SMCP SA

PAR:SMCP

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Q1 2019 sales conference call. [Operator Instructions] I must advise you that this conference is being recorded today, on Monday, the 29th of April 2019. I would now like to hand the conference over to your first presenter today, Célia d'Everlange. Please go ahead.

[Célia d'Everlange, Head of Investor Relations]

Thank you. Good morning, everyone. This is Célia d'Everlange, Head of Investor Relations, speaking. Thank you for being with us this morning for SMCP Q1 Sales Conference Call. I'm here with Philippe Gautier, CFO of SMCP. As usual, we will go through this presentation and then we will have the Q&A session. Before I hand it over to Philippe, I invite you to go through our usual disclaimer on Page 2. And I think that now we can start. Philippe, it's your court.

[Philippe Gautier, CFO & Operations Director]

Okay. Thank you, Célia. Good morning, everyone. Thank you for being here this morning.So as you have seen from the press release, Q1 is, in a nutshell, in line with expectations and shows a good resilience despite a rather challenging environment in France. This is thanks to a strong double-digit international sales growth with an outstanding performance in Asia which further demonstrates the international desirability of our brands.We have also seen a sequential growth acceleration throughout the quarter on the back of a positive welcome of the spring-summer '19 collections which reinforces our confidence for the rest of the year.Our performance has reached 9% of sales growth on a reported basis, boosted by positive currency impact of 1.8 points, driven by the U.S. dollar and the Chinese renminbi. So that's 7.2% at constant currency, reaching EUR 274.6 million of sales. This performance corresponds to a positive international like-for-like growth, notably driven by APAC which was at double-digit like-for-like growth, and the continued expansion of the store network with 19 POS in Q1 2019, of which plus 8 DOS. This is the result of opening 14 doors internationally while adjusting our footprint by 6 doors in France.Overall, we made good progress on each of our strategic growth levers, with the reception of spring-summer collection has resulted in a lower discount rate through a positive mix impact compared to last year.As you probably remember, at the full year results, we shared 3 key priorities for 2019 and I wanted to give you a quick update on this. First, on retail excellence, we continued to roll out the e-learning program in France and in Europe and we continued to pursue our store network plan in France. I will comment on that in just a minute. Second, concerning digital, we continued to roll out omni-channel strategies and we recorded very strong results on social media, thanks to the efficient and richer content used over the past few months. Finally, in Asia, we opened our new headquarters in Shanghai and we signed a new partnership with JD.com. So I will now go through our Q1 sales in more detail. So moving to the regional dynamics on Page 5. First, some quick comments before we delve further into each region. So with 7.2% of sales growth at constant currency, the quarter benefited from a strong double-digit international sales growth, driven first by APAC at plus 28.4% at constant currency and second by EMEA at plus 9.9% at constant currency. Meanwhile, France at minus 3.9% continued to face challenging market conditions related to the yellow vests product. And Americas reported a strong start to the year with a plus 1% at constant currency.Finally, the last one then that I would like to draw your attention to is our sales weight by region, which shows a continued deleveraging of France to 35% of our total sales, while our exposure to APAC and America is now, for the first time, stronger than France and Great Britain's, 36% of total sales, and also at EMEA at 29%.Concerning the growth prospect in APAC, you can reasonably expect this region to be bigger than France in a couple of years. It will further strengthen the growth profile of SMCP as Asia is, year after year, our fastest-growing and most profitable region. So I will now go through our Q1 sales in greater detail. So moving to Page 6. In France, sales were down minus 3.9%, affected by a decrease of traffic and a challenging market. Its Q4 '18 was impacted by the direct impact of yellow vests' store closure. Q1 have seen a stronger indirect impact on the back of a slowdown in tourism, notably Chinese tourism, and the lower consumer confidence. For this reason, we will continue to be cautious on the French market over the next few months. Meanwhile, as part of our priority to drive retail excellence, SMCP pursued its network optimization plan coupled with qualitative investments. As you know, we have launched a plan of optimization in France at the end of last year. We focused on the top 15 province, cities, after Paris, representing about around 160 stores, i.e., about 1/3 of our network. After locking our locations versus our main competitors, we made a qualitative and quantitative review calling to 4 criteria: profitability, productivity, quality of the location and store quality. For each of them, we have also completed an in-depth review of the performance in regards to traffic conversion and like-for-like.We then identified different solutions to optimize and enhance our footprint in a twofold approach: one, rationalization of our number of stores. For example, merging some of our women and men separate stores into bigger, dual-gender stores and closure of smaller corners; two, qualitative investment in our stores, refurbishments and our implementation of new concepts, opening of key locations such as Champs-Élysées. All in all, this plan will impact 1/3 of the French POS in about 3 years. At the end of this plan, 70% of our stores should be at new concept versus 30% today and 50% of some old, freestanding store will have a dual-gender store format versus 30% today. We also foresee 5 to 10 net closing per year.In accordance with this plan, we made 3 net closings over the quarter and some qualitative investments in key locations, including Sandro Lille, Claudie Pierlot Cannes and Maje Francs Bourgeois in Paris, a key store in terms of sales contribution. On the right part of the slide, you have an illustration of our beautiful new store in Lille.We opened a dual-gender store for Sandro, 140 square meters, with at least 2 smaller stores, women and men store that were about 70 and 50 square meter, respectively.In parallel, we'll also continue to roll out our e-learning program in France and Europe while preparing the launch in North America and Asia. Our teams are also benefiting from our new digital tools in terms of visual merch management and retail dashboards.In EMEA, sales were up 9.9% at constant currency. This solid performance includes a positive like-for-like sales growth at low to mid-single digit, in line with expectations, as well as the continued store expansion with 48 DOS over the last 12 months mainly focused in Spain, Italy, Switzerland and Benelux, and also a new country for Claudie Pierlot which is Ukraine. After a soft start in January in line with Q4, this quarter has benefited from a sequential growth acceleration in most of its key market, Germany, Italy, Benelux, Switzerland, notably supported by the positive reception of our 2019 summer collection. We are also satisfied by our performance in the U.K., which is posting solid growth despite the difficult climate related to the Brexit. Meanwhile, digital showed good progress, particularly in the lower-penetrated countries such as Italy, Spain or Switzerland.On Page 7, you can see that Americas posted a low start to the year, performance at plus 1%. It is against a very high basis of comp especially in February. It is as well as the market showing such condition with lower consumer confidence and, more importantly, a slowdown in tourism, especially Chinese tourism. The performance also reflected cold weather conditions which led to a late start of the 2019 Spring-Summer collection. We also had some lack of inventory on our '18 -- for Winter '18 collections following a very strong performance in Q4 '18. Looking forward, we remain very confident for the rest of the year and we'll still expect to generate double-digit sales growth for the full year in Americas. Over the last 12 months, we opened 11 DOS and 2 new point of sales on Saks.com for Sandro and Maje.Finally, the group recorded an outstanding sales growth of 28.4% at constant currency in APAC. And this is on top of a very high base in sales comparison, plus 54.1% in Q1 2018. So that reflects the strong start of the 2019 summer collection as well as the very dynamic trends in greater China, particularly Mainland China which has been over 35% of sales growth at currency constant. Its performance was driven by double-digit like-for-like sales growth in Asia, the continued store network expansion and solid progress in digital.As you have seen, we recently announced a new strategy partnership with JD.com which will lift further our customer reach in Mainland China and it will further diversify our digital sales channel. In addition, we completed our own website with the launch of Claudie Pierlot. Overall, the performance is very balanced between brick-and-mortar and digital.In APAC, our road map is clear. We still foresee a lot of white space, as mentioned many, many times by Daniel. We have today some very strong positions in malls with a strong CapEx to negotiate with their landlords to obtain the best commercial location, very often at the center of the accessible luxury store. Recently, we opened some important stores which are Harbour City Maje and Claudie Pierlot. And our pipeline for 2019 includes many of our beautiful projects such as opening of new Sandro dual-gender store in IFC in Hong Kong, just in front our existing Maje store, which is among the top 5 freestanding stores in our global ranking. We continued our expansion with plus 55 DOS in Asia over the last 12 months, including 4 corners in Galeries Lafayette Shanghai in Q1 '19 and 4 meaningful stores in Chengdu and Tianjin. Now I'd like to discuss some Q1 '19 initiatives on Page 8. It contributed to leveraging our core business ready-to-wear and further develop accessories. This quarter, we continue to capitalize on the M bag range [indiscernible] the launch of the M Skin bag. The objective is to animate the season with new attractive models and style and price. Naturally, we're matching our ready-to-wear offer while continuing to develop expertise in stores, selling ceremonies through our training product. The launch has been supported by [ presence ] of dedicated window display, out-of-home campaign, while first time by buses and tour buses in Paris. We have also complemented this effort with digital and with some [ first-time touring ] services.The quarter has also been marked by new products, with the first launch of shoes corners for our 3 brands with our historical partner [ Le Brantôme ] in prime locations: [indiscernible] and Lille. Several communication devices have been set up with [ Brantôme ] supported initiative on digital with the [ Brantôme ] CRM on social media with a broad activation on retail and press coverage.Two other examples, for Sandro, which sponsored the Canterbury Artists Code in Hong Kong [indiscernible]. To advertise the codes along the way division, a large advertising campaign was launched with the name [ Logo at Sandro ] in Hong Kong Island announced in April, alongside the VIP program which offered invitations to our customers in [indiscernible], a large campaign has been also launched, [ great bus ], for the exhibition and to reach with fans to attend the event, with the objective traffic from online into stores. Second, for Claudie, [ with also ] capsule in partnership with UNESCO Organization. Having already supported causes such as the protection of the environment and access to education for disadvantaged children, this year, and for the second time, Claudie has teamed up with UNESCO to support the Keystone Foundation, an NGO working for women and the environment in India. On March 12, a capsule collection of 4 cotton T-shirts, made using organic farming techniques was launched. The messages, "Only Human", "Raise Up Your Hands and Love" and "You're my earth you're my soul" were printed on the pieces. The funds raised will benefit 100 women from the Keystone Foundation's "Green Stewards of Nilgiri Biosphere" program, helping them to become more financially independent by diversifying sources of income and improving their environment.Now shifting on Page 9, looking at the performance by brand. Maje and Claudie Pierlot reported a sales growth of, respectively, 9.8% and 10.5% in constant currency, while Sandro's performance was at plus 4.3% at constant currency. This performance reflected: first, stronger contribution of openings for Maje and CP versus Sandro, keeping in mind that more than half of Sandro's opening were [ theoretically ] smaller corners, while Maje opened a couple of meaningful stores in terms of productivity such as Regent Street, Munich and [indiscernible] in 2018; second, stronger performance of the 2018 Fall-Winter's sales period in France for Maje and Claudie Pierlot. Meanwhile, all the brands generated a strong international sales growth that have been supported by positive start of the 2019 summer collection in all regions.Over the quarter, SMCP continues to grow its base announcing in digital, particularly where our penetration is lower, which is Southern Europe. The 3 brands also recorded very positive results in social media, acquiring new followers, including plus 45% for Sandro, plus 35% for Maje and plus 32% for Claudie Pierlot. Finally, on accessories, SMCP displayed solid progress, mostly driven by shoes for Sandro, thanks to the success of the "Flame" sneakers and all categories for Claudie Pierlot, while Maje continued to capitalize on the momentum of the M bag family.So to wrap up and before we pass the floor to Q&As, just a few closing remarks, which are on Page 11. So in Q1, despite challenging market conditions, as you know in France, solid progress has been made in line with the overall strategy and our key priorities for 2019. The quarter also illustrated good resilience and great traction of our brands internationally. Looking forward, the sequential improvements in Q1, coupled with the positive reaction on summer '19 collections, reinforces our confidence, leading us to reconfirm our full year guidance.So thank you all for your attention and we are now happy to take your questions.

[Operator]

[Operator Instructions] And your first question comes from the line of [indiscernible] from JPMorgan.

[Unknown Analyst]

The first one would be if could you expand please on the acceleration you're mentioning through Q1. Maybe if you could quantify that to some extent. And also, can I just ask if Maje was actually back to double-digit growth at sales group level?And the second question, on the U.S., if you could give us some more color on the current trading and the pace of growth once the weather turn more seasonable. So what kind of growth you are seeing now in the U.S., please?

[Philippe Gautier, CFO & Operations Director]

Sure. Thanks for your question. So in terms of the trend within the quarter, I can confirm you. So we started January mid-single digit, talking about total currency constant sales. Then February was very much in line with the quarter. March was double-digit currency constant, mostly driven by the positive reception of summer '19 collections.If we talk about U.S. more precisely, so, yes, U.S. has been a low performance, as you saw. There are some elements in terms of the market. We saw that the concession was a bit lower in the quarter, concession growth. But then we had a very high basis of comps, so we had plus 29.5% in Q1 last year. And last year we were at over 45% in February, which is huge. So what we have seen as well is, compared to other locations, we had later start of the summer collection in the U.S. as the weather conditions were much tougher than anywhere else. And we had also a -- we were a bit short of inventory in terms of '18 -- Fall-Winter '18 collection after a strong performance in Q4. So that's the main driver. Now February was the weakest due to the very high comp last year. And we started seeing an improvement in March, and that's where we expect -- we are confident for the future. We expect to be double-digit going forward in the U.S.

[Unknown Analyst]

Just to confirm April is confirming that -- the acceleration you mentioned in March -- for March?

[Philippe Gautier, CFO & Operations Director]

Yes. If we talk about U.S., yes, this is confirming. Now you know that, yes, April is more or less in line with March. But you know that for the quarter, this is -- we need to look at the performance month-by-month. We have different products every month, so I would not draw any conclusion at this stage for Q2. But I would say we are satisfied with the start.

[Operator]

Your next question comes from the line of David Da Maia from CIC.

[David Da Maia, Research Analyst]

The first one on your like-for-like. I know you don't disclose like-for-like performance on a quarterly basis, but you mentioned positive international like-for-like growth in the release. So is it fair to assume your like-for-like were flattish overall in Q1? That's my first question.Second question on current trading again. So your annual guidance clearly imply that Q1 should be a low point in terms of organic growth. Can you share with us if April trends, April, are already in line with your 2019 objective, meaning between plus 9% and plus 11%?

[Philippe Gautier, CFO & Operations Director]

Right. David, yes, you're right. Overall like-for-like is flattish in total. It is positive low to mid-single digit internationally, with the higher performance, as I mentioned, in APAC, which is double-digit like-for-like or -- so that's in terms of like-for-like.In terms of Q1 and April, what I would say, yes, I would say April is in line with our expectations. That's what I would say. And that's on the back of positive summer '19 collections. And that's where we feel comfortable about the guidance. But obviously, its performance, we need to look month after month.

[Operator]

Your next question comes from Anne-Laure Bismuth from HSBC.

[Anne-Laure Bismuth]

Anne-Laure Bismuth from HSBC. I have a question regarding the like-for-like improvement in China. Actually, the like-for-like improved. Actually, in Q4, they were weak. So is it possible to know the magnitude of the improvement of the like-for-like in China in Q1, please?

[Philippe Gautier, CFO & Operations Director]

Sure. And also I would say, it's -- maybe to give you a little bit of color. So as I mentioned, it's -- for APAC, it's double-digit like-for-like. It's even -- it's also double-digit in Mainland China. Mainland China was actually the strongest market. I mentioned over 35% growth currency constant for Mainland China. We continue to be very, very positive on Mainland China. What I would -- so definitely, you can see this is an acceleration versus Q4. I know we had many question about Q4, the environment maybe was a little bit tougher in Q4 with lot of talk about the U.S.-China trade war. Feels like the environment is more favorable in Q1 '19, but also our performance is really strong. We have strong feedback from the malls. What I would stress as well, it's very balanced with strong growth across the various countries. And also across brick-and-mortar and digital, we have very good performance in both channels. And obviously, we are also very excited with the new partnership with JD.com. And we see also good progress in terms of social media in China. And we see our number of follower with WeChat and weibo which are growing over 100% versus last year. So very positive about China.

[Operator]

Your next question comes from the line of Marion Boucheron from MainFirst.

[Marion Boucheron, Research Analyst]

Just 2 more questions for me, please. One, on EMEA, could you comment, give a bit more color on the acceleration you've said for Q1? And how is April trending? I mean can we expect it to go back to double-digit growth? Then the second question was at -- regarding Sandro in Q1 and -- well maybe the performance more in Europe. Did you see big discrepancies by categories to explain, I mean, on the weaker sales if we just strip out the fact that the stores were a bit smaller, the ones you've opened? And that was the last question.

[Philippe Gautier, CFO & Operations Director]

Okay. Sure. So in terms of EMEA, what I would say, in general, yes, we saw an acceleration versus Q4 and also some acceleration within Q1. This is mostly related to what I mentioned in general, which is strong performance of summer '19 collections. This is in a relatively tough environment. If you look at Europe, information on textile, the markets in Europe is -- has been down in '18 and it's flattish in '19. So when we are growing 9.9%, we are gaining meaningful market share. And I would say it's pretty broad-based across all the different regions. Even as I mentioned, U.K., we are relatively steady. That's why with U.K. we're still growing mid-single digit in the U.K., which is quite good if you consider all the noise around Brexit in the quarter. So this is rather favorable. And then we continue to make progress in digital.If I talk about Sandro for a moment. Yes, as you mentioned, relatively to the other brands you had a smaller impact of new stores. That's due to the number proportionately to the size of Sandro as well as the fact we opened quite a lot of smaller corners in 2018 with El Corte Inglés or Globus, not a lot of very large stores if you compare with Maje, for example. And then I would say the other driver is fall '18 sales was softer for Sandro than for the other brands. But then we have a positive start of the summer collections, or the '19 collection, with Sandro and very solid price, for example, in accessories. So that should give you a little bit of color on that.

[Marion Boucheron, Research Analyst]

Okay. And just to come back on EMEA. On the like-for-like in Q1, is it fair to say that they were just low single-digit positive?

[Philippe Gautier, CFO & Operations Director]

Yes. It's in line with the international like-for-like sales. So it's low to mid-single digit, which is definitely a strong performance in the current environment.

[Operator]

[Operator Instructions] Your next question comes from the line of Kathryn Parker from Jefferies.

[Kathryn Parker, Equity Analyst]

So my first question is on digital in China, and if you could give us any idea of their relative sizing, you think, the JD.com partnership will be versus Tmall and then your own website.And then my second question is on outlets. So I can see in your 2018 report that you had a greater proportion of sales from outlets, and I just wondered how you see this developing through subsequent year.

[Philippe Gautier, CFO & Operations Director]

Sure. So maybe 2 things. So if you look at our digital presence in China, as you know we have grown very, very fast. We have grown in terms of digital in China. It took us 2 years to be quite close to the group average in terms of e-commerce penetration. So that's really impressive. Now unlike the rest of the regions where we do the majority of our sales on our own site, China is a little bit different where due to the size of the Tmall business, so we do over 80% of our business with -- e-commerce business with Tmall. So what we would expect is to have a more balanced proportion between Tmall, JD.com and our own website. Now it's not going to happen from one day to the other. This is going to be gradual, so I won't give you an exact number. But it's more about while continue to grow the penetration of e-commerce in China, and we can expect this will continue to grow, and having a more balanced business.Your comments on outlet sales, what I would say, it's important to put that in perspective. The big thing is that we have one of the lowest share of physical outlets of any player in our industry, even compared to luxury where around 8% of our sales turns to factory outlets. You can have luxury players which are between 10% and 15%, and you have accessible luxury players which could be 30% to 50% or more. So what you see is that we were missing some distribution in terms of outlets. So there is a little bit of a catch-up and we can grow a bit more outlets. Now it will continue to be a really small level, a small proportion. So yes, it's growing fast, a bit faster, but it's still a very small share.

[Operator]

We have no further questions at this time. [Operator Instructions]We now have a question from the line of Marion Boucheron from MainFirst.

[Marion Boucheron, Research Analyst]

Just on Q1, could you come back to where you ended the quarter in terms of discounting for the -- I mean the end of winter '18 collections? Just to have a rough idea of what we should get then for H1 results on the margin side.And then on outlet, when you have the outlet section online, is it recorded within e-commerce? Or it's recorded in the outlet part when you're disclosing the -- in the registration document?

[Philippe Gautier, CFO & Operations Director]

Sure. When you talk -- so maybe your second question, when we talk about outlet, I'm talking about factory outlets, so that's physical brick-and-mortar. And then you could have like digital outlets, which are done over the e-commerce site. Now you have a question on discounting. Yes, as you remember, we explained that in [ 2018 ], we had a bit more discounting than what we had hoped. And that you -- well, there are 2 items. One, there is a market trend which is to go to always higher discounts, so that's one thing. Second thing is you had some one-off effect in France, one in terms of unfavorable seasonal climate aspect in 2018, second was related to the yellow vests. So that's where the discount in the market and ForEx was a little bit higher. It's good to see that in Q1 we have a lower discount compared to last year. We talked in general for the -- on a full year basis about the discount around 30%, average discount. So we're a bit lower in Q1, and that's largely driven by the mix with higher proportion of summer '19 sales, with the good performance of the new collections. So yes, we feel this is going in the right direction. It's one of our targets to reduce the share of discounting. And we would expect that to have some favorable impact on the gross margin in '19 compared to '18.

[Operator]

your next question comes from the line of [indiscernible].

[Unknown Analyst]

Would you be able to comment on your outstanding debt considering your good results? If you have any plans for refinancing it or other ways of addressing your capital structure?

[Philippe Gautier, CFO & Operations Director]

Sure. Absolutely. If you have in mind, we have -- so we have continued to deleverage every single year, and we have reached a leverage of 1.6x end of 2018. So that's a debt of about EUR 300 million, and there are 2 key components in there. One is a high-yield bond, which is EUR 180 million outstanding. And the rest is financed with RCF. And the high-yield only is quite expensive. It's at 5.875%, whereas the RCF is much cheaper at 2%. We have the possibility with an option to reimburse the high-yield bond as of May, starting in May. So we are -- been discussing with our banking partners to put in place a new financing that would be corporate side financing -- banking financing. So it's still a little bit early to give you the exact details, but we are making good progress on that and we should inform you pretty soon about the reimbursement of the high-yield loan. What it will bring is it will bring a very meaningful reduction in our interest rates.

[Operator]

We have no further questions. Please continue.

[Célia d'Everlange, Head of Investor Relations]

So thank you very much. Thank you for your attention. We wish you a nice day. And we will talk to you end of July now. Thank you very much.

[Philippe Gautier, CFO & Operations Director]

Thank you very much. Have a great day.

[Operator]

That does conclude our conference for today. Thank you for participating. You may all disconnect.