Magazine Luiza SA

BOVESPA:MGLU3

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Thank you for waiting. Welcome to Magazine Luiza's conference call to discuss the results of the third quarter of 2018. [Operator Instructions] Now I would like to turn the floor to Mr. Frederico Trajano, CEO of the company. Please, Mr. Trajano, the floor is yours.

[Frederico Rodrigues, executive]

Good morning, everyone. Thank you very much for participating on our conference call regarding the third quarter of 2018. Here with me, I have all the executive management of Magazine Luiza, and me and Roberto Bellissimo, our CFO, will be doing the presentation. We'll -- I will hold a brief introduction and then Roberto will go into the details.

In my opinion, we had very positive results considering a challenging scenario that we had forecasted. I had forecasted that this challenging scenario in our last call. Post World Cup, we always have a World Cup hangover. As we say, it was a very strong growth quarter. And sometimes we even anticipate sales from the second half of the year to the first half of the year, especially on TV side. We also had a net FX pressure scenario, which was a major concern for me about the second quarter because of the elections and all the uncertainties surrounding elections. And because of all that, I should highlight our sales growth. Considering the fact that the third quarter of last year was one of the best quarters in the company's history, we had a growth in the offline as well as in the online last year. So to grow on top of that basis and facing a challenging scenario really was -- it's something that the company should celebrate. And it was even higher than my expectations. We have grown 24% the brick-and-mortar stores with an expressive share of same-store sales, 16%. We are already reaping the benefits of an expansion program we started -- accelerated last year of opening new stores. We have over 80 stores open, and by the end of the year, we should continue on that pace of growth.

And also, I should highlight the growth of e-commerce, both in 1P, an operation that is growing on top of high growth already. And with a result of that is very significant of marketplaces that we were already expecting in the range of BRL 1 billion. So that is a very significant growth when we compare it to last year. And we'll talk more about that shortly.

We had new sellers coming in now in October. We are already with 400 new sellers that is a record for new sellers in a month, showing that we are improving our onboarding process and we are still being very selective about the entry of new sellers. We are, by far, the company that is most selective, most strict because, for us, the service level of 3P has to be the same as the service level of 1P, that is very good, very high. But what I am celebrating the most about this third quarter results is the performance of our customers' indicators.

We committed ourselves and we emphasized that, since the beginning of the year, in all our conversations with investors, in all our releases that this would be the year of the customer. And we would raise the bar and raise very much regarding the growth of our client base, and especially the growth of the customer service levels. So we were committed to put together a real operation, an, in fact, operation that would be guided, follows consumers and also customers because anything that we can have that is most important is to have a loyal customer base that would have no reason to leave us. We have been doing that and for this term time in this release. And I would like to invite you to read the release, the message, that we have sent. We are showing some indicators that we did not disclose to the market before. I'll be talking about those because I believe that is crucial for all of you to understand the quarter vis-à-vis the significant growth of these indicators. We have added these customer indicators at a high bar so that you could see and you've seen any organization in Brazil or -- and in all over the world, but many of them are not really focused on the customer. Sometimes they lose market and they do not have our situation. So some of these indicators are qualitative and some are quantitative. I think it's important to grow our customer base. We had an increase in the average ticket. And this year, we wanted to grow the number of our active customer base. We have grown 31%, the active customer base, with the highlights to e-commerce that has grown 71%, a very significant figure, much higher than any other operations in the market. And I would like to emphasize that we are not growing e-commerce and not growing brick-and-mortar stores. Brick-and-mortar stores have grown 21%, but we are really gaining market share, not only sales but especially share and the client base, both in the online as well as in the offline.

For the online, I should highlight our efforts to increase not only the increase of our client base but also the loyalty. And we are working on the app. Over 75% of our access are already by the new digital options, the app and also -- and the website. We have a total of 19 million of downloads in it -- on the app. And the brick-and-mortar stores, I should say that the app customer will buy more frequently. They are more loyal to the [indiscernible]. We provide them more advantages, such as free freight so that they can have the delivery -- free delivery of products, over BRL 100. So this is a better purchasing experience. We can buy in up to 10 seconds. We are one of the best-evaluated apps, both in the App Store as well as in the Android store, so we developed an app that we are always improving, and it is generating a constant relationship.

And also [indiscernible] and our tracking, post sales, in the app has improved a lot. Therefore, we are very happy about the customers that are using the app. And the app for brick-and-mortar stores, we consider to be the credit card. Because then we have a relationship with the customer that is not onetime off to be more frequent. And in addition, to increase our client base, we want to have a more frequent relationship with those customers. And this is a challenge because we were a company that were very much trying to build frequency products of a high average take rate. Now we are improving the share, the participation of the light products. And the credit card customer buys more. We decided at the beginning of the year to accelerate investments and bringing in customers by selling the Luiza Card. We are selling 150,000 cards a month, 86% more than last year. And that involves investment, discounts for those customers that buy with the credit card, the financial dynamics of accounting, the results of the credit card has, that has an impact in the short term by the IFRS 9.

But what time the credit card, since this is very possible, it will improve the company's results in the long term. In the short term, we do have an impact on Luizacred, but in the long term, we will have a very positive result, both Luizacred as well as for Magazine Luiza. Because since this cardholder has a higher credit limit, they will buy more products and they have the profile of the customer lifetime value that is more positive. So the investment on the app shows that we are investing that -- something that it might translate a little bit less is the short term, but in terms of value generation for the long term makes sense. And we are making that conscious decision of doing that right now because it does have a trade-off. To give you an idea, 50% of everything that we sell in the brick-and-mortar stores, we sell especially by the Visa credit card. So it is a sound figure, and it turns very resilient, the results of the brick-and-mortar stores. Because the credit card, the Luizacred is still -- those customers are loyal to the channel and a good part of the growth of brick-and-mortar stores has to do with the increase of penetration of credit cards in that channel.

I talked a little bit about numbers. Now I want to talk about quality, service level. We invested a lot in terms of sales, especially in delivery. We opened 2 new DCs, and we invested a lot in the express delivery. Today, over 30% of what we sell online we promise and we deliver in up to 48 hours. I think this is an average that is much higher than the market. And a good part of the online growth has to do with the higher conversion of products that we promise at a shorter period of time. Sometimes the customer privileges lower delivery time rather than price or any other KPI that you might provide. And since we are giving lower delivery times in 160 cities, where we have the express delivery, we have had higher conversion rates. And this express delivery model not only is bringing higher NPS to our customers but also we are converting more sales and growing more at a very accelerated level on top of a high base. We should highlight and congratulate our logistics team. They are doing a great work. We also have the mother-load delivery, such as the pilot we are running. We want to transfer what we have in 1P to 3P.

We tested with 10 sellers. And with the pilot project, we reduced that time in 60%. We want to work more on that to make that available to our sellers. But this is a promising start for our pilot project. And as we always do, we have a strong ability to roll out our pilots at an expedited rate as we have been showing you consistently. I also should highlight indicators that are very relevant for any retail operations [indiscernible]. Our client or customer satisfaction to customer service that has increased. The waiting time also is less than 1 second sometimes to 30 seconds when they call customer service. 60% delivery time reduction when you buy in the website. The [indiscernible] the complaint side. And for con, all of those complaints have decreased 40% of every 1,000 orders. So we are -- with the service level, with delivery level that is much better than the market average. We are improving, we are very happy about it. So we are the only ones that have the few RA1000. We also have that sealed for our brick-and-mortar stores. We have our website out, so as the RA1000. These are very solid indicators. And all the efforts we have dedicated to improve the service level to customers, to increase the number of active customers and frequency of purchase, all of that is showing positive results, and our stores NPS improved. Our e-commerce NPS is still there and it's growing so I am especially happy about the team's work regarding all of these indicators and how we have been able to consistently grow. We always have trade-offs to reach those indicators. We have invested BRL 36 million, and that brought our margin down in 1 percentage point vis-à-vis the prior quarter. We invested in logistics with the 2 new DCs. We increased the supply of stores. And also for deliveries to be able to promise 48 hours, we increased the number of people working in logistics handling the goods. We also increased our store capacity, the capacity of customer service. We invested in tools, technologies, some of them in the OpEx, some of them in CapEx. We also have taken actions to bring in more customers to our app, to our card base. All of those investments are crucial so that we can go forward and protect the company against any market threat. And also maintain this company as one of the companies that tends to have a share gain -- a market share gain that is relevant. These investments were all planned. And our conversations, we have already mentioned that. And I would like to say that, based on what we see, especially in other online operations, these are not very high investments. Other companies that had to grow a little bit more, they had a trade-off that was much higher than ours, showing that our growth is extremely healthy. And we are very much focused on generating value to our shareholders. The return on invested capital is on a raise of 30%, that's very high. Yes, we are letting go a little bit of percentage, but in absolute results, we are growing EBITDA, cash generation, net income. So I believe this is an operation that has been proven to be sustainable, healthy and a way to tap into growth with a greater potential of value generation to shareholders is this one. Yes, we do have a trade-off there, and I want you to interpret it in a positive fashion knowing that the company has that discipline of generating value to shareholders, and this always has been our motto for the online and offline operations.

Now closing my remarks, and before I turn to Roberto for the financial results, I would like to tell you a little bit about the fourth quarter. In terms of -- well, I am not as much concerned because my concern, as I had said in the prior call, was the FX pressure because that makes it difficult to negotiate with suppliers. This was what happened in part of this third quarter. And now at the end of October, beginning of November, we have a better overview of the FX. It's more positive. We were able to close our deals for Black Friday for the last quarter, and we will start negotiations already for the first quarter of next year. So we are already in a situation where we have more visibility. And obviously, it will depend on our execution capacity. Because, if you have a good quarter in retail, you have to execute well the next quarter. And our comparison basis is getting worse because we were very good in the quarter -- third quarter of last year, and we were extremely well in this quarter. So as I usually say, our main competitor is the results that we had in the prior quarter of the year. So we have to execute it very well, with very little error margin so that we can provide you better results than the quarter of the past year. But I should highlight, it's always a challenge for our operations. But in terms of the macroeconomic scenario, the indicators show a good situation that is at least a little bit more predictable than what we had in the third quarter, and now we can plan ourselves both for the past quarter -- for the last quarter as well as for the quarter that comes ahead. I'll turn the floor to Roberto and then we'll be available for your questions.

[Roberto Rodrigues, executive]

This is Roberto. Good morning, and I will start with some highlights on Page 5. We have grown 34% on top of 30% growth last year. So in fact, our highest growth last year. And with the BRL 4.6 billion, the same level of the second quarter, where we had the World Cup. It was really an outstanding sales performance. Same-store sales, 16% in brick-and-mortar stores, and new stores had a contribution of 8 percentage points in this growth, very positive since the beginning.

Marketplace and e-commerce has grown 55%, also reaching the highest level, 36% of our total sales, and has grown 55% on top of 65% as compared to last year.

Marketplace also has grown, reaching an annual sales of BRL 1 billion in September. Our gross profit was down a little, basically, because of higher share of e-commerce that increased 5 percentage points when we compare the last year to this year. But we diluted operating expenses 0.5 percentage point, considering the investment of 1 percentage point in operating expenses. So this dilution could have been 1.5 percentage points, but it was 0.5% considering all investments Mr. Trajano talked about. We grew EBITDA in 11%; net income in 29%; operating cash generation and ROIC, also very high.

On the next page, we have the performance. Our number of stores, we have 83 stores that were opened in the last 12 months. We have investments that we have already started for more dozens of stores that will be opened in this quarter.

Our CapEx has increased a lot. It has more than doubled in the third quarter when you compare it to last year, reaching BRL 234 million more or less of that, 50% in new stores and remodeling, and the remaining in IT and logistics. And well, that's our strategy.

On the next page, we have our quarterly sales performance, our e-commerce performance, sales growth, IBGE, the closest that our segment had strength and we did have growth in the quarter. So we gained a lot of shares in different channels.

On the next page, we have margin performances. For expenses, you can see that we have diluted administrative expenses that are essentially fixed expenses for the company's management office, DCs. And we have not diluted sales expenses by the investments in service level, no customers and so on.

And the equity income, the profitability of Luizacred decreased a little bit. We'll talk more about that. But also because of the growth effect and the IFRS 9.

On the next page, our performance for EBITDA. Once again, we have grown our EBITDA because of sales growth, the profitability of e-commerce, the dilution of expenses even considering all investments in customers.

And the financial results on Page 10. We can see that we continue diluting a lot our financial expenses. We were able to reduce those in 1 percentage point, not considering prepayment of receivables. We have financial revenues, and we also show here the cash generation starting on working capital. And a highlight here, we continue having an average term of inventory turn that's very high. The purchasing period of 90 days and also 70 days foretelling so that's very healthy. And this is something that we already said in the second quarter. We increased the inventory a little bit. We anticipated purchases taking advantage the prices that had no effect of the FX increase or appreciation. So anticipated some of the purchases of the third quarter to the second quarter, since we have 90 days to pay. We anticipated those purchases and so we have more payments in the third quarter. So we should have less payments to be made in the fourth quarter. The working capital is seasonal, but this effect has decreased a little bit the cash generation for the third quarter, but that will favor the cash generation for the fourth quarter. And even considering these anticipated purchases and all the increase in investments in fixed assets and everything else, we were able to maintain our net cash position at BRL 1.3 billion (sic) [ BRL 1.9 billion ], considering BRL 700 million of cash and BRL 1.2 billion of receivables. So I believe that we still have a sound capital structure and a cash generation, and a return that is high as well.

On Page 11, we have the capital structure. We have reduced BRL 1 billion in debt in the last 12 months. We increased our cash variation of BRL 1.3 billion in the last 12 months. We have the net income margin of 3.3% in the quarter even with all the investments on customers and an ROIC of 31%.

And then on Page 12, we talk more about Luizacred. We are still investing on Luiza Card, increasing our card base. We reached almost 4 million credit cards in September, growing at an annualized base of almost 1 million cards. We should grow around 1 million cards this year. We are selling, as Fred mentioned, 150,000 cards a month. And it's important to say that 95% of our base is active, and that means that they are either buying or they have a balance to be paid. They are receiving the balance. And 65% do use the credit card every month, in average, and 7x a month in average. So in fact, this is the main card for most of our customers. And this is very important for the bottom chart that shows the credit card sales increase inside ML and 54%, also improving the growth of brick-and-mortar stores. And with the highlights for e-commerce that started having the use of that share -- the use of the credit card in the e-commerce. It's lower but it's growing. So the revenue of Luizacred went over BRL 5 billion in the quarter, a portfolio BRL 7 billion. With all the conservative approach that Itaú Unibanco has.

And on the next page, we show that NPL 90 went from 8.3% to 7.4%, one of the lowest levels. And the NPL for 15 to 90 days also is at the lowest level for the third quarter at 2.8%. So we have been able to grow a lot with a very healthy portfolio, a very conservative approach and levels of provisions that are also conservative. We show here the coverage ratio at 189%. With the IFRS 9, we have strengthened our provisions. The impact in the short term was on the results. If you show the results in BR GAAP you see that this is still growing, it's over BRL 115 million over the year. And as Fred also mentioned, the trend, the potential of the Luiza Card as well as the profitability of the portfolio and demand in the long run is very good. And it makes all sense, both for retail as well as for Luizacred to have this strategy. These were the main highlights. So now, we would like to open the floor for the Q&A session.

[Operator]

[Operator Instructions] Our first question is from Luiz Felipe Guanais, BTG Pactual.

[Luiz Guanais, analyst]

I think the investments made in platforms and the purchasing experience are [ varying ]. But on the side of the seller, how can we expect the performance of fulfillment indicators for the next quarter? And the second question, can you share with us, out of these new customers, the active customers, what is the percentage that is going straight to the marketplace?

[Frederico Rodrigues, executive]

Luiz, thank you for your question. As I said, in terms of fulfillment and the use of our logistics for sellers, we started the pilot project with 10 sellers with very positive results. Now we are in the rollout process. We have a version 1.0, which is the one that we use third-party contracts for sellers and we have an advanced version when we use our own network. We are already running tests with the Logbee that now is considered our own network because we acquired it. So we are still on a pilot stage. We intend to roll it out, to start to roll out in this fourth quarter and to accelerate it over next year. But I will not provide you guidance in that sense. We are being very careful to do that. We have to do it very consistently and to maintain that positive customer experience. What I can tell you is that we'll be doing it very fast. But this year, logistics were concentrated on express delivery. And next year, we will also concentrate on taking in the volume of third parties. So we are confident that we will be able to bring that, which is one of the main differentials of 1P and bring that to 3P. We are still not even providing the major differential. And considering that basic model, where the sellers are taking care of logistics, even then, we are having significant results regarding sales curve. I think the growth curve of the marketplace is even higher than operations with public figures. This is an exponential growth showing that the marketplace is a greenfield. We have a lot of markets being used. The penetration is still less than 5%. So I believe that e-commerce is an area that can be explored by everyone. We have room for people to come in and the growth there in the marketplace shows that we have room to grow in Brazil. About new customers, that's around -- I think Roberto can tell us.

[Eduardo Galanternick, executive]

At this is Eduardo, Luiz. Let me tell you about the impact of marketplace on the customer base of e-commerce. We have 2 main impacts. One impact in the entry of new customers. First, when we look at the participation of marketplace of 13%, when you talk about the number of customers, much more because the ticket of the marketplace is lower. And in fact, that contributes to the entry of new customers. But it also has a significant contribution for the increase of purchasing frequency. If you compare those that buy -- that bought an item from marketplace to those that didn't, that level is higher. And if you compare that to an active base, you see that you are not losing customers. Not going into the details of figures, I should tell you that this is a significant impact, more than sales in itself.

[Operator]

Our next question is from Robert Ford, Bank of America Merrill Lynch.

[Robert Ford, analyst]

People seem to think that the pressure on the margin on the quarter is over. How would you address that?

[Unknown Executive]

Bob, can you please repeat your question. I did not understand very well. There is a connection problem.

[Robert Ford, analyst]

Of course. People seem to think that the margin pressure on the quarter means that, that story is over. How would you respond to that?

[Frederico Rodrigues, executive]

Well, Bob, I think this is only the beginning. If you were a digital operation and we are a digital company with brick-and-mortar stores, we have to be totally focused. And indicators for digital operations, if we consider Amazon operators, Google indicators, Alibaba indicators, all of them are interaction indicators, growth indicators, indicators for active customer base. They are not totally focused in maximizing percentages. So if you want to be a digital operations, you have to play as all digital operations play. We make a decision this year. For a few years, we have started a digital operation. And to help that game, we have to talk about exponential growth not linear growth to grow exponentially. And you cannot grow exponentially any platform in the world. In the ramp-up, no platform in the world can grow with a margin percentage. We are very clear, since the beginning of the year, about that, and we have shown that we can grow but significantly above the market with a trade-off that's much lower in terms of margin, more than what we have seen in the online operations in Brazil. So I should emphasize that, if there is a vehicle that can replicate the online growth in Brazil with some level, and in our high level of return on invested capital, 30%. And this company is Magazine Luiza, but we chose to be a digital company, not a traditional company. And to be a digital company, we have to have exponential growth, both at the base, interaction with customers as well as service level and loyalty from these customers. So the operation is just beginning.

[Robert Ford, analyst]

And also same-store sales were extraordinary. How do you explain that growth? And what do you think about the same-store sales growth over time?

[Frederico Rodrigues, executive]

Thank you for your second question. And I will turn now for Fabrício, our Officer for Operations, to talk about brick-and-mortar stores. But a quick remark, in our strategy, brick-and-mortar stores have a crucial component for the experience. The multichannel customer is better than the single-channel customer. So we are opening new brick-and-mortar stores. We are renovating them and we are -- also some stores we are renovating -- all stores. But we have been investing a lot in implementing technologies that turn the experience of the consumer in the brick-and-mortar stores much better than in other stores in the market. You can buy in 2 minutes. Now we are also developing the digital credit card. And they have a new credit card in Magazine Luiza. That takes only 2 to 3 minutes rather than 25 to 30 minutes that we had in the prior model. Today, you do that through mobile sales with a seller or a salesperson in the store. All of that in the store environment using the tech process in the store. And also, we have our team -- the work of the team, the motivation, our commercial team is working a lot. We have the stores well supplied. We are working on the very basics of supply and retail very well done because we do have a digital operation. We are also stressing reinforcing our traditional basis. Therefore, we have a significant same-store sales growth. And also we have some stores with an even higher performance. We are gaining a lot of share in brick-and-mortar stores. And I'll turn to Fabrício for more details in some categories in which we are growing.

[Fabrício Garcia, executive]

Good morning, Bob. Thank you for your questions. This is Fabrício. As Fred mentioned, I think the same-store sales are growing also because of digital operations. Our service level and stores are very good. We take advantage of all these investments. The customers are also benefited. Management of categories also is going very well, not only this year. We operate well all the categories in this quarter. Now for instance, the white line in furniture this year are higher than the store growth. Mobile phones are growing again. TVs did not take a strong hit after the World Cup. We have other categories such as IT importers and games that are growing above market rates. So the focus on the category, as Fred mentioned, and the promotion and our assertiveness is really making the difference and is growing our base, not only the credit, which is also a driving force for our business, it's a whole set of actions.

[Operator]

Our next question is from Joseph Giordano, JP Morgan.

[Joseph Giordano, analyst]

I want to talk about the growth of Luiza Card, which is amazing. But in a way, it is replacing the payments, especially on the online, with the irrelevant growth. I would like to understand how much of this Luiza Card today already represents something in the online world. I would like to understand if you want to really work with this loyal customer of Magalu or if we are still having irrelevant growth in new customers that were not traditional customers of Magazine Luiza. And second, I want to understand that fulfillment initiative. I want to know if this is an exclusive process that a fulfillment is only done in the Marketplace, it's a Magazine Luiza sales, and how integrated this logistics will be with sellers. If they will have the inventory in their own DC, how does this model the store will work as a drop off location? How can we consider that and how the things work from now on?

[Frederico Rodrigues, executive]

Well, thank you for your question. I'll turn to Roberto for the first question on the card and then I'll talk about the fulfillment.

[Roberto Rodrigues, executive]

Hello, Joseph, about Luiza Card, so far, most part of the growth comes from brick-and-mortar stores, also new cards, that is happening in the brick-and-mortar stores. We reported that we increased the IDP, the share of Luiza Card and the sales of Luiza Card in 7 percentage points when we compare the third quarter of '18 to third quarter of '17. And just the card itself, we have more or less 50% of share of Luiza Card -- of credit card and brick-and-mortar stores. The card is over 40% of those 50%. And then direct credit to consumers is 50% of sales in brick-and-mortar stores. Of those -- of that share in brick-and-mortar stores and credit card. With credit card, in the Internet, it was 4%, and this year, it's already at 6%, turning to 7% and 8%. And this is in a constant growth month by month. And we do have a lot to do. We are working hard. A lot of things will be available in the e-commerce very soon, improving customer experience, with customized offers for preapproved customers with experience, promotions, discounts. So they will be able to purchase right there and then, with a discount, with no interest, with a series of benefit for the e-commerce customers throughout. This card is started for our brick-and-mortar stores. We are adapting that for the e-commerce customer. We believe that we do have a potential to increase the share of the card in the e-commerce, and we are also considering developing a new card focusing on the e-commerce customer specifically. So there are several opportunities to be presented. In the e-commerce, we expect to have the same success for Luiza Card that we have on the stores.

[Frederico Rodrigues, executive]

Okay, Joseph. Now, Joseph, what I would like to say is that, once again, one of the assumptions of our Marketplace strategy is that everything that we do for 1P, we'll be doing for 3P, everything, all functionalities of store pickup, all of that we are working on. We see the store as a shoppable distribution center. We're adapting all the stores, we are adding all the stores. We have already renovated 44 stores up to September, we'll be renovating 100 up to the end of the year. And we'll roll it out for the new stores. All the new stores are being opened with new -- this new capacity. 30% of the area for storing and inventory handling. And all of that will be available to sellers. That is to buy on the website and pick up at the store will work for 1P and 3P and the stores in the future. We'll also be collection points, that is the seller will be able to deliver a product in the store, then it will be directed to the DCs, so that it can be sent to another store or even to the home of the final consumer. So in our almost 900 stores, now we are seeing those as distribution centers that sell and they will be in full operation for Marketplace. That is our long-term view. Obviously, we have the rolling out process, which we are executing very carefully as they go. This is an objective also of our logistics and tax team, our operation, back-office, legal, everyone is working to turn that into something where we already to have the go ahead of our legal department to be able to operate for third parties because that also requires an approval. So we are working at full speed. And we will not give you guidance of this rollout. But as every other roll out that we have made, we do have a great capacity to accelerate and grow once implemented this view, and we -- what I always have advocated about the omni-vision for our retail and 1P, it will be just as strong and powerful for 3P and will give us a competitive advantage for fewer market rate operations, if it is not the most competitive advantage, at this point, we will have, it will be a great one.

[Joseph Giordano, analyst]

Perfect. And more questions, if I may. And you involved the seller and we involved the customer, and we already see a digitization for consumer credit. I would like to understand the company's understanding, have a lot of services for sellers, but now we start to extend credit for these sellers. And probably, brought -- bringing these 2 sides together in a payment term and in a payment, I mean...

[Unknown Executive]

Well, of course, now, we are in the first stage of Magalu Pagamentos prepayment of receivables. There are no risks for the company here. And at the same time, this is very important for sellers because the need of credit is there on receivables. And we know our new process is frictionless for the seller. And also it has a better rate than the average of the market because we have also as an assumption for the Marketplace. As the better option for the seller, we will not tie the seller with logistics or with payment. We will be the best option for them. For me, the seller is our client. So we are in a market here with 2 clients. We have the final consumer, we have the seller. I see the seller as our client. Our mission here is to provide the best option to the seller. I don't want to tie the seller to me. But I want these sellers to make sure that the best operation to work with is the Magazine Luiza. Well, the digital companies in the world that I like the most are the ones that have an open mindset. In China, in the U.S., it's not to limit the sellers' options, on the contrary. In the short period, what I can tell you is that we are doing the rollout of Magalu Pagamentos prepayment that are at full speed. We will be accelerating that very soon. Most of the sellers will be operating there. But we will not make every -- anyone to work with us, so it's up to them. We will not tell them not to work with the competitor. We want to provide them the best option, and that's how we are working. That's our strategy, that's Luiza way to do.

[Operator]

Next question from Thiago Macruz, Itaú BBA.

[Thiago Macruz, analyst]

It has to do with the investments that you have made in customers. You did have a positive reaction in all your KPIs. You mentioned 4 points. Logistics, Luiza Card, customer service. And I want to understand the growth in them, considering that also part of this investment will be diluted in the next quarter, we will not see all of them in the same magnitude. That's my question.

[Unknown Executive]

Hello, Thiago. We are not distributing this investment. We're not breaking that down. This information is not open in the release and it's not published by the company. But I can tell you that the most part of this investment is in logistics, especially in quick delivery, express delivery because we believe that this is a differential that is most competitive in the market, as the investment in new DCs, investments in capacity, investment in automation and the Logbee and increasing Logbee and supply frequency, all investments and converting the stores a shoppable distribution center. So logistics is being benefited from these investments. Decio and his team because in fact, that's what -- where we believe that the structural bottleneck of Brazil is higher. The market's average operations are difficult. So I would say that our main investments are guided to better logistics, express delivery, better level of return, better experience and the store pick up. We are already working with the inventory in the stores for a store pick up. So we are focusing very much in these logistics investment that really require investment. So it's not as much in marketing, which is an investment in which you would spend one year, and next year, you have to spend again in marketing. For Logistics, you develop the route and you increase frequency. We start at a lower capacity and also at a lower density. And while you provide the customer lower delivery time, you have to increase the delivery time and you decrease the idle time of our drivers. So now we are committing a due date and when we have a growth in orders, all of that is optimized. And so in terms for the next quarter, we'll be maintaining focus on these investments. We will not give you guidance on percentages, but I can tell you that this operation is going to focus on growth of absolute numbers and less in margin percentage. This is what's guiding the company, a high growth, accelerated growth, less percentage in margin because, in fact, the better digital operations in the world are guided by these same KPIs. So we'll be disciplined on that without losing sight, in our case, the discipline on return on invested capital, so lower margins but absolute growth in sales and margin management results. Okay?

[Operator]

Our next question is from Maria Paula Cantusio, BB Investments.

[Maria Paula Cantusio, analyst]

But still, following this prior question, how these levels of investments will be for the next year? Next year, we already have a pressure on gross margin because of the end of Lei do Bem, the Law of Good. So what do you foresee for next year? Also I would like to talk more about exponential growth and that's what you're focusing on from now on. And in my opinion, the Marketplace would be very important there. So I want to understand, how do you see the criteria to bring sellers into Marketplace? Will you be able to reach this exponential growth even being as strict? Or when you have a complete platform of services, you will be able to bring down the bar so that you can bring more sellers to your platform.

[Frederico Rodrigues, executive]

About guidance, we will not provide anything. I will continue emphasizing that the company's focus will be the growth of our customer base and direction with customer service level for customers. Also, with the discipline of cash generation and return to shareholders, less focus on margin, but a focus on general growth. You are right, that the main driver for growth in the company will be Marketplace, that's right. Because of all the channels, that's where we have more exponential potential to grow because we have the investments in other areas. So this is really a market that it has a platform dynamics. And then everywhere in the world, it tends to represent a larger growth. And we are growing that on an established investment base of logistics, as I mentioned, that we'll be sharing there. And it has a better dynamics of ROIC, both for 1P as well as 3P. And I think this will be maintained. There's a possibility of growing, generating value to shareholders in a very clear fashion. Once again, even with all the selective process that we have to taking new sellers, last month, we had a record of 400 new sellers. We have a lot to improve in all processes because just a 2-year-old platform, we have reached in the quarter and year already BRL 2 billion, with less than 2 years in the operations in the platform. We have a lot of process to improve, the onboarding, the sellers' approval, which can be improved. We are able to reduce the period of time to introduce a new seller. We believe that there are a lot of people that are not in the market yet and they will be more mature operations. You're talking about 16,000 new sellers, 35,000, millions and millions of tax saving on [ non-Brazilian ] and Brazil debt or sell -- could be selling with us. So we have a huge market to grow. And our ambition about having sellers in the platform is huge. But those sellers have to be formal, they have to follow all legal and ethical issues in Brazil, and they have to provide the same service level that we provide to our customers. We are not going to grow if we have to lose service level. Once again, the indicators for customer levels is just as high as sellers' growth and also growth for active users. So we have no shortcuts here. We'll be growing at a very high bar for service level. And obviously, sometimes, the seller does not provide a good service level because they don't have a good logistics to provide that. But if they can use ours, they can benefit from us. But I will not tie the seller to my logistics process, I will give the sellers the option to choose because we believe that a platform company has to be an open company. So if I have addressed your question, that's it.

[Maria Paula Cantusio, analyst]

Fred, so for next year, you will continue investing in service level as you did in 2018?

[Frederico Rodrigues, executive]

Yes, we'll continue investing in service level. And the impact of that in the P&L will depend on the level of growth and the sales that we will have. So we will not give any specific guidance for profitability percentage. But customers are not 1-year investments. We will maintain that focus because, once again, we do believe that companies -- digital companies, and that's how we see ourselves today as a digital platform with the brick-and-mortar stores. These companies have to be evaluated using those criteria, an increase of the client base and direction of our investments and cash generation as well. We'll be focusing on maintaining cash generation but with less focus on margin percentage, which is how the traditional retail market works and a digital company cannot be as fast as a conservative or average retail company.

[Operator]

Our next question is from Mr. Richard Cathcart from Bradesco.

[Richard Cathcart, analyst]

I have 2 questions. The first one is around -- about Logbee. I want to understand your opinion about the end of the tax rate for next year. And second question, analyzing the growth of e-commerce and Marketplace and also a retail company that has a low penetration in e-commerce, we know this is a category that is difficult to operate. How are you preparing the company and the company's logistics to seize the potential of this category in the future?

[Unknown Executive]

Hello, Richard. Thank you very much for your question. About your first question, what is it again? Okay. The Lei do Bem, the Law of Good. It's very difficult to understand what's going to happen because this is going to change for the whole market. Everyone that has benefits from this tax rate now is going to transfer this new tax cost to prices. Historically, what I see is that usually the market ends up transferring that. Because if you look at the results of market operations, I don't think anyone can let go margin right now. So from what I see in the competitors and in the market and everyone that has published results, I believe that everyone will need margin. No one will be able to let go margin. Therefore, I believe that we'll see these taxes being transferred almost totally. But we have no guarantees there. So again, conservatively, I think that this transfer will not be of 100%, especially in the first quarter of next year, this will be a stabilizing quarter, we -- that's where we have our main concerns in our budgets. We probably are contemplating a non-full transfer practice. I think in the first half of the year, we'll have a normal situation. But once again, I have no crystal ball. I don't know what's going to happen, how the market is going to react. We will have to be following the situation up and closely. And as much as possible, we'll be working on that. And in our calls and public interactions that the market will be making, it's very clear how we are going to deal with that. But what I want to say is that no one today is able to take in. Our margin is above the -- the market average is much higher. We were very -- one of the very few profitable operations both in the on and the offline. In the online, I think we are the only ones, so I don't see anyone with that capacity taking in that margins off. But we never understand the market. And each competitor has a different strategy. So I cannot anticipate anything about the Lei do Bem, Law of Good. Now on fashion, it's factored that it has low penetration in Brazil, but it has great potential, it has great representation. And other countries in the world, in China, 20%, is one of the main sales channel. I think this has a huge potential. And we want to be an operation of co-categories. We want to operate in all categories. We want to have the developed competencies, such as we have already developed for consumer goods products and so this is on operations. It should be full commerce, full category. Therefore, we'll be preparing ourselves to go into different categories. And they are very important if we consider that increased consumption frequency. The increase are indicators for frequency customers. And Logbee was an acquisition that allowed the company to do the last mile for the lowest added value product because Logbee was very good at a higher item, but -- or higher ticket volume. So it provided that type of category. It is a specific in the story, but it's nothing that we have not faced before with other challenges.

[Operator]

Next question from Franco Abelardo from Morgan Stanley.

[Franco Abelardo, analyst]

Two questions. The first is about the gross margin. I want to understand the drop in the margin. This was because of mix or did you have an investment gross margin per channel in brick-and-mortar stores and your online? And my second question, we -- should we see a positive contribution from Marketplace in this gross margin? Or if you had it, does it help to offset the drop of the gross margins that you have seen in the quarter? This is the first question. The second one is about working capital. We have seen it lower inventory levels as well as in payment terms, Roberto mentioned that there was a purchase prepayment in the third quarter. And should we see this working capital going back to regular rates in the fourth year or -- fourth quarter, I'm sorry, or we should see any different movement ahead?

[Frederico Rodrigues, executive]

About the gross margin, the main factor here for the quarter, obviously, is the exponential growth of e-commerce, growing on top of a high rate already. And we always say that the gross margin of e-commerce is lower and it is more than offset by a lower expense. And in this case, we did not see the stable EBITDA margin because, in fact, we had investments, especially in logistics. And as I mentioned in the quarter, but e-commerce won against a market share in the company, it reduces the gross margin of the company, but it offsets it with the lower expenses providing us a stable EBITDA. Since we invested in all these factors that we mentioned, new DCs, higher purchasing frequency, we had also a reduction in our EBITDA margin. But obviously, this was as planned, maintaining a high level of return on invested capital. We also had a little bit of transfer of the FX rate. We have the impact of the 15 days of July for the World Cup. But within the category, the margins are well behaved. I think the main impact is the e-commerce mix. At this time, it was not as much offset by expenses dilution because we had investments in consumers, which is part of our strategy.

[Roberto Rodrigues, executive]

Franco, about the working capital, it's like I explained. The inventory in the last 12 months has increased around 35%. And if they had grown at a same pace, we had a difference of BRL 200 million that the supply of the counts should be high. And why it's not, because these BRL 200 million, we purchased in July and paid in September. If we had purchased in July and August, we would be paying in October or November. Therefore, what should be happening now is that we have the right levels of inventory, 7 days of turnover, that's the average, e-commerce is even better than that. We are very much prepared for the increases of sales in the fourth quarter. And the average purchasing time is right, it's of around 90 days. What happened specifically is that we anticipated purchases from third quarter to the second quarter. And so payments went from the third quarter to the third quarter more or less in BRL 200 million. So what you will see in the fourth quarter is that, in theory, in average, in this quarter, since we have 90-day term, our balance of suppliers of what we had at September is lower because we already paid for that. The cash generation of this quarter should be BRL 200 million higher than it would be in the cash generation for the fourth quarter, which is already good, usually. And this is going to be better because of this anticipation. And for the end of the year, we will not foresee any changes. We'll have the same inventory turnover and the average purchasing time that we had estimated. And this is really a onetime offing because of the dollar rate in the middle of the year. We took advantage of that. It was a onetime off situation in that quarter, In the year, that it will not change. And the focus on the working capital and also on the cash managing -- management is still there. As Fred had mentioned, it has not changed.

[Franco Abelardo, analyst]

Okay. It's very clear, Roberto. If I may, a follow-up on the gross margin. When the Marketplace gains a share of total sales, should we see an improvement in the growth -- in gross margin or not? Maybe because of this Law of Good and the e-commerce in 1P growing faster, we should see more pressure on the gross margin from now on.

[Roberto Rodrigues, executive]

Franco, yes, I forgot to mention that. Once again, as Lei do Bem, Law of Good, is -- we don't know, we don't know how the markets will behave. Let's consider that if the market transfers 100% of the tax surprises, in theory, we would not have a margin pressure. And I'm sure that the ramp up of the Marketplace should improve the gross margin of the company, especially for e-commerce. When the e-commerce gains share and the company as they hold, it tends to help the total margin to drop less. But obviously, next year, we will see other factors. We have a gross margin, which is a mix of e-commerce, brick-and-mortar stores, that's one, and the level of the transfer that the market will be doing because of this Law of Good. All of that will have to be part of the equation. If we consider the variables and consider Marketplace specifically, we operate Marketplace in a very profitable fashion. This is a positive business. We are not holding take-away promotions. Since we have always operated with 1P, the Marketplace is a rational operation. We have trade-offs that make sense for the long-term cash generation for the company, not otherwise. So this is already added to our gross margin. If it were not the Marketplace, our gross margin would not be as good. And as it gains share in the e-commerce side of the company as a whole, the trend is that we should have a better result. And -- but I was -- again, I should say that we cannot forecast what will happen with this Law of Good.

[Operator]

Next question from Tobias Stingelin from Citibank.

[Tobias Stingelin, analyst]

I know you had several questions, especially about the marking. Well, first, congratulations on the results. I think the strategy is right, to focus on growth. Now my question is what is a fair growth? But in order for us to understand, Fred, how can we think about it, considering that you are capitalizing, you could improve your growth. So how are you going to drive that cash generation, breakeven cash generation? I'm trying to bring in the conditions so that we can better understand this trade-off vis-à-vis growth vis-à-vis profitability. Forgetting the margin, I'm thinking really about the growth here.

[Frederico Rodrigues, executive]

Well, Tobias, it's very difficult to address your question without providing guidance. So I'll have to be very cautious and I will try to be more qualitative here in order to give you a general overview. So about this overview, once again, I want to make it clear. And since the beginning of this year, we thought that we were adopting a strategy of growing about the basis with, at the same time, an increase of the service level and the growth, not only focus on GMV but also driven to the increase of our active customers because we were, from 2010 to 2014, we did not grow our active customers. We had 10 to 11 active customers those years. So we understood that, in order to be a digital operation that is significant, we had to significantly increase our base of customers, not only GMV, active customer base, we had to increase in directions with these customers, the number of times we have a relationship with them, both financially as well as the number of uses and new and so on. All investments we have made were made analyzing the customer lifetime value. We invested heavily. We worked with a consulting service in the first quarter. We identified the investments that will give us more return in the long term, so this is a customer lifetime value. We thought that credit cards, the customers that have the credit card that have the app and other segments that I'm not mentioning here, these are segments and profiles of customers that tend, in the long term, to be more profitable customers for the company. They tend to have a buy back profile that is better. We accelerated investments in these customers. So I'm sure that, over the year, the results of the company will explain these investments and will maintain a high return on invested capital because, if you compare what we're investing to what the markets -- market invests, then we have a higher return and we have additional sales to what has been invested. The CapEx and everything else today, we have a machine that is producing a growth at a cost of investment that is much lower than what we see in the market. So this is the way we are going. But a guidance, in terms of margin percentage and all these impacts, we cannot provide you. I can tell you that we do believe that, in Brazil, you cannot choose -- you cannot -- say well, so what we will not accept at all, a higher indebtedness level, a return on invested capital that is not something out of the rational, we do not accept operating at a loss. So the company has always focused on very rational growth. And so now we are considering, on the long term, not only in the short term, that's how the best operations in the world work.

[Operator]

Next question is from [ Rodrigo ] from Goldman Sachs.

[Unknown Analyst]

About brick-and-mortar stores, I see that you have very good returns in terms of technologies. But in terms of new stores, I see that you had lots of activity gains. So does it make sense to have maturity curve from those stores that are -- for the stores that are opening from now on? And also, if you have more cards in these stores? And my second question is about customer service. When you had another quarter with results, you still consider the impact of the IFRS 9. So we see here a change in the more normal level on the results. When will be able to see that, next year? And when you see that maturation of this new batch of credit cards?

[Fabrício Garcia, executive]

Thank you for your questions. Rodrigo, this is Fabrício. About new stores, in fact, yes, the first thing that have happened to new stores this year that are not performing very well that the strategy was right, we were very good in the execution. So we identified the market. So we're going in, investment in stores, occupation and so on. And we went very well in different markets. We went in new markets offering digital operations, very good service level. We opened 2 DCs to cater to these markets, a promotion of the products that is the strength of the brand. But in fact, these stores performed above our expectations, but they do have a maturation time. I'm sure that next year, they will have a better performance than this year. So we do have a great opportunity to grow in these stores because we are into 2 new markets, Maranhão and Goiás. We are starting our market share in these 2 areas that is lower than what we have in mature markets. So considering that, we have a great growth opportunity, and I believe that we'll be maturing with 2 or 3 years of these stores. And also, we'll be having good sales on these stores, it's part of the strategy.

[Unknown Executive]

Rodrigo, about credit cards. All card purchase volume, when you grow a lot, in the beginning, usually, you have some problems, you suffer a little bit both because of sales costs because they're relevant and the number of cards is also relevant. And also now because of the IF -- IRFS 9 (sic) [ IFRS 9 ], you have to make provisions, and sometimes, the customer is not using the full credit limit of his credit card. And that's why our older customers are more profitable. So we have a portfolio that is new this year. We have more customer base, that's why they are less profitable. But once again, in terms of customer lifetime valuable, it's very profitable. And we are adding a lot of new clients maintaining delinquency at very healthy levels. And Itaú, as you know, is very conservative in this approval rate. The approval rate is very strict, it's less than 10%, actually. So we expect that -- well, this year was the year where we accelerated growth. We are selling 150,000 cards a month, much more than past year, which was around 80,000, 70,000 a month. So we doubled the expansion here, so the issuance costs are affecting the results in the IFRS 9 and the BR GAAP. And there are also the new provision criteria for the limits and the trend for the results is to have a convergence, and also to improve in the mid-term and in the long term with the maturation of the portfolio. And we will continue investing and increasing a lot this base of cards because of the strategy we already talked about. With this new credit card, you can have 2 benefits, the retail and Luizacred, but it makes all sense in terms of return on invested capital in the long term. So investments on share are profitable.

[Operator]

We now end the Q&A session. I would like to turn the floor back to Mr. Trajano for his final remarks. Please, Mr. Trajano, the floor is yours.

[Frederico Rodrigues, executive]

I would like to thank you all for participating on this call. Thank you, also to the team and to all partners that helped us have a positive quarter and despite of all uncertainties of the market. Thank you very much.

[Operator]

The conference call of Magazine Luiza has ended. Thank you very much for your participation, and have a nice day.