Magazine Luiza SA

BOVESPA:MGLU3

Q2-2025 Earnings Call

[Operator]

[Interpreted] Good morning, everyone, and thank you for waiting. Welcome to Magalu's conference call regarding the quarterly earnings. [Operator Instructions] We want to inform you that this event is being recorded and will be made available on the company's IR website at ri.magazineluiza.com.br. The earnings release and presentation are already available in Portuguese and English. The link to the presentation in English is also available on the chat. [Operator Instructions]

Now I would like to give the floor to Fred Trajano, Magalu's CEO. Fred, please, you may go ahead.

[Frederico Rodrigues, executive]

[Interpreted] Good morning, everyone. Thank you for attending our conference call on Magalu's earnings of the second quarter of 2025. I'd like to begin by emphasizing that this was yet another period with consistent execution with important efficiency gains, growth in strategic fronts and resilience of our main categories. Without question, the main highlight of our quarter, once again, was our profitability and our financial discipline.

We reached EBITDA of BRL 727 million in the second quarter of '25. Noting that this is in a context where interest rates, the Selic rate reached 15%, so a huge increase compared to the interest rates of last quarter. So that implies a series of challenges in terms of P&L for the company, top line, bottom line. So in this context, we maintained our discipline as we had in previous quarters to improve margins and increase our operational profit. So in that sense, the main highlight to reach margins was the control of expenses with SG&A well under control as well as our capacity to manage them.

There are things that are out of our control. The interest rates are not on our hands, but our expenses, our costs are, and we've been working efficiently even considering an inflation of 5% and the cost of any Brazilian company is indexed by inflation, and we've been able to control our expenses and reach this 8% margin.

I would also like to point another emphasis that's been important to our results, which is the discipline in cash management. We had a good quarter in terms of cash generation, BRL 497 million operating cash. Roberto Bellissimo will detail this further in his presentation. And the big highlight, I think 2 top highlights is the reduction of BRL 150 million in inventories in this quarter and monetization of taxes that is another line that we monitor in our cash committees and working capital. It's one of the most important committees in the company, and we have full control. Fabricio can also talk a little bit about the inventory formation.

And since we're getting into the third quarter now, I'd just like to let you know that we formed the inventory in the second quarter at a higher U.S. dollar that was at the beginning of the year. So it got close to 6 at the beginning of the year. So the inventory formation was at a higher dollar value, and we believe it was good to reduce these inventories now. So we had a clearance sale in the middle of the year to reduce inventories, and Fabricio can detail this.

We formed the inventories of the third quarter at a lower U.S. dollar. So when we negotiated, it was lower, and we're confident we have good negotiations to be more competitive, especially in 1P and websites and stores for the third quarter. So I think this inventory reduction was important in the long run for the negotiation conditions, and that makes us -- we will get to the third quarter definitely with better competitive conditions than we had in the second quarter for those channels that we have, not only Magalu, we did the same for KaBuM! and other companies in the group.

Next slide, please. Now on sales, I'd like to point to the resilience of our main categories. We've been able to increase 1% net revenue in the context of high interest rates that end up impacting not the market. I want to make it very clear. The market remains heated. It's still in full employment. The employment rate shows that we are at historically -- this unemployment is at historically low levels. The population is employed. Social benefit levels are increasing, and there's a lot still to come, potentially a reduction of income tax for families with up to BRL 5,000 income. So it's a good economy.

But when interest rates are high, the capacity of us to have sales with 24 installments with no interest, the capacity for us to be aggressive and have a positive contribution margin is lower. So it's not that the market is -- the consumption market is affected as much as the actual capacity of a retailer with high ticket categories have to have more aggressive sales with prices at the best terms. So I think that's the -- how the market is. In the third quarter, Selic rate will remain high, but we have costs that we have been able to get good negotiations for the quarter, and I believe we will have an even better third quarter in terms of sales, continuing with this rationale of efficiency with the second quarter.

So the second quarter here, we saw growth in physical stores at 3.5%. It would have been 5% if we excluded Rio Grande do Sul that was a smaller -- much smaller value in the South because of the flood. So if we exclude that, that is concluded now in June, same-store sales would have been even better. It also decreased. There was a slightly higher dynamics compared to the first quarter. And 3P posted a decrease, and that was a tactical decision of not entering, especially into competition in the market dynamics of free shipping and so on. We have very strong discipline of not selling products with negative contribution margins. So that was a tactical decision for the quarter, not long-term strategic decision.

But noting that even low-ticket categories, we had great performance in market categories in consumer goods. But effectively, we did not enter into a -- we did not enter that discussion. We didn't join the discussion of categories with negative contribution margins. We believe here that this condition, I think this will pass. It's not perennial, and we are fully capable of resuming over the quarters.

But what I want to make clear in market's view is that Magalu is a company that has an economic model with 3 growth engines. It's different from other markets that only have one engine, only 3P, only physical stores or retailers that only have physical stores or only the 1P engine. We have 3P. We have the growth engine of 1P, and we have the engine for growth in physical stores. So that, I believe we have been able to be resilient even in situations that are adverse in the market.

Now with the engine of the 1P, finding rough the rain because of a specific economic condition, 1P and same stores -- physical stores will make up for it or when we have a drop in 15% in same-store sales, 3P helped the stores at that time when 1P faced difficulties in 2022, '23, when we were rebuilding inventory, there were some aspects there that we needed to evolve. 3P also helped. So having this balance between 1P, 3P and stores is a competitive edge that is important for Magalu, and that's how we built our operation.

When we put together our 1P, we did not put it together to the detriment of physical stores. It was integrated. And 3P, when we put it up, it's not to the detriment of 1P and physical stores. We want the psychological balance between the 3 growth engines, the 3 important channels for the company, and that's how we'll move on.

And we have a highlight as well that for the categories, especially where we're leaders in the market. In the Magalu channel, categories with tickets above 1,000, we had 5% growth, 1P and 3P. So combining the categories, these protect our shares and gain share in these categories. That's an important highlight. And what happened on the online was very specific for very low tickets, a lot due to the short-term issue.

Another important point in addition to the important categories for Magalu, it's important to note how well the companies we acquired are doing, which are part of our diversification cycle and I'll talk a lot about our ecosystem. Ecosystem is not an end. We didn't do -- we didn't adopt an ecosystem strategy as a buzzword of ecosystem. The idea is to invest in companies for the acquisitions that we made in this period to diversify our results lines as an asset fund manager has to diversify results, not put all the eggs in the same basket.

Magalu also wanted to diversify results to complement the core category like electronics with other categories. And this is shedding light into 3 companies that we acquired that are doing very well, KaBuM!, Netshoes and EPOCA, all of them operated with good results. KaBuM! with BRL 12 million net income in the quarter with the GMV growth, Netshoes as well, BRL 24 million was very good for the quarter in terms of results, growth as well that was very significant. Same thing with EPOCA with income and growth.

So it's not only a very important position that we have in good durable goods and categories, but we also have an important position in computer accessories, gaming and a very important position as well for health care products, sports items, netshoes is at a very good phase now and beauty and cosmetics. So Magalu has been able to gain a competitive presence in these categories as well with profitability. So all of them following these lines. And then later, I'll talk a little bit about this because for these operations, we also want to have the 3 engines.

A lot of these operations are only 1P. We added 3P, for example, Netshoes, 50% of it is 3P now. KaBuM! has also increased 3P and EPOCA is entering with 3P now. And for all of them, we are adding an engine of physical stores, and I'll talk about this towards the end of the call with the launch of our main -- our big new format that's Galeria Magalu. Still on ecosystem, I think one of the situations, if we were to face an interest rate at 15 and high interest rates, we would feel this very strongly in our results more than we do now.

So again, the ecosystem is not an end, but it's a means for us to be able to achieve less of a cyclic results, which has always been traditional for our categories. The standard for traditional categories was that. And that's exactly what we're working on. I'd like to point some fronts of the evolution of our strategy that I would say is the -- this was the last big year for the cycle of ecosystem. I'd like to start with logistics. Magalog that was a department in the company, then we bought 3, 4 logistics companies, and it turned it into an independent company, independent from Magalu. Magalog provides services to 1P and to Magalu stores. also starting to provide services for sellers, but providing more and more services for companies outside Magalu's ecosystem.

Now we got to 90 external clients at Magalog, generating significant revenue. So it's no longer a center of expenses, but it becomes a center for revenue for the company, we're gaining a lot of share in segments like fashion, Zara in Brazil operates through Magalog, Renner operates through Magalog. Pets, PetLove use Magalog, sports, electronics. So we have an important expansion of our network, and that helped us dilute costs and have competitiveness for Magalu as well. So it's going very well.

Magalog has been able to achieve this with a level of excellence that it has also provided Magalu's NPS is 80, 85 for 1P in stores, 75 for 3P, so 80 on average. And Magalog is transporting this service level to its own clients. So we received now recently an award [indiscernible] RA1000 and a lot of excellent awards with these external clients awarding Magalog as the best logistics operator in the quarter. So we transformed that into a company last year, we already have 90 clients, and we keep on growing.

Also other highlights. Going back to 3P a little bit is the penetration of fulfillment. I'll let Fatala and Garrido talk about this later, but from 21% of orders in the first quarter went to 27% in the second. So we have a lot better distribution level. There's 10 distribution centers at the company that are working for sellers as well. So that's an important evolution for us. We increased -- we grow 3P, where we have more control and more competitive conditions as well, more resilience for the future. So we're replacing partner shipment to sellers who use Magalog. So dropping with partner shipments, we're offsetting with that by growing with Magalog.

Another highlight that has been the highlight for some time in this quarter, even more so worth of note, and Beto will talk about it and Jorg as well. MagaluPay, we have all of the companies here in our credit financing and financial services performed very well. We have records at Luizacred, the $100 million in the second quarter, ROE of 19%. And once again, compared to last year, delinquency indicators going down with high coverage. We will have here and [indiscernible] will be able to detail this. There's something new that we were able to get authorization from our financial institution with the Central Bank, who will operate with the buy now pay later lines and direct credit to consumer credit will start operating now in the third quarter of this year. And through that, we'll obviously get great opportunities to continue to increase penetration of products.

Our penetration is on physical stores slightly over 40%. There are physical retailers in Brazil who operate with the penetration of financial products of 70%, regional, sometimes getting to 70%. So there's a lot of room for growth. And it's one of the situations today, even on physical stores, the opportunity to increase penetration of services and on online, a huge opportunity for to increase. We only have 10% and there's a series of initiatives to increase penetration of services on the online sales, and he will be able to detail these initiatives.

On the third quarter, I believe we will evolve in these aspects. And MagaluPay as well. I'd like to highlight within the MagaluPay umbrella, the excellent moment for the consortium, consortium Magalu has another quarter of significant growth, consortium. At a moment of high interest rates go very well. It's a good alternative, both for investments and for savings and for purchases, and it has been growing steadily with a lot of profitability as well -- another pillar of the ecosystem that has been supporting us.

Next slide, please.

[Foreign Language]

[Operator]

[Interpreted] Our first question Luiz Guanais from BTG.

[Luiz Guanais, analyst]

[Interpreted] I have 2 questions on my side. Fred first, I know you talked a little bit about the ecosystem of physical stores and different brands within the same ecosystem and how important this is to generate value and improve margins. But if you can give us more detail about the drivers that you see for the expansion of margin in Magazine Luiza looking forward?

And the second question would be, if you can talk about the evolution of the conversion rate of the sellers and how credit may be important in this indicator?

[Frederico Rodrigues, executive]

Luiz, thank you for your question. Well, I think the drivers for monetization and so on including margin and our strategy are very based on things we've been presenting here and part of the channels I described. So I see that the penetration of ads is still very low, even though it has increased significantly in the second quarter, there's still huge room to penetrate ads and what improves the online margin. And it will also improve for physical stores because our ads will be relevant for physical stores as well.

I'd also like to point that Magalu -- more than the marketplace. Magalu is a brand place. We are the best channel for brands because we don't have an excess of white label products imported from Paraguay. So 4 brands, there is a place with the best brand safety it is to announce in Magalu's ecosystem. So this is also very good and also because we are a lot more strict in the type of product that we allow on 3P. So I think ads is an important channel, and we're having a lot of good development and traction with the brand and announcements and ads with the tools as they evolve the best indicators we have.

And also, as I said, the penetration of financial product in physical stores, we have 40% of penetration of the cards and direct consumer credit. But on digital, there's still room to increase penetration without increasing risk. Jorg can talk about this later on.

And on the online, there's a huge opportunity. The penetration is below 10%. So we can and should must improve our penetration of financial products on the online. And we have a series of initiatives and definitely, but not exclusively, the new financial company and the investments that Jorg has mentioned -- making in terms of team, improving products as well as in the purchasing journey that they may vary.

In terms of conversion, this is the year where we're working not only for 3P, but overall for the company to improve conversion rates. So we've been evaluating all different aspects, 360 degrees, including the time -- the delivery times, pricing in upfront and in installments, we are assessing to improve bidding algorithms for market -- marketing to bring visits with more conversion rates. So there's a series of structural investments for improvement that we're making so that we can see an increase in conversion looking forward. And we had a quarter with expenses.

SG&A, there's this asset selling expenses. And part of the evolution of this quarter was also in the sense of discipline for media investments and what we brought to convert more, but there's still a lot to evolve and to seek in terms of growth.

What we're cautious here is that we're not getting into a war that generates conversion at a negative contribution margin. So like low cost freight or freight or free freight preshipping that we don't see that brings negative contribution margins. We do not see a reason for our Magalu business to get into a war, even in the long term. At a time where we have interest rate of 15% a year, discipline must be good. And our features give us the option of seeking conversion as long as it has a positive contribution margin. So there may be a great increase of conversion in other senses.

And later, I think -- I don't know, maybe Atala Garrido, do you want to talk a little bit about initiatives and conversion? I think it's important to talk about the market category and what we're having, if you can add?

[Unknown Executive]

[Interpreted] Thank you, Fred, and thank you for your question. But as Fred said, I think one of the main features that we had a benefit or edge that we had this quarter that's important to convert sellers is precisely the growth of fulfillment. We grow all as we can make the most of the virtuous effects of multichannel, omni channel. So we make the most of DCs and collections and deliveries from 1P and physical stores. And with that, we're able to offer coverage even for preshipping or on store pickup. We have 97% of deliveries made by Magalog in this store pickup operation that we believe is a differentiator.

And with that, [indiscernible] can offer customers faster shipping and more coverage of free shipping in a way that into this culture of rationality on expenses that Fred mentioned. [indiscernible] has a conversion that is 3x bigger than deliveries made by the sellers themselves. So as we can increase the share of [indiscernible] on orders, we got to 27% now 3 percentage points more versus the last quarter and 6 percentage points compared to last year. We are able to bring the sellers to a conversion level faster.

The main evolution from now on, we just launched in August. We had a soft launch on products, then we're going to explore more in the Magalu Expo at the end of this month, we have already enabled a feature to attribute preshipping as the shopping card gets to BRL 200 and supermarket purchases in full. And that's for 1P and full. And that values categories with lower tickets, without hurting margins. So we believe this is the next frontier for growth in the share of [full].

But I would also say that in our pickup operations, we've been able to move more than 2,000 sellers that were shipping from post offices move them to the Magalog network even using external clients that are coming in, as Fred mentioned. And that improved for those 2,000 sellers, their delivery times in more than 5 days, a conversion of more than 20%. And for us, savings and operating costs. So all of these logistic operations and services for sellers are very important to be able to move conversion forward as we protect the business margins.

[Operator]

[Interpreted] Our next question, Antonio Cardoso with Jefferies.

[Antonio Cardoso, analyst]

[Interpreted] I have 2 questions. One, you talked about Magalu Bank a little bit. If you can evolve the subject a little bit further. Now on the second half of the year, where are we going to be able to see difference or possible results? And what are the opportunities either for growth or cost savings that we believe is mentioned? Maybe get Jorg to talk to us.

And the second question marketplace, how do you see marketplace positioning in the medium and long term? What should we expect from the marketplace? Growth in line with inflation to happen as the market growing -- as the market grows, what's the medium to the long-term positioning for marketplace?

[Jorg Friedemann, executive]

[Interpreted] Thank you, Antonio, for the question. This is Jorg. I'll start talking about the opportunities for the short and medium terms in Magalu Bank. We see -- we have a lot of opportunity related to operating and fiscal efficiency, migrating retail direct to consumer credit and maybe Fred can talk a little bit more about this about these impacts. I also see gradual evolution in Luizacred, both Beto and Fred talked about this. And I think the second half of the year we'll be able to capture the benefits of the investments made at Luizacred, both in terms of improving the product and controlling delinquency rates. And I am very optimistic with consortiums.

As we mentioned, consortium has been becoming a sales powerhouse in the platform, growing more than 30% a year. The second quarter total sales totaled more than BRL 1.5 billion. In addition, and this is something new, we have been investing strongly in data and credit expertise so that we can expand our capacity to serve recurring clients in the ecosystem. So these clients, obviously, have a less risky profile, but they are not enjoyed at full capacity in MagaluPay today.

Next week, we are going to bring a very senior executive as the Head of Credit with more than a decade of experience in companies such as [indiscernible] and Capital One to help us raise the bar of these disciplines in our ecosystem and start to materialize this potential in the short term.

[Frederico Rodrigues, executive]

[Interpreted] Now answering the rest of your question, I think I talked a little bit about this already. I think the role of 3P for the company -- we don't have a guidance for each of the channels. But I think without a doubt, we expect to grow above inflation and above the market, not only on 3P, but in 1P in stores as well. We want to grow on all 3 channels. We don't have one engine. We have 3 engines. 3P just as 1P gives us strong scale, stores give us margin and poses and helps us in logistics operations. 3P also guarantee assortment relevance because with the frequency, we can include items that have more frequent consumption for us and profitability. Well-managed 3P can help quickly the company's EBITDA margin.

The issue here is to have discipline not to seek growth in 3P at all costs, to be very disciplined and make sure that it falls into the value proposition for the company as a whole, contributing to specific aspects where they have the location to contribute, as I said, assortment, relevance margins and growth where the market presents opportunities. So we need to have a technical eye to the market to accelerate. I'm certain that for the long term, we will have one of the big options for a lot of sellers and B2C brands that we'll have a huge level of safety to increase their operations here.

In addition, for example, a brand that has a D2C Samsung. They have 3P, but they also have 1P in physical stores. So having this relationship, there's a lot of synergies in the process. And for sellers as well who make the most of the most -- the same omnichannel structure that we have -- store pickup that we mentioned. I think all of that are important, not only for 3P, but 1P and physical stores, we want to grow above the market and above inflation. And when this is possible, and we have a positive contribution margin, there may be a time or a quarter where we choose margin more than growth which was the case of this quarter now, and that depends on the dynamics.

Now we're in a contest as a retailer that 3P has high tickets. At the moment of high interest rates, any decision usually we leverage sales of high tickets in terms of payment terms and so on, but with high -- with the Selic rate at 15%, that becomes too expensive. So that limits our firepower temporarily. But once the Selic rate goes down, and you look at Magalu's pattern of growth, when Selic goes down, we grow well above the market. We're at a very specific context of high Selic rates we have a little bit less capacity to grow, specifically on online, and I'm confident the Selic has reached the maximum. And once it starts dropping, once again, we will be one of the main retailers and Brazilian online retailers to capture this growth with profitability.

Now we have to be disciplined and focused on our project without getting into a war for growth at any cost.

[Unknown Executive]

[Foreign Language].

[Andrew Ruben, analyst]

Maybe just to focus on stores a bit. We see the speech and focus, I think, shifting even more towards multichannel. You mentioned the Galleria Magalu. I'm curious how you're thinking about store growth as part of the more normalized strategy? What would you need to see to begin a more steady pace of core store openings? Is it just about interest rates or anything else you want to see in terms of, say, the store level returns?

[Unknown Executive]

[Foreign Language]

[Operator]

[Interpreted] Next question, Rodrigo Cuestas [indiscernible].

[Unknown Analyst]

[Interpreted] Already with a follow-up on the previous answer. Thinking about the value levers, talking about 1P and physical stores. I'd like to ask you what exactly is the focus on these 2 channels for the next 12 months?

[Frederico Rodrigues, executive]

[Interpreted] I'm sorry using [indiscernible], could you repeat your question, please? I think I had a problem here with my connection.

[Unknown Analyst]

[Interpreted] Sure, Fred, no problem. But following up on your last answer, you'll talk about both 1P and physical stores and thinking about the value levers, what are exactly the main indicators, what are the main things you're focusing on, on these 2 channels thinking about the next 12 months?

[Frederico Rodrigues, executive]

[Interpreted] The next 12 months, we have again to consider looking at a Selic rate at 15%, I think we need very strong discipline in terms of margin and management of working capital and cash, very strong discipline. And without a doubt, we're seeking and investing our attention a lot and how to consolidate the margins, the margin levels that we reached with more operational leverage and sales.

So the next 12 months, we'll try to consolidate this better. The margin we reached this quarter with expressive growth on top line.

So for the next 12 months, I would say, these are the alternatives we're going to explore, 1P/3P and physical store, margins with this opportunity for monetization that I described as well as growth in our acquired companies. So I think it's a lot of consolidation of the margin with greater growth looking forward. That's a challenge. And of course, if we have to choose, I prefer to bring in positive results, but the ideal would be to have positive results and top line growth.

[Operator]

[Interpreted] Next question, Lucca, UBS. Okay. Moving on to the next question then.

Next question is from Felipe at Citi.

[Felipe Reboredo, analyst]

[Interpreted] It's a question more in the sense of expense control that you been able to be very disciplined in maintaining a stable even in a scenario of high inflation. So I'd like to understand the main drivers for this control and how you look at this going forward?

[Frederico Rodrigues, executive]

[Interpreted] Thank you for the question. We had another microphone and I apologize. So I think the control of expenses, again, is the only thing that we have in our hands. It doesn't depend on the market as much. So G&A, it's more a matter of discipline. In terms of cost control, we have the matrix management of expenses. We had the zero-based budget last year, reducing administrative structures in physical stores last year, reducing the share of salespeople and back half control of expenses from electricity to leases, negotiation lease. So we have a very strong committee focused on these items. And we already expected this to be a difficult year in terms of increasing interest rates and financial expenses. So what we could control, the Selic rate is not, but G&A control.

In terms of selling expense, there's a little bit of our management that I've been talking about the conversion -- the focus on conversion, I expanded a rise question to that end. So there's initiatives to increase conversion. And I'll take the opportunity, Falata, if you want to add about our more technical initiatives to increase conversion, you can add. I would turn the floor to you at that time. Maybe now we'll be good.

[Unknown Executive]

[Interpreted] That's great. Yes. Talking about the work we've been doing focusing on conversion. We have 3 main fronts: one, focused on competitiveness; one is the service level for deliveries; and then everything that we do working on customer experience in digital channels. In digital channels, there's great effort being made and we are working very focused on surveys with consumers to raise points of improvement.

In terms of searches, we are removing all types of friction in the checkout process with greater opening in terms of payment methods to make it easier for our customers to make a purchase. So a lot of work being done in the sellers base as well, building tools that they can operate better for their sales and also to simplify how -- they operate their stores inside Magalu.

So the combination of these different fronts, especially including what Garrido mentioned, that we've been focusing on fulfillment that already brings compared to shipments from the partner themselves. With our full delivery, we increased conversion 3x. And these are the main fronts focused on how the seller is operating and the customer experience in the channel.

In addition, there's also strong work being done for conversion with the investments that we have in traffic we've been working on changes in the algorithm and building models for investment in media and structural work where we are building a strategy to get more diverse traffic, drive more diverse traffic through video ads.

We're building a community that can build videos, and we're going to work more focused on social channels to drive visits from an experience that also brings a lot more opportunity to demonstrate our products, to showcase our products. We saw a very strong -- the trend built by agents, we saw the impact made internal tests, and now we're working structurally to scale this up. And it's also worth mentioning, part of a future work that Fred already mentioned on the last call, and we are working on them and testing is an AI commerce front. We already have a soft launch for the [indiscernible] brain in Whatsapp, we have about 1000 employees at Magalu testing that. And based on their feedback, we made improvements. And it's also a channel where we believe the consumer experience will improve and conversion levels through this channel will be or should be a lot higher than what we see in traditional channels, just because how easy it is and how much it reduces friction in the purchasing process through these assistance that may be of great help in the decision-making process of consumers.

[Operator]

[Foreign Language]

[Unknown Analyst]

[Foreign Language]

[Unknown Executive]

[Foreign Language]

[Operator]

[Foreign Language]

[Frederico Rodrigues, executive]

[Foreign Language]

[Operator]

[Foreign Language]

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]