accounts to 0.5x our EBITDA. Looking forward, there is a gradual reduction of this debt. Seeking efficiency in the second half, both in inventory and accounts payable. And also our EBITDA and our gains and efficiency, as we mentioned, with the expenses due to our strategic decision that is to reduce the size of our structure. The payment flow is very high, and we expect advances for the next half year.

About our cash. For the first half, we show the use of our resources, partly used in working capital acquisitions and paying dividends. So our generation of future impact will be even more consistent for our EBITDA in the second half and significant improvement of cash generation for the company, allowing paying dividends and also continuous reducing the level -- the amount of leverage that we want to see by the end of 2023. So these were the highlights, [ Alicia], I pass the floor to you, so we can have Q&A.

[Victoria Machado, executive]

[Interpreted] We have a Q&A session. The first is from Danni from XP.

[Danniela Eiger, analyst]

[Interpreted] Could you detail people working on domestic projects and how can we can think about this going forward?

[Unknown Executive]

[Interpreted] Thank you, Danni, for your question. We had a CapEx investment of 33% above last year. The first quarter, we already mentioned that we were going to advance opening new stores and renovation of the same store. So we will have a CapEx similar to what was in 2022 but with higher than the first half.

If you look at the store line, we're deeply focused on AR&Co and our investment in the United States with the new store that is bringing exceptional results. And here, we're talking about corporate then BRL 36 million in investment. There's 32% growth year-over-year. And mainly related to our distribution center that still required investment in the second quarter, but now it's finalized and ready and fit according to the framework that we need to support the company in terms of logistics. And the rest of the amount is the continuity of investments in technology.

So we have Schutz and teams with -- for new applications, new functionalities as well as the ones that are supporting the integration of the new companies to our business. And we believe that, that CapEx level could be lower in the future, but not substantial because it's necessary. And that's what's guaranteeing the business being supported in the digital lines and integrating the channels, which is our vision in the big transformation of retail for the future. And it will also connect our products, stores and our brands to consumers. That's the idea behind that.

[Victoria Machado, executive]

[Interpreted] Sachete, the next question is from Ruben from Santander.

[Ruben Couto, analyst]

[Interpreted] So once again, you the changes that you've announced show how agile you are in recognized errors to correct the route for some projects. But could you give us some more flavor on the criteria and reasons that you use to select the brands that would discontinue? And thinking about the learnings in this process, should they influence the strategic direction of the company moving forward? In the brand architecture?

And I'd like to hear more about the structural changes that were promoted in the first half and that announced clearly now streamlining the brand portfolio and restructuring that?

[Alexandre Birman, executive]

[Interpreted] Okay, wait a second, hold your horses, Okay. So let me start with the end. If I forget something, you can go back to the beginning. Okay. Thank you, Ruben, for your question. Alexandre speaking.

So first of all, we will have no further impacts. We've cleaned up that -- so for the expenses in the second quarter. Second, about the learnings, trying to go into B minus category. That's not a path for our company. In DTC gross margin is greater than 70%. That's where we really know how to navigate. So we no longer have the intention of testing the waters in other categories, even in bags and shoes in B minus and C classes. It was a test during the pandemic driven by an opportunity to create a white label for a big e-commerce, but it did not show to -- it doesn't really strategically fit. Not -- it wasn't just financial. So that was an important learning. That's part of the business, right, testing fast and correcting fast.

What about the question? How does that change for us in the long term? Oh, the value of those savings, all those savings should be about BRL 80 million a year, in our SG&A line. So that's a significant amount. Like I said, what changes, I'm not going to test anything unless it's A, B plus categories. So that already eliminates many issues in M&A that there were some speculations in regards to that in our company.

And about the learnings, I can say that we'll always want to test the company is rebelious, restless. Over 50 -- over 100 years old with the start-up spirit, but does really value dividend payment and cash generation. So since the IPO 12 years ago, it was over 1 billion dividends paid in that period, on average, BRL 100 million per year. Even though we -- COVID was 3 years ago.

So the company's assumption is to have a cash position close to net cash and 0 as possible. However, we do like to test things and we're very agile. I believe that the pandemic was the biggest example in history that we had. And now to a lesser extent, but also important, some business areas that we're supporting, the business that were in the maturation phase. We could see that the return would be more in the long term. And to think that we have rose 50% in the cycle '22 compared to '21. So that generates a new company.

We're going to end the year with revenues over BRL 6 billion without a doubt. And if compared to 2021, the company made BRL 3.6 billion. So it's pretty much double the company that we had 2 years ago. So we're very fast in making changes. We really have things in control and an awesome team. So that decision was very important. The first quarter showed us that it would be a more challenging scenario. So we didn't wait.

We had a lot of support from the Board of Directors, as always, so the brands that are no longer in our portfolio, My Shoes, and my brand and Bambini and Fiever because it's too much concentration on sneakers. And that's the only one that upset me a little because it was the brand after this second phase, first Arezzo and the others, and then we have Baw very similar to Fiever with a higher recurrence than Fiever. So a bit of an overlap between the 2.

We decided to discontinue Fiever. The others were pretty much testing, but I really liked Fiever. I really liked it. But Baw is a brand that brings in the young people, the underground street. People that tribes that really add to Vans.

[Victoria Machado, executive]

[Interpreted] And the next question is from Luiz BTG.

[Luiz Guanais, analyst]

I'd like to understand the level of verticalization of production that you achieved versus the target? And if you can comment on how you see the evolution of the pricing point in the American market.

[Unknown Executive]

[Interpreted] Okay. There are very specific questions. So help me out here. I'll start off, though. How are you doing Luiz? Thank you for your 2 questions. I'll start off with verticalization. Here, once again, I'd like to address the more cultural aspects of our company.

So when you go to Rio Grande do Sul, where we operate the most we have in caps on the wall speed. So in the beginning of the pandemic, where we have a boom in demand and 2021, especially because many of the U.S. brands were sourcing in Brazil with China closing down, we quickly saw an opportunity to improve our own production because our origin back in the 70s was a plant. So for 20 years, we were just that, we were a plant. So we really know how to do that.

We saw many plants that were decommissioned. So we quickly invested and it wasn't high investment so that we can guarantee the sourcing. During that strong growth cycle in 2021, 2022, you never saw us not delivering or not having revenue because of the disruption in the supply chain. The reality changed completely.

So -- and then the U.S. market heated up, China opened up, and there's the U.S. dollar. So consequently, -- there was a huge opening of production for our products here in Brazil, showing that we did not need to continue growing in a verticalized manner.

So one of the nonrecurring write-offs was closing the plant in Veranopolis because it didn't have strategic sense. And even the labor that we had was higher than expected. So that shows our ability to adapt fast. And the level that we delivered from 16% to 17% in own production in footwear, it showed that it wouldn't be higher than 25%, but now the growth would be through outsourcing. That's the initial model that we had.

The plants that we have for shoes -- that's very well structured that's been here for 23 years. It Schutz. That's where I started my life. It's essential for the brand because it gives us the flexibility of producing many different types of shoes very fast, fast replenishment and our plants in Bahia, that has our lower price points. The labor has very appealing cost and excellent productivity. We also invested in bags. That was very important for our business.

So verticalization is in bag production because that's where we have to grow a little more, especially because bags has a lot of outsourcing in the sewing. And the most important part is cutting because there's expensive machines, and we've invested in an extremely modern machine, $1 million in a machine but it will give us savings of almost 16% in leather consumption. That's the type of investment that we will have mainly focused on bags.

So now about pricing in the U.S.? That was the second question, right? Yes. Well, with the U.S. dollar, we had to make some adjustments of 7% to 8% in our prices in dollar in the U.S. market. That is based on the sell-in for the beginning of August. Based on that, for the August sell-in, it was well accepted by the department stores. So there is a certain inflation in the shoewear market, well, in all categories in the U.S.. So it's okay. That wasn't a big issue. And our target price is $128 per Schutz. We export $100 up to $148.

The Alexandre Birman brand is operating in a segment that has a lot of price elasticity. And even part of that production as of '23, '24 will be done in Italy. The same plan is Paris, Texas. So Alexandre Birman $595 price point will be -- that will be the range. And the Arezzo brand recently entering Macy's, the launch will be on Independence Day in Brazil, September 7. So Macy's window will be full of Arezzo. So that's $99. It's a more sensitive price point. We can't go over that too much.

We really have to work on our sourcing and the volume that Arezzo has to get appealing gross margins even with a much lower price point than our average. But I'm absolutely sure that the Arezzo brand will have excellent results in sellout compared to the competition. The brand is already operating on level a bit over $100 and still about the U.S..

[Marco Calvi, analyst]

[Interpreted] Marco's from BBA says that we've seen a sequential improvement in the second half. So what are prospectus for operating in the second half?

[Alexandre Birman, executive]

[Interpreted] Well, perfect. Not too many short-term levers to improve our operation. We're reviewing how to roll out the new retail model that Schutz has found by opening the flagship on Broadway. It already has a positive bottom line, not just a very high top line. So the store already has very interesting profitability level.

We're preparing a model that can be rolled out that can be replicated and many shopping center operators are looking for that, but that's not going to happen in the 2023 cycle. In addition, strengthening our e-commerce and increasing full price sales and Arezzo jumping in, which can lead to very fast growth.

We already have this second sell-in for Arezzo in August, and Macy's is really confident about the growth capability of the brand. So first quarter 2024, we believe there will be great revenues for Arezzo brand in the U.S. And Alexandre Birman with production in Italy increasing its perceived value. We already have to include Paris Texas in revenues, very strong share in the U.S., but it's still the beginning.

So we don't have exponential changes, but instead, gradual and continuous improvement of our operations in the U.S. market, stabilizing our expenses, which is very important. So we're very confident that the operations that the made in Brazil shoewear is unique in the U.S. and balance out our investment level versus return. So we do trust that the operations in the U.S. market on the right path.

[Victoria Machado, executive]

And the second one from Citi from João Soares.

[Joao Pedro Soares, analyst]

[Interpreted] So asking about multi-brand growth. So how it's working in the Arezzo&Co growing and prices versus markdown?

[Unknown Executive]

[Interpreted] So in multi-brand we have the share of wallet that's very relevant. And the sense of coming in will give us an interesting upside because the brand is very underpenetrated as we've shown in the acquisition thesis. It's only present in 500 points of sale in Brazil, Schutz have 1,200. So we have a good share for this since the strong growth. And in the bag category, we still don't have cross-selling in multi brands that we have, especially in Arezzo that we have in the monobrand chain. So it's a very strong push here.

And BriZZa, it's worth noting. We've been investing increasingly more in BriZZa in multi-brand. It's been showing excellent performance in multibrands. So I can't say there's a silver bullet that will help us grow strong and multi-brand and maintaining that rate of 26%, 20%. It's a distribution saying that we really master. We have state-of-the-art B2B system with our electronic showroom, we're very agile in product launches and collecting the orders. So we're going to maintain the consistency.

The mix of our sell-in and multi-brand is pretty much full price. So we have one registry online that every now and then purchases some left over pieces from our collection and in AR&Co, we have very strong -- since the acquisition, it's different than shoewear boutique. And in the second half, it will be more challenging in AR&Co multi-brand, but we've been transferring the good practices and AR&Co will see the sell-in where the -- that will take place next week, and we're absolutely sure that we can evolve in that -- AR&Co in multi-brand.

[Victoria Machado, executive]

[Interpreted] Our next question is from.

[Unknown Analyst]

[Interpreted] I would like to understand in the second quarter of 2023 and how the company is thinking about growth in gross margin?

[Unknown Executive]

[Interpreted] The competitive scenario is very challenging. The shoe brands have an absolute leadership. We have 3 largest brands in the Brazil for the upper income classes. Our sales at malls show sales per square meter that are much higher than any other competitor. The distribution of the brands in the multi-brand, as I said, with high loyalty from our stores. It's almost a one-stop shop here in terms of price and brand.

So to date, we don't see strong competition about growth. Our consolidated growth in second half and the quarters to come will be similar to what happened so far, and we're confident of achieving our guidelines for revenues for the year of 2023. And marketing, we have good news. The savings we have at the beginning of 2023 will be fully captured in the third quarter. So we're seeing a possibility of good improvement of margin in our results, be it EBITDA or net income.

[Victoria Machado, executive]

[Interpreted] Our next question is from Vinicius from UBS.

[Vinicius Strano, analyst]

[Interpreted] How could you see the different brands of women's apparel? How is your my -- for long-term strategy?

[Alexandre Birman, executive]

[Interpreted] She's talking about our company? Well, that's a point of attention. We've been learning a lot with this category. Our challenges to supply are huge. I have a positive highlight for Carol Bassi. In terms of the percentage of our revenue being low, Carol Bassi is growing very, very strongly with a very high profitability. It's a bread that will surpass BRL 35 million in EBITDA in 2023 with growth of above 60% year-over-year.

We can open a new store in a different format, and we're going to test it. It's not going to be a mega store. It's going to be the first store with 120 square meters at Leblon shopping with a much lower CapEx. We're very confident in the operations of that store. It will show our capacity of future expansion.

We also want to open the Carol Bassi store in a more mega store format with a good allowance at mall and Curitiba in addition to renovated in the flagship at It's hard to believe that it's almost BRL 60 billion in revenues per year. So -- it's a same-store since it opened in 2019. It will be -- we're working on a pop-up store inside the mall in Carol Bassi competitor at Cidade Jardim mall doing very well. So this is what we have for Carol Bassi in 2023.

And the store in a smaller format has the potential to open hundreds of stores. So we're very hopeful. About women apparel in our brands in Schutz at Reserva. The reality is a bit different, about Schutz. We're very confident that we saw which is the best assortment. The store at Oscar Freire has been having interesting sales in BRL 500 -- BRL 1,000 per month. And we defined it was one of our assumptions of which format we should roll out that apparel is an accessory for shoes. So the stores that we're going to roll out we'll have a mix of apparel, shoes and handbags. And in the future, maybe sunglasses, within the same format.

The first store will open at JK Mall in the same place we have a store today. It's an 84 square meter store. It took a long time to achieve the concept of a project that would align the brand with the capacity of display in stock all the products, the level of confidence is very high for the store. And we're going to wait for the results to mature in November to roll it out.

We're going to open 2 more stores still in '23 with the same format, and I think we got the niche right. It will -- apparel will account for 25% to 30% of the Schutz's brand. This is what we want to do with this brand. We haven't taken it to a multi-brand although having requests for many store owners wanting Schutz brand, we don't believe that for the cycle of 2023 or not even for the winter. That will start in September, October. For winter 2024, we're going to take it to apparel.

At the Leblon Mall due to the revenue, the results are good. Greatest performance at Reserva has been due with the stores of Reserva. The rollout is incremental sales and operations that account for 12% of the stores income. So we -- there's a level of 8% to 10% of incremental revenue when the gears are working well, very few SKUs. So we don't take up a lot of the area. So what we have organic is women's apparel. These initiatives that I just mentioned. I hope it's clear that our process with the adjustments that had to be made for the company to have growing margins in the bottom line, analyzing opportunities of inorganic growth. Now we have a little bit more flavor in our strategic decisions.

[Victoria Machado, executive]

[Interpreted] We have some questions about working capital from Vinicius from JPMorgan. About this normalized cash cycle with the mix of sellout. I think we mentioned this a bit about the changes in working capital, but he wants to understand how this will work going forward?

[Rafael Sachete, executive]

[Interpreted] It's important to talk about the business. Alexandre already mentioned that we won't have structural changes in the future of the 12% to 17% is our normal now. For the sales levels, it seems that they're more normalized for what we have today. And these channels should increase and progress in a similar fashion.

We've been seeing higher derivation of B2B in the second half. Going forward, we have improvements in inventory, especially -- but we don't have gaps in days -- inventory days as we had in the past. If we look at net income, it was related to the inventory that we have for Vicenza. And the inventory days are similar to 2022, but we believe that we can be more efficient and we're working in that direction to improve days of inventory for the second half.

About accounts payable, we have an improvement bringing that to the same numbers we had in 2022 for the second -- third -- second quarter and part in the third quarter of 2023 and part of that in the fourth quarter.

I'm going to summarize my answer. It's between 21% and 22%. Today, we have 27.8%, but we did have that impact of Vicenza in the past 9 months. So the normalized going forward, will be 20.5% to 22%, and that's the best that we can see going forward.

[Victoria Machado, executive]

[Interpreted] The next question is from Irma.

I have a comment. This advanced of our accounts payable is spearheaded by the company. It wasn't any pressure that we received or better. We have a mission which is to care for the financial health of our stakeholders, be them, our suppliers or franchises. During the pandemic, for example, we didn't cancel any orders from our suppliers, and we supported the franchisees extending payment days for royalties and other initiatives shows how the company really takes care of their stakeholders, and this is key.

We saw scarcity of credit for the suppliers that we use our balance sheet that is very robust, where we're in a very comfortable position. If we look at comparing the average of the market of our peers, 0.5x our debt makes us confident that we can pay a percentage of dividends has always been done. That's our assumption. But in cycles, we help our stakeholders. For the second half of 2023, I can say that we're only going to improve our working capital over net income. But it was a deliberate decision, and we're very happy after closing the cycle when we could help the suppliers with very types of very high interest rates. Irma also wants to know about how we're taking the position mean of pricing in the main brands and how the consumers have been reacting.

[Unknown Executive]

[Interpreted] Okay. Perfect. Great question, Irma. We achieved a level that is the ideal limit of the upper range. We've been doing this consistently despite our pricing system be cost plus. So we have a fixed selling cost with the COGS, which is part of our product to know what the price will be at the store and each model that we developed.

And now we're looking at a reduction in the price of raw material for high summer we're going to have a huge launching next week, and we see a great reduction of that growth. An average price in line with the same collection of 2022. It was a cycle that was pressured globally. And I see that now, we're more going to stability and the increases we had so far has an effect on sales since the volume was very impressive in the second quarter.

[Victoria Machado, executive]

[Interpreted] The last question from Citi.

He talks about the sell-in, how we see the health of the franchisees on the purchases for this half.

[Unknown Executive]

[Interpreted] The sell-in that we're going to perform is already for the first -- fourth quarter. For the third quarter, the purchases were made in June and July. We had some advances for the summer collection. So sell-in, you saw that in this quarter, our same-store sell-in was similar to the same store sell-out. We do that deliberately looking at the capacity, as you said. For them to pay balancing that rate with the franchisee in the multichannel, it's a continuous growth. So we're looking at a more extended cycle for the second half of 2023. We're going to maintain growth rates similar to the first half, but a variation in the third quarter and fourth quarter is already part of our calendar.

[Victoria Machado, executive]

[Interpreted] Those were the questions we had. We can conclude.

[Alexandre Birman, executive]

One hour of call, I would like to thank you all for being part of this conference call. For the third -- second quarter and first half of 2023. Thank you for your attention. And I would like to congratulate our team. It's a wonderful team and the Arezzo&Co ecosystem that really makes our heart beat faster. And our blood flow through our veins. And our Board of Directors and the support of our financial team that helps our company and make us be better and better. Our tireless struggle towards 2054. So let's go. Thank you, everyone.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]