Magazine Luiza SA

BOVESPA:MGLU3

Earnings Call Transcript

[Unknown Executive]

Good morning, everyone. Thank you for waiting. Welcome to Magalu's conference call about the fourth quarter of 2021 results. For simultaneous translation, please click on the interpretation button at the group icon on the lower part of the screen and choose your preferred language, Portuguese or English. We inform that this event is being recorded and will be available at the company's IR website ir.magazineluiza.com.br, where you can also find the release and the presentation, both in Portuguese and English. The English presentation link is also available at the chat.

During the presentation, attendees microphones will be off. Afterwards, we will start the Q&A session. [Operator Instructions] The questions received in writing will be answered later by the IR team.

Now I would like to turn the floor over to Frederico Trajano, CEO of Magalu. Fred, you may begin.

[Frederico Rodrigues, executive]

Good morning, everybody. Thank you very much for participating in our call about the fourth quarter of 2021 and the year as a whole. Once again, I'm here with all the executive officers of the company who will be available to answer any questions that you might have at the end of the presentation. Besides my presentation, our IR manager, [ Vanessa Paprini ], will talk about the results. Unfortunately the father of our CFO died yesterday and all our solidarity to him and to his family. And Vanessa will be stepping in and she will also participate in the Q&A.

In 2019 after finishing the most successful transformation process of a company in Brazil in terms of digitalization, we started a new strategic cycle based on the construction of the multichannel marketplace, the entry gate for thousands of analog retailers. And with these retailers, we did what we did with Magalu. We conveyed our technology and our know-how, our knowledge so that these merchants could be participating in the digital world as well. And the strategy also involves the diversification of revenues and the radical creation of the product base offering this to our over 37 million active clients. And we made many acquisitions, many investments and many organic investments as well in order to reach the objective.

After 3 years of the end of the strategic cycle and 2 years of the pandemic that hit the whole world and also Brazil, we consider that we have many things to celebrate in terms of our figures. We are really doing what we said. We are walking the talk and we have a lot to do still for the next few years. And I'm going to share some of these figures with you and part of the progress of the implementation of the strategic cycle and that corroborate all that.

First, of course, I would like to highlight the growth once again. Even in spite of 2 years of the pandemic, we prepare our total GMV, including physical adult line, we reached BRL 56 billion of GMV in 2021 or twice what we had in 2019, a growth of 28% vis-a-vis the previous year, already with 71% participation of e-commerce in the year as a whole. And one of the drivers of our growth has been online as we doubled our GMV online that we tripled the sale of e-commerce from 2019 to 2021. We sold over 200 million items in the whole system of Magalu in delivering 39% growth in spite of being a very high growth base. And the retailer that will be most in the first year of the pandemic. And although we had a very high base, we were able to grow an additional 39% in 2021, which means that, once again, we were able to achieve this extraordinary growth.

And in online, the focus -- our focus, as I said at the beginning of the presentation was the marketplace. We grew fourfold our marketplace vis-a-vis 2019 from 3 to 13 GMV, 69% growth in 2021 and over an exponential growth of 156% that we had in 2020 to 2019. So you can see these are very robust figures.

Very important figures for the digital world and for the Brazilian retail as a whole. In terms of marketplace, I would like to highlight a historical fact. Now in February, after 5 years of its launch, marketplace -- the GMV of marketplace has already exceeded the sales of the physical stores. The participation is already higher than the physical stores in the overall sales. And February was a month where we repriced our prices for sellers, and in spite of that, we had a growth that was higher than the market with much better margins in the marketplace than we had in the previous years that were years that while some platforms were not even charging the sellers a fee and the competition was very fierce. And in spite of that, in spite of the change in prices, we were able to reach a GMV higher than the physical stores.

And in February, also a very good performance, better than the fourth quarter of last year. So this is evidence of a correct strategy. And I will be going into details about everything that we have been doing in order to generate this outstanding growth in this channel, which is so important, which is marketplace. And of course, we have been acquiring new sellers and outstanding figures from 26,000 to 160,000. This is a very steep growth in the number of sellers, 160,000, 40,000 sellers in the first quarter, 45 million offerings for the total and over 61 million offerings diversifying our product lines and the average ticket offered to the clients. But I will be going to detail about the geography regarding the sellers that we are putting on board which is a very good strategy.

It's very different from most of the players in the market. It's very important to reinforce that. As I said, we have a focus on the digital seller but also on the analog seller as well. We created -- at the beginning of the pandemic, we created a platform, a very adequate platform and totally focused on analog sellers, which is the Parceiro Magalu with end-to-end technology involving the online billing, inventory management, delivery management, totally different from the digital sellers who are native digitally.

Just to give you an idea, last year, 80% of the sellers that we acquired on the platform came from Parceiro Magalu. These are analog sellers that by means of our marketplace, were able to offer their products to clients in the whole world by means of the digital world, and this figure will continue to grow. And I will talk about the importance of physical stores in terms of attracting these sellers.

One interesting point is that they have a profile which is different from the product mix. Most of the products that are coming on board, they are long-tail products and not traditional categories, and these sellers already give us 2 different characteristics. The main one is the fact that we have a very wide geographic base. We are deconcentrating Brazilian sellers from Sao Paulo and bringing onboard sellers from all over Brazil in order to offer their clients to Magalu clients that are also scattered throughout Brazil.

And for logistics, this has to work because in Brazil, if you have a centralized and low-ticket logistics, you will never be able to reach the economic BRL 30, BRL 40 average ticket going from the Southeast to the Northeast. For instance, you will never be able to get a good revenue in this platform because that margin will be negative because the participation of the freight cost in the total GMV and the take rates will be extremely high. And we are deconcentrating and concentrating on the average ticket on these geographic locations. So our growth strategy of our marketplace is decentralized and sustainable, and we believe that it will be more and more efficient in terms of economics.

One important highlight is that 56% of the new clients of Magalu came from the marketplace. So this has been helping Magalu to conquer clients that were not clients that -- but the products of the company. So most of the new clients that are coming to the platform, 56% come from the marketplace. And one of the reasons why we have been able to significantly improve the volume of sales of the marketplace and also the conversion rate were all the logistic investments that we made as of 2021. So we made a follow-on, and the objective of the follow-on was to increase our logistics. We went from 31% with cross-docking, and DCs, exclusive DCs to 272, much higher than the guidance that we gave you in the follow-on. And also the total warehousing area, going to 1,389,000 square meters, increasing 2.1 fold. And also, we increased the coverage of our own logistics. We made 3 acquisitions, GFL, SODE and Logbee was already with us, in order to increase the participation of our own fleet in Magalu Entregas and Magalu delivery in the total GMV.

Now some figures that I would like to share with you, 80% of all the orders of 3P Magalu went through Magalu Entregas. Almost all these orders went through our own network of Magalu. So we don't have to rely on the postal service or third-party trucks. And this generated 2 very important factors. The first one, we increased quite a lot, our deliveries in up to 2 days from 18% to 30% last year, significant increase and this also increased the conversion rate of 3P last year, increasing 50%, which is very significant vis-a-vis 2020.

And I would like to mention that when the client buys a product on the platform, they buy 1P and 3P. It's important to buy with a good price and a very good delivery. In 1P, we already have a very good service level, much higher than the average of the market, 78% of the deliveries in 48 hours, and we are further improving the participation of this quick delivery in the sale of 3P. But 1P, it was already a representative part and the experience that we have you can see that we already have 78% delivered in 48 hours, or up to -- and we are the only company that -- we do not mix 3P with 1P. Either Reclame Aqui, which is the customer complaint website, for instance. So we had a growth of 10 percentage points in the FPS. And we are also developing the ultra fast ship from seller up to 24-hour delivery. Over 1,000 sellers have -- are already participating because of the investments that we made in over 21 capitals with a coverage of ship from seller.

Now I would like to highlight the role of the physical store in our marketplace. It has already been very important in our growth and our leadership in 1P, 45% of all the 1P goes through digital -- physical stores, and it has become a major competitive advantage. This is why I say that our marketplace is multichannel, and we resignified once again our physical stores, and it is extremely important. They are extremely important, both for our clients and our sellers and everybody who interacts with our marketplace.

And I would like to highlight 2 points. The first one is the transformation of the stores into Agency Magalu. And the local sellers that the store brings to the Magalu system, they can deliver in the Agency Magalu, and we shared some of the results from these sellers with you. We have almost 10,000 sellers that are using this as their main point, 150% growth with a drop in the cost of freight in relation to the traditional total postal costs. Stores are also 3P pickup points. We have 1,100 stores already doing this with the store pickup. And the difference that really made Magalu the leader and the benchmark is being transported to the marketplace world, and we want to reemphasize the importance of the stores.

The stores are much more than a point of sale, which is a logistic point, not only for 1P, but 3P as well. Besides selling financial products, it is much more than a POS. The stores, even if all are breakeven only, we will be happy because we will have over 1,100 points. So it is very important to have this role be performed by the physical stores. You can see that this is an evolution and it became a very big competitive advantage. 50,000 of the sellers came through the service delivered by our stores. So you can see the importance of the physical stores attracting sellers. And Magalu is a multichannel company and not a POS company. We're going to talk about this a little bit later.

You know, of course, that there will be some difficulty in the last quarter. But overall, for the full year, we were able to keep the sales from the stores even higher than in 2019. We grew 100 -- we had already grown 1% vis-a-vis 2019 and now 6%. And the sales for the year as a whole was very resilient, and we believe that after this moment is water under the bridge. It will come back again and generating more contribution to the business and play a very important role for the whole ecosystem.

Second point. I talked a lot about the multichannel marketplace. And now I would like to mention a very important point that I said -- I referred to at the beginning, which is a diversification of revenue streams and the coming on board of new categories and also new lines of service revenue. We made quite a lot of acquisitions, 20 acquisitions over the last couple of years, mainly some before that, such as Netshoes and Época. And we are sharing this with the market to show this very clearly. Although we had a very good performance in durables and we continue to be the leaders, it took us 6 decades for us to become the leaders. But our diversification of categories has a very good result, and it's very important to give visibility to you.

These long-tail categories, which are not the traditional categories represented about BRL 20 billion, and we will be talking about KaBuM! a little bit later. 45% of the online sales coming from new categories, home accessories, peripherals, beauty, grocery, food delivery, all the categories that are growing very steeply. And with the marketplace and with the companies that are coming with the group, we have been very successful. And I would like to highlight that the acquisitions, besides contributing to the top line, they are contributing to the bottom line as well. So we are very successful in terms of bringing companies to the group that help us expand GMV, and that will help the company to be more profitable, and I would like to mention that they are all in line or higher than the original forecasts. The acquisition strategy is already bearing fruits and the numbers corroborate this.

And I would like to mention each one of them just to illustrate. Let us start with KaBuM!. KaBuM! is the youngest of the group. We announced the acquisition in July, but we were only able to integrate it into our balance sheet in November 15. So the results of KaBuM! will be integrated in 2022, but it is a company that it's like the Disneyland of gamers. It's a leading technology and gaming e-commerce site 4 billion GMV, BRL 300 million profit, more than 2 million active customers, more than 60% of them had never bought in the Magalu ecosystem. It will bring a new customer base that is different, loyal and in a category that is growing worldwide, gaming.

It is totally complementary to Magalu. We are talking about IT accessories, peripherals, things that people buy for gaming and also people buy these accessories for Bitcoin mining. So more than 20,000 items assortment. So this has a loyal customer base, and we will be doing a lot jointly in the universe of technology and gaming e-commerce. This is going to be a very successful acquisition as well as Netshoes acquisition. We are celebrating record results in this universe of lifestyle categories that we added to Magalu, particularly with the acquisition of Netshoes.

For Netshoes, we had some record marks last year, GMV of 4 billion, the highest profit in our history, BRL 135 million with the back office integration, logistics integration, store pickup and a number of advantages that Netshoes alone did not have. But integrated to Magalu ecosystem, we were able to reduce G&A, and of course, we had wonderful management. A 250,000 items assortment, 7 million active customers, a loyal base and one of the main sports e-commerce channels in Brazil. Very high organic access, and it's proven to be one of the main e-commerce brands. We sold more than 10 million pairs of athletic shoes and 1 million soccer team jerseys. We are responsible for managing most of the club stores -- soccer club stores, and we manage those.

And along with Netshoes, there comes Zattini, one of the main fashion channels in Brazil. And there, with it came a team with a lot of expertise, know-how. Sylvia joined with her expertise to have the Brazilian e-commerce fashion. So profession, GMV was 1 billion at Magalu, 170%, up year-on-year growth, more than 300 brands available. And I would like to highlight the fashion marketplace. 50% of the fashion GMV was 3P last year. We can see 30,000 sellers in the category. Some came with the acquisition of Netshoes and Zattini. We have increased the sellers base. And also via hub, we included 8 industrial hubs. We have a number of factories connected directly to our e-commerce. So also the fashion category has grown a lot, and we are very confident that we will continue to provide and deliver very positive results. We are one of the leaders in fashion and we'll continue to grow above market average.

Another highlight last year was Epoca in the beauty category. GMV of BRL 1 billion in 2021, 60% year-on-year growth of GMV, plus 3 percentage points of share in the category. It is profitable. So Netshoes, Epoca, KaBuM!, all assets added to Magalu ecosystem, adding to the top and bottom line. Altogether, lifestyle categories represent BRL 6 billion in total sales in a very strong combination of 1P and 3P with a lot of growth potential looking forward. I'd like to remind you that these categories are underpenetrated in Brazil.

Now I would like to talk about the groceries category, BRL 1 billion. This is the GMV of groceries in the whole ecosystem. Last year, we acquired VipCommerce, an e-commerce platform that helps analog retailers of supermarket products to join the online world. It is the only specialized platform specialized in supermarkets. These customers gave us a GMV of BRL 330 million. This is still a SaaS model. 200% GMV growth year-on-year, 190 million items sold and more than 280 cities served. We should be able to integrate a good part of these customers to our ecosystem, particularly to our SuperApp, and we'll have some news for you soon to be announced to the market. We will integrate all of these customers, all of these cities. And Vip has been able to grow with the SaaS model. So the groceries category growing a lot, 1 billion GMV. But in terms of items sold, it has a relevant share in our total sales being responsible for bringing customers to the Magalu platform.

I would also like to highlight our food delivery. Although it's not present in the capital cities, Magalu generated 1.3 billion of GMV in food delivery and became the second largest player in the Brazilian market with the exit of Uber Eats. 5.3 million total customers. We are creating a platform based on AiQFome. We have 30,000 active restaurants in food delivery. And I'd like to highlight that our food delivery is profitable.

AiQFome has always operated profitable -- in a profitable way. We are still focused on small and midsized cities, but we're expanding our services to other profile of cities, and we are very excited with this potential growth. I'd like to remind you that we integrated AiQFome in the SuperApp last year, and we're reaping the fruits of that kind of integration. Another successful acquisition that has proven to be positive, both in the top and bottom line.

I would also like to highlight our Magalu ads or ads initiatives. We bought 3 content channels. Canaltech, one of the largest content channels in Brazil, totally special Magalu ads, totally focused on the fashion beauty home category, Steal The Look. In this category, you don't need just the products, you need content. And one of the most loved channels in Brazil, Jovem Nerd. With the acquisition of KaBuM!, it's going to be more representative in our ecosystem. Altogether, including the audience of these 3 channels, KaBuM!, Netshoes, Epoca, Zattini, we had more than 450 million sessions accessed in December of 2021 across all of the Magalu ecosystem.

Perhaps we are the ecosystem with the highest audience in Brazil. And last year, we had a tie with specific advertising, we were able to sold -- to sell BRL 100 million in advertising revenue, particularly with the development of new features, self-service, the inclusion of Magalu Pagamentos to the platform and also with the Magalu ads, that will facilitate for key sellers to advertise across all of the platforms within a large ecosystem. With such a large audience, many sellers will definitely want to enjoy many of the functionalities we are offering. We're very excited with diversification of revenue. BRL 100 million is very significant for Brazil, and we will continue to grow.

And I would also like to highlight our fintech, which achieved significant TPV, BRL 65 billion last year. We launched our POS machines of Magalu Pay focused on analog sellers. We are also in the process of launching a corporate account. The fintech was profitable last year. We had almost 5 million digital accounts created in the SuperApp, Magalu Pay. The participation of Magalu Pay in sales, integration of Magalu Pay with PIX helped us a lot in terms of cash in, so that we could have money in the account for customers to use and enjoy exclusive promos.

And the onboard of Magalu Pay is totally simple. You just have to have the SuperApp and some additional steps. It's totally integrated with the SuperApp, a lot more than other digital accounts on the market. And 3 million new credit cards issued in 2021 with a focus on Magalu card geared to online shoppers. It generates cash back. You can look at your balance in the Magalu SuperApp. And our credit portfolio of Luizacred totaled BRL 17.5 billion last year, much higher number than a good deal of the neo banks in Brazil, showing the potential of our ecosystem to escalate the business.

So the fintech is doing quite well. And here, we see the breakdown of GMV, 65 billion, 41 billion, and credit card, 16 billion of prepayment of receivables and also Banking as a Service. With Hub Fintech, one of the acquisitions completed in July of last year, it is responsible for a good part of innovations and new features on our platform.

And to end, I think that the numbers clearly indicate progress of our strategy, our omnichannel approach, diversification of categories and revenue streams with a balanced ecosystem. And I will speak a little about the financial highlights of the quarter and the full year. Vanessa will be handling that part, and then I'll be back to answer your questions, together with the whole executive management. Thank you very much.

[Unknown Executive]

Thank you, Fred. Good day, everyone. Thank you for joining us in our conference call. I will go over the financial highlights for the year and Q4. Starting with the full year, while Fred mentioned some of the growth, but it is important to stress the marketplace were practically 70%. Our e-commerce, BRL 40 billion, tripling in size, growing 39% in 2021. And physical stores, even with all of the difficulties related to the macroeconomic situation in the second quarter of the year, grew 6%, and are at levels higher than prepandemic. We grew almost 30% total sales, BRL 56 billion, more than double than in 2019 when we had only BRL 7 billion in sales. So that's a super highlight for the year.

In terms of results, Magalu reached BRL 1.5 billion adjusted EBITDA in the year, a margin of 4.2%. Adjusted net income was BRL 114 million in the year. [indiscernible] was grown to BRL 591 accounting -- BRL 591 million accounting net income.

On the next slide, we have the highlights for the quarter again. Marketplace grew 60%, more than BRL 4 billion. Total e-commerce grew 17% to BRL 11.1 billion in the quarter. Brick-and-mortar stores given a greater concentration of higher average ticket and higher interest rates, higher inflation, posted a retraction of 18%, resulting in total sales 4% up in Q4 '21 over Q4 2020 with BRL 15.5 billion total sales. Adjusted EBITDA, BRL 223 million, equivalent to an EBITDA margin of 2.6%. And we had a retraction of the sales of our physical stores, as mentioned, and we had negative BRL 79 million in adjusted net income, and accounting net income of BRL 93 million considering nonrecurring events.

On the next slide, we have the EBITDA margin evolution how it performed compared with Q4 '20. We see a positive contribution in terms of gross margin because of the greater share of services revenues. On expenses, selling expenses and administrative expenses, lower dilution of expenses because we had lower sales of our brick-and-mortar stores as was mentioned before. The company is working on an agenda to make our 1P durable goods operation more profitable. We are breaking on a gradual pass-through of the increasing costs. We had an inflation of costs in recent quarters and also to reflect higher interest rates. We've been doing this along the first months of the year.

On the next slide, we have our capital structure. Again, we had working capital contributing to the capital structure of the company. And here, it is important to highlight that we have been working a lot to improve inventory turnover. In the first months of 2020, we had a reduction of BRL 1 billion in the level of inventory so that we can work with a more efficient inventory turnover in the short term. In terms of net cash, we ended the year with BRL 5.5 billion in December of 2020.

And when we look at the next slide, we see our cash flow. And I think we have to highlight our capital structure. We ended with the highest cash in our history, BRL 12.3 billion. In the quarter, we invested BRL 300 million in CapEx, and we captured BRL 4 billion in debentures with a long maturity, 4, 5 years maturity, aiming to reinforce our capital structure even more, and we ended -- whether that's up for BRL 4 billion. And we can see the receivables of 8.2.

Fred spoke a little bit about the portfolio, but it's important to mention that we ended the year with more than 7 million cards issued in the year, practically [ 2 ] we had ended 2020 with 5.3 million cards. We ended with 7.2 million. Here, we have to highlight the Magalu card launch was very successful. We launched it in April, and we reached 1 million cards issued and complementing Luiza Card.

In terms of TPV, 41 TPV, the year growing 40% over last year and 80% of this TPV is outside Magalu stores. So our customers use the Magalu cards, both inside our stores and our e-commerce and also outside Magalu. And this was driven by the Magalu card. The quarter TPV grew 40% with BRL 12 billion.

Lastly, speaking a little bit about indicators of the card. We ended the quarter with one of the lowest default levels. Our long NPL was 5.6%, a little bit higher, but still much lower than the pandemic levels, showing how healthy our loan portfolio has been, the growth of our credit portfolio, the growth of our card base that has been very solid, very solid growth, which improves more and more in our relationship with the clients.

In terms of results, in the year, Luiza Card had practically BRL 300 million net income according to the methodology of the Central Bank. And in IFRS, you can see the numbers. And this is related to the growth of the card base and growth of our sales and the portfolio indicators in terms of delinquency remains very low.

Well, those were the financial highlights, and we can now begin the question-and-answer session.

[Operator]

[Operator Instructions] JPMorgan.

[Unknown Analyst]

Vanessa, Fred, I have 2 questions. The first one has to do with the short run. How do you see the evolution of demand for the other categories? And maybe this is a point of attention? And Fred, could you talk about the challenging short-term changes in the long-term strategy of the company? Will you change priorities? Will you accelerate some and slow down some others because there are some initiatives that are really working well and the company is setting up the whole ecosystem. I would like to know what you're going to accelerate and decelerate.

[Frederico Rodrigues, executive]

Thank you very much for your question. In the last call, I talked about the short term almost being like a macroeconomist, and I spent quite a lot of time in our financial statement talking about that. Nothing changed significantly from the last call to now. The situation is the same. I do not want to talk at length about it. The only difference is that we are prepared for what is going on in the second quarter of last year in a way, the macro economy was rather surprising maybe in terms of the intensity of the change, the headwinds that we had. So I believe that nobody was prepared. Not even the very important hedge fund managers were prepared here in Brazil to face what happened in terms of inflation and everybody had to revise their portfolios and nothing changed in relation to the short-term situation that you read about in the news. And the only thing is that we are prepared and Vanessa has already mentioned some of the adjustments in order to make the operation more profitable and adapt ourselves to the size of demand.

In terms of the strategy, it is quite the opposite. As I said during my presentation, also in the message from management, the strategy since 2019 is in the diversification of categories. What happened is that we have this pandemic and everybody had to buy durables. I was not going to say to Brazil as well, don't come here to buy a smartphone or a refrigerator, I want to diversify. Of course, we would never do that. After 6 decades, we became, and we were very happy about that. We were the leaders in the category of durables. And of course, there is some headwind in terms of the pandemic, but we will be much better than the average, and we are already very well positioned in order to tap into this market. So we are very well prepared to face a period. I'm not an economist.

I don't want to be an economist in this call, but maybe we will have to wait for about 1 quarter and the strategy was very good. All the acquisitions were in different categories and adding new revenue streams, and they're all performing very well, very successful, BRL 20 billion GMV, 45% participation online, most contributing to our business. We will just accelerate the implementation of the strategy and the connection between and among all these companies, KaBuM! is happening.

We are doing BRL 100 million, but we can do much more. So everything is going very well. Basically, we have to execute the plan, which is something that we are already doing that we did from 2019 to '21, and we will continue and, of course, focusing on multichannel that is bringing sellers from all over Brazil with a very special focus on analog sellers. So we are not going to change our strategy. We will continue to implement it with discipline and continue with the traditional categories. We know that there are cycles. So we have been through many cycles before. So it's very difficult at a certain point because everybody wants to be in the category.

[Operator]

Our next question is from Irma Sgarz with Goldman Sachs.

[Irma Sgarz, analyst]

I would like to know more about the design of the logistics network. I think that you have an approach a little different than some other players in the market. So could you please elaborate on where you stand, what are the work fronts you will be focusing this year, trying to improve average delivery time for 3P sellers. I know that you have evolved a lot. It was good to hear that it increased from 18% to 30%. And I know you're going to grow more. So what are the work fronts you will be focusing on this year? Any other technology acquisition? Or will you be working on the right algorithm to locate inventory in the right places and perhaps improve routing? Or will you be expanding the assortment onboarding more analog sellers or will you be working on physical assets? Well, you brought forward the opening of some new stores. So I would like to hear what are the hurdles in the short term to improve these delivery rates even faster and even more?

[Frederico Rodrigues, executive]

Well, thank you very much, Irma, for this question. As this is a question that we get frequently from investors, I think that we are disclosing some important numbers now to clarify our strategy. I would like to highlight the expansion of our network. Logistics capacity is very important. We increased from 30 cross-docking stations and CDs to -- and DCs to 272 last year. Our focus on logistics is based on practically all of the points that you mentioned.

First, you have to bring in sellers in decentralized catalog. I have to have a decentralized seller base, present all over Brazil. We were able to do this through our hunting efforts by our brick-and-mortar stores and through the Magalu Partner program. So we are bringing more and more sellers, more and more outside the Rio and São Paulo area because in Rio and São Paulo, that's where we have around 70% of the sellers, but now we have people from the Midwest and Northeast and the catalog is expanding. And with our cross-docking stations, we can collect from the sellers and ship directly in our network without necessarily having to store goods because the sellers already have their goods stored in their own stores. So having a logistics with a lot of flow and local inventory, that's the logistics we are aiming for. Our focus, as you said, is to make the goods travel a little distance.

If a customer in Franca in the countryside of São Paulo [indiscernible], which is available in the fulfillment in São Paulo or in an analog seller in the city of Franca, we want to ship the good from the seller in Franca, avoiding long-distance transportation. Now with fuel prices increasing, the main cost of e-commerce is shipping and freight costs. So the less the goods have to travel, the better.

When I speak about smaller tickets, lower take BRL 30, BRL 40. It is impossible to have a profitable sale if we are selling small ticket and making that go travel a lot. So we're increasing the logistics base 272 that help drop-off and shipping. We are making a 1,400 stores work as logistics drop-off points, 15% store pickup. This is economically feasible for lower tickets, engines like Magalu agencies that became drop-off point for sellers in the spring, a reduction of 50% in the cost. More than 10,000 sellers are using Magalu stores to drop off their goods.

From the standpoint of customer experience, the structural change in the searching algorithms and of the data structure that we have, it's all monumental. To make -- we have to make local products available to local customers. It's a total reengineering of our categories. AiQFome is already prepared to serve customer -- local customers with local sellers. So the change in logistics and in IT is very, very complex, a lot more complex than it sounds, but we have a very solid team working on geo location because we believe the more the local customer buys from local sellers, the better. And of course, we have to continue to hunt for local sellers to make sure that the products are active in our list of products. It's a holistic work.

Now with all of the investment made in storage area, and also with the fact that 1P durable goods that have consumed practically all of the storage area that we had, it tends to create more space in our DCs. In idle space, we'll use that idle space for the fulfillment buy -- we'll add fulfillment buy to our possibilities available to sellers. And we believe that all of these factors together will help us improve the share of ultrafast deliveries for 3P and 1P already has very fast delivery.

When you buy them as one product, you don't see whether it's 1P or 3P. In Brazil, 1P is not good, 3P is good. In the U.S., it's not like that, 1P or 3P, it's the same for customers, it's delivered fast and customers actually prefer to buy from 1P. The market prefers 3P. We don't do what the market wants. We do what the customers want. And we'd like to believe that we are going to improve also our 3P. And as you say, the improvement was very significant last year. We're going to have more stores working as Magalu agencies and will improve the algorithm. And even Magalu Ads. We have features in Magalu Ads. So that sellers can advertise to local customers. So this is being shared by all of our business teams with the highlight going to labs, and I'm sure that we will continue to evolve in that indicator looking forward.

[Operator]

Our next question comes from Maria Clara from Itaú.

[Maria Clara Infantozzi, analyst]

Well, I have 2 questions. The first one has to do with the working dynamic about the inventory of the company. When do you expect to finish the process? And the second one has to do with the physical stores with the multichannel ecosystem and the sales through the platform, exceeding the ones in the physical stores, what could we expect in terms of this evolution.

[Vanessa Rossini, executive]

Thank you very much. I will start and then Fred will answer about inventories. In December, the beginning of December -- at the end of December, we had the inventories of KaBuM! close to December 15, the result was about these days. So this impacts the nominal figure in Magalu. It also prepares itself in order to sell inventory by means of our big sale. So we have to prepare ourselves during this period.

Over the quarter, we had this turnover. We had an improvement in the turnover, but this continued during the first month of the year. We propose ourselves to do this. This was very intense at the beginning, the sale was very important for our inventories. It was very important for us to sell the inventory that was there in our storage. In the first few months, we already had a significant reduction of about BRL 1 billion in the inventory, bringing it to the levels that we consider as more adequate for the operation.

[Frederico Rodrigues, executive]

Thank you for the question. In terms of the future of the physical stores, I have already talked and I will reinforce some points and we will talk about the adaptation of the stores and to give them a new meaning at this level. I have already emphasized the strategic importance of the physical stores in order to post the product in order to have the store pick up, and this is fundamental for 1P and very fundamental as well for 3P nowadays. And this is a very successful channel in terms of sale of financial products as well.

So it is much more than a point of sale for physical merchandise. This is where we sell financial products and also a very good support for sellers and more and more, it becomes fundamental. And we have a very big discipline in what we do in stores. Our stores are very lean. We have small stores, the cost for the square meters lower than similar ones, and we have a cost per square meter, that is extremely low. And most of the costs are variable. So we are able to adapt to what it is generating in terms of revenue. If they stay on the breakeven, it's already very good. We are talking about 1,400 points of service in our ecosystem. But I would like to call Fabrício to add to what we -- what I have already said.

[Fabrício Garcia, executive]

Good morning. Thank you for the questions. Fred has already talked about the stores. and we found the road to be played. And in our ecosystem in these last 2 years as the support for 3P. There is a very big concentration of the core products of Magalu in the physical stores and we are in a complex situation right now, but this is going to improve, and therefore, the physical stores are going to improve in this regard as well. We have been working with some pilots in some categories in the stores, very successful pilots.

We should be placing new categories and remove a little bit of concentration of the core product. We have been investing quite a lot in technology in order to improve productivity, usually, in the back office, the support area so we can operate the store with less people, and this brings down our cost and we were able to open the new stores with -- at a very low cost with a very profitable operation. So the low-income population needs credit and the stores, the physical stores are with the people in these lower brackets of income bracket of the population can come and get credit. So just adding to what Fred had already said.

[Operator]

Next question is from Bob Ford with Bank of America Merrill Lynch.

[Robert Ford, analyst]

Fred, could you elaborate on your cost structure? And how should we think about the EBITDA margin evolution this year?

[Frederico Rodrigues, executive]

I'm sorry, Bob, could you repeat the question, please?

[Robert Ford, analyst]

Could you speak about the cost structure. And how should we think about the evolution of the EBITDA margin this year?

[Frederico Rodrigues, executive]

Well, we did not have reversals. Oh, we did not have reductions -- I'm sorry, I have not understood. Okay. Bob, I think -- and given the performance and the volume of sales that we posted in the second half, particularly in Q4 of the year, I think it becomes clear that these numbers were below our expectations. The brick-and-mortar sales were below our expectations. We had a capacity size for volume that did not materialize in Q4. And we had to adjust the capacity in all aspects. So we are adjusting variable costs, fixed costs that involve contracts, service provision, the team capacity. In other words, we are making a number of adjustments to adapt our structure to the volume that the market is supporting right now.

So we are working very hard in all fronts, people productivity, Fabrício mentioned a little bit of that, shipping, logistics optimization. We are -- we have teams focused on optimizing itineraries, routing, logistics options to reduce the shipping costs as a share of gross revenue in marketing. We are making an effort to improve the ROE of our marketing. So regardless of the market being more competitive or not, CPI is increasing. So we are working to make our processes and databases more sophisticated to derive better results and will be successful in absolutely all work fronts vis-a-vis last year.

And like I said, Bob, we were not expecting what we had in Q4, and that's the economic slowdown. Now we know what's happening. So now we are prepared in the first quarter for that. So this year, the margins in my view, will improve gradually. Of course, the first quarter, just like Vanessa said, we still have some inventory adjustments to make, part of the capacity adjustments were done in the first quarter of 2022. But we already see improvement compared to what happened in Q4, significant improvement, particularly as of the month of March, and we believe that this is going to continue along the year. We'll continue to improve as we are successful in our initiatives to improve efficiency. If the economy is not doing well, we have to do our homework in-house.

In other words, we have to optimize, rationalize improve the share of interest-bearing sales. There are a number of initiatives that the company is implementing to try and improve and adapt our core. As you know, new initiatives, as I showed you, are doing very well in terms of top line and bottom line, but we need to adjust the size of the company to the new macroeconomic scenario. So we have a number of initiatives ongoing and we are executing them according to plan and to schedule. Along the year, this will become very clear in our results.

[Operator]

Ruben Couto from Santander.

[Ruben Couto, analyst]

Adding to the previous question. And in terms of cash generation for 2022, could you talk about how these drivers that you have just mentioned will be impacting the result of 2022? Do you believe that the second half could be improving in terms of cash generation and what other actions are important so that you may go back to the previous cash generation, is it the marketplace or the relevance of 1P vis-a-vis 2P -- 3P and the recovery of margin and also cash generation for 2022? What can you tell us about that?

[Frederico Rodrigues, executive]

I will start and Vanessa will join me. In terms of cash generation, there are many aspects involved. The first one is the working capital. As I said, we have been very vocal about that. We have been adapting our working capital. We have always had a lot of discipline in terms of generating cash and also a good management of working capital fees.

It is good when you have a good planning for sales and for inventory and to have a very good market reading. So this year, there is a lower unpredictability than last year. We have been working to go back to the traditional levels of Magalu having a positive working capital. We are working on that. We still have an adjustment to do this still in the next quarter because it consumes cash. Because of the natural cycle of the company, we are very much focused on going back to our normal levels of working capital of the past. So we have, let's say, monetization of assets, the default of last year did not become cash in many locations. It will be cash and other assets. And of course, there is a discount. We will only do things that are positive for the company. We are working on that only if we have very good opportunities.

And we prefer to monetize assets as the case may be. We would never do anything that could hinder our results. And I also see many benefits. Marketplace was not good last year for cash generation because as the whole market was having 0 take rate and free freight, it consumed more cash than generated cash. So in February, we changed this. And now we have a positive contribution, and it is now what it should be always economic model of positive cash generation because the market is more rational now. So I think this is very positive. But I'm not saying that it is good in 1P and bad in 3P. No, it depends. Because you can have in 1P that is a very good cash generator and the 3P that is not a very good one. It has to do with you're juggling with these. And the scenario makes things more difficult, but we have a very good team and a very good team in our physical stores as well.

I would like to go back to our physical store team. They are spectacular. We have a great culture, we have thousands of people who work there and deliver results and they deliver the goods, and they give service to the sellers and to the clients and you must not forget that the physical stores have -- has a very big difference, or competitive advantage, the most motivated team that we have in this area in Brazil.

[Operator]

Our next question is by Vinicius Strano with UBS.

[Vinicius Strano, analyst]

In the previous earnings call, you mentioned a premium Black Friday. So I'd like to know what is the company thinking regarding the product mix? Do you intend to focus on more premium products in core categories? And what is the general competitive landscape? Perhaps the competition is a little bit more aggressive right now. And if I may ask another question, Freddie, could you speak about the initiatives to increase organic traffic for the company?

[Frederico Rodrigues, executive]

Well, I'll answer the first question. And then I'll let Edu answer the second question. Well, unfortunately, in Brazil, we have a situation in which the low-income classes lost purchasing power, given the economic issues. We feel that at the brick-and-mortar stores because the profile of our buyers in the physical stores are on average 2,500. And of course, the impact of inflation is huge on family income. I'm not going to speak about macroeconomics, but I had to mention this.

In the presence of inflation, Brazil is for just a few people. Just for the people who feel less the impact of inflation of food items, of power, inflation of fuel. So the premium categories remain more resilient than low-ticket categories, but this is bad for the Brazilian economy. It's bad for Magalu and for practically all retailers in Brazil. There are very few that are exclusively focused on premium customers.

Black Friday happened as it did. But of course, we want to sell to everyone. We have the passion of Magalu to bring products to low-income consumers to bring digitalization for small sellers. We are inclusive. So the situation makes me sad. And I hope that we can quickly go back to controlling inflation to again continue to distribute income so that Brazil will be for many and not for just a few. The characteristic of Black Friday was what it was because of the macroeconomic situation. And as regards to our [ audience ], Edu will answer the question.

[Eduardo Galanternick, executive]

Edu Galanternick. Speaking about organic traffic and reducing the reliance on marketing investments. There are 2 dimensions to answer the question. One is a tactical dimension, continuous work that we do to evolve [ SCO ] and CRM, whenever we add customer base, by growing Magalu brands or adjacent brands, we can enrich our recommendation algorithm and improve our CRM strategy. But these are more tactical aspects.

From the strategic standpoint, what makes a difference, what we have observing and we saw that a lot in the second half of 2021 is that adding new categories, increased the frequency, particularly in our app increases recurrence and makes customers to end up choosing a better traffic mix for us, more organic traffic. This is not data that we disclosed, but our share of paid sales in the year was reduced more specifically in the second half of the year and because of this growth of new categories added. And I'd like to remind you, last year, we completed the integration of AiQFome in the Magalu app still at a second stage, but we completed that. And as Freddie mentioned, we are completing the e-commerce integration into Magalu.

KaBuM! is already fully integrated in our marketplace. And as we move forward, as we convert Magalu customers to these new services and new categories, we'll have higher frequency and reduction in the need for investments. We can choose to invest or not. It's our discretion, but in an aggregated form, we'll see a reduced need for investment. And this is what happened. This is -- diversification of categories is a strategy for us.

[Operator]

Out next question comes from Danniela Chambô Eiger from XP.

[Danniela Eiger, analyst]

I have 2 questions. The first one has to do with your inventory provision [ in the last ] quarter, how much has been used already in this quarter? And how much can we expect remaining for the third quarter? Because I believe that you have used 100% as the M&A strategy. You're very much focused on that, especially during the follow-on and even before the follow-on. Given a higher degree of uncertainty in the macro scenario, are you going to wait a little bit for the strategy, maybe carrying out smaller M&As in the short term? So maybe you could give us an update of your frame of mind about future M&As.

[Vanessa Rossini, executive]

About the provision, we used a significant part of that during the quarter, as I said before, the inventories started at the beginning of the fourth quarter, they continued at the beginning of 2022 with the fantastic sales we gave 1 additional step in this director. So in February, the level was much more adequate. So it was used in the fourth quarter, but also in the fantastic sale, as we call it. And I will give you further details later on.

[Frederico Rodrigues, executive]

Thank you for the question and still about the M&A. 20 acquisitions in 2 years. And now we will have to digest all that. And we have a lot of work in our hands. Our integration team has a lot to do in order for us to reap all the fruit from all these acquisitions, although all these acquisitions are performing very well. We believe that right now, not because of the macroeconomic scenario, but due to execution reasons, we are going to focus more on the assets that are already here with us and evaluating all the possibilities and making all the connections among all these acquisitions. So we are going to halt this for a while, and we are going to focus on doing the best possible with what we already have inside our system.

[Operator]

Our next question comes from João Soares with Citibank.

[Joao Pedro Soares, analyst]

I have a couple of brief points to raise. First, I'd like you to elaborate on the 3P growth, which was very positive in this quarter. I would like to understand what are the main drivers of 3P growth, is it the arrival of new sellers that you hunted in recent months? Is this a legacy seller selling more or the maturing of some other sellers. Could you give us more color on 3P growth? And also Fred, you have a lot of services that you are providing, which you are offering when we look at Magalu agencies in Magalu Ads, you're selling advertising. So you're evolving a lot in your service offering. How does this reflect in the take rate and the commission that you are charging from sellers?

And the last point, if I may. Regarding the short term, I don't want to insist a lot, Freddie. I knew that this is a little unpredictable. But lately in February where we saw an improvement in the foot traffic of some stores and the whole sector being more optimistic I don't know if you share this optimism. Could you share what you're thinking?

[Frederico Rodrigues, executive]

Thank you for the questions, João. I will let Leandro Soares, responsible for our marketplace, answer your first question. You can give you more color on that, and then I'll come back to answer the rest.

[Leandro Soares, executive]

Thank you very much for the question. Well, marketplace growth has 2 components, as you mentioned. There is a component of new cohorts. We added a large amount of new sellers over the year. They started slow, but after a few months, they are selling at an accelerated pace. And the component of old cohorts, I think that there's a little of both. And we can see that -- this growth stems from both factors, the new sellers and the old sellers in decentralization, so that we can start selling across Brazil at affordable costs. In September, we also had our free shipping policy that accelerated those process. We were offering free shipping for up to 100% discount for our partners.

Now starting in February, we updated offering up to 75% discount in shipping costs. So that changed a little. So from the standpoint of billing, we maintained the percentage. We added BRL 3 fee in the adjusted shipping to make it economically feasible to serve all of our partners and to sustain growth for long term. I think that this is the main component that explains the growth that we had in Q4 and, of course, sustainability for the coming quarters.

[Operator]

We are now ending the Q&A session. I would like to turn the floor to Frederico Trajano for his final statements. Freddie, go ahead.

[Frederico Rodrigues, executive]

Well, I think that when this is recording came too early, let me answer the second part of João's question. Well, like I said initially, I didn't see a significant change in the macroeconomic scenario from Q4 '21 to Q1 2022. The difference is we are more prepared to cope with this new scenario that we are dealing with. So we -- in my opinion, we believe the more significant improvement will happen in the second half of 2022. I think it's the opposite of last year. First half will be a little harder, second half will be a little better from the macroeconomic standpoint, but the company is prepared for that more challenging scenario, improving our operation along the quarters. This is what I envision for the future. But again, I don't have a crystal ball. Things might get better before. Anything can happen, I should say, but I'm not expecting great surprises though.

[Operator]

We are now closing the Q&A session. Freddie, let's move to your final statement.

[Frederico Rodrigues, executive]

Well, I would like to thank all of you for joining us in this earnings conference call. We have all the management here with us, and I would like to thank the management, I would like to thank all Magalu employees who are working hard to execute our strategy. I would like to say that we obviously understand all of the challenges and short-term scenarios, but we are absolutely motivated and excited to execute on our strategy. And instead of looking at a snapshot, we want to look at a film. A film is better than a photo. Thank you very much.

[Operator]

Magalu earnings conference call has ended. Our Investor Relations team will remain available to answer further questions and doubts. Thank you very much for your participation, and have a good day.

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