Max Stock Ltd

Q1 2023 Earnings Conference Call


spk01: Good morning and good afternoon, everyone. Thank you for joining us again today. With me on the call is Nir Dagan, our Deputy CEO and Head of Finance, and myself, Talia Sesler, Chief Corporate Development and IR Officer. I will cover the first part of the presentation and Nir will be presenting the most important part of the presentation, which is a review of our first quarter results. And before we start, as a reminder, there is a presentation accompanying today's prepared remarks. As always, the slides are available on our IR websites. And on page two, you have our standard disclaimer language, which I'm sure you are all familiar with. So turning to slide number three, I'll start with highlights of our first quarter results. As you can see, we had a very strong start to 2023 with top line growing 11.5% and net income attributable to shareholders increasing 50%. We attribute our strong performance in this quarter to a couple of factors. First, our top line growth reflected the addition of three new owned stores that were open over the last 12 months. Additionally, we benefited from a shift in the timing of Passover spending from Q2 into Q1 compared to last year. Also from higher store traffic and from strong sales in Purim, which is the equivalent of Halloween. All of that helped us fuel our same store sales growth to 8.6%. Looking at the period from January till the end of April, which eliminates the Passover timing impact, same store sales were up 2.5%. Second, our gross margins expanded 240 basis points versus the prior year period to 41.4%, driven by moderation of global shipping costs that we have been alluding to for a few quarters already, along with further efficiencies in inventory management. These factors were the main drivers behind our adjusted net income growth of more than 17% and adjusted EPS growth of more than 20% in the quarter. And our gap net income attributable to shareholder was up 50%. That is reflecting everything I've just discussed, plus almost no stock-based compensation expense this quarter versus almost $4 million in the prior year period. We expect to see modest stock-based compensation going forward as much of this prior stock-based compensation amount was related to the IPO. and the main reason we adjusted for it in the past. Overall, we're very pleased with our start to 2023, and we look to carry this momentum into full year 2023. Slide number four, you all know MacStock by now, so we can skip and go straight to slide number five. We have 59 branches in Israel and now also one store in Portugal. Together, they make up more than 60,000 net square meters of selling space with approximately 2,000 employees. Now turning to slide number six, we saw top-line expansion in five of our six core categories, including very strong double-digit growth in housewares, which is our largest categories, also in consumables and in office and school supplies. Also, a note for you in case you try to model our financials. Note that this quarter we added a disclosure in footnote number three in our financial statements that split revenues into sales from own stores, sales to franchisees, and revenue from commissions and fees. On the next slide, slide number seven, and I apologize that this is in Hebrew. Unfortunately, this was only available in Hebrew. As I mentioned, we had a very strong Purim season. We also backed the season by a short TV campaign. And what you see on this slide is a screenshot from an independent presentation done by a consulting firm in Israel called Chomansky and Ben-Shachar. This is publicly available on their website. And the slide refers really to the revolution that Maxtalk had done, this sporing in the prices of customs. So, you know, we used to sell costumes for $59.90 and we reduced the price to $49.90 and we created a massive demand for these products that were already discounted even last year. and ended up seeing massive demand for these products in our store. This consulting firm also added a statement saying that according to their estimates, this phenomenon is here to stay and is also expected to expand to other categories. On slide number eight, we always take a look at our strategies and opportunities. So on slide nine, this is a slide that we always review during our quarterly conference calls just to show you how we progress towards our target of 80,000 square meters. by the end of 2025. So today we are at approximately 61,000 net square meters of owned stores, an expansion of about 50% from our starting point at the end of 2019. And if we add our current pipeline, we're at about 79,000 square meters, which really positions us well to hit our goal of 80,000 square meters in the medium term. And if you think that 80,000 net square meter is In the end, it's not. We believe that Israel remains a significant white space opportunity. There's way more growth above this 80,000 square meters target. On slide number 10, we spoke about this store last time. We actually opened it a day after our earnings release in the last quarter. So this store was opened on March 21st. in Harimol and its size is 1570 gross square meter and 1000 net square meters. It is serving an addressable population of about 70,000 people and we look forward to seeing good results from this store. And on slides number 11 and 12, you can see some pictures and some data from our new franchised stores, our new Minimax stores. As you remember, this is our smaller inner city format. And we recently opened two such stores, one in Tel Aviv and one in Akko. This is the local terminology or acre as well. That's the formal name. We see plenty of growth in our Minimax format, also in addition to our growth in owned stores. On slide number 13, looking at our store pipeline, we've signed agreement for six additional owned stores with a total of approximately 17,000 raw square meters, of which three are expected to be opened this year in 2023. So the next three stores will be Be'erot Yitzchak. This is a 3,300 gross, 2,200 net square meter that is expected to be opened around August this year. Next is Kiryat Gat, expected to be opened towards the end of the year. 1,900 gross, 1,200 net. And Bat Yam, which is a new signed store, that one is also expected to be open towards the end of the year, about 1,250 gross, about 1,000 net square meter. So all of these three stores together are expected to add approximately 6,400 gross square meters to our owned stores. And now we're turning now to an update on our new business in Portugal. So last week, and in line with our plan, we opened our first Max10 store in Portugal. We spoke about Portugal in the past, and I believe I mentioned that the chain, Max10, will offer a wide selection of products in categories like our Israeli business. But with a cap of 10 euros per item. And the store that was just opened in Braga is 2,200 gross square meters and about 2,000 net square meters selling space. And we're very pleased with the initial launch and have plans to add two additional stores actually that are in our pipeline. In Portugal, it's also going to be in the north area of Portugal. And while this is still a very small portion of our business, actually even negatively contributing to our EBITDA, Nir will talk about it, we're still very excited about our first expansion beyond our home country. And now I'll turn the floor over to Nir to go through the most important part, the first quarter results. Nir, please.
spk00: Thank you, Talia. Slide 17. Starting with our first quarter results on slide 17, total revenue was up 11.5% for first quarter last year. As Talia mentioned at the beginning of the call, our top line growth reflected the addition of three new on-stores that were opened over the last 12 months. Additionally, we benefited from a shift in timing of Passover spending from third quarter in 23 into the first quarter of 23 compared to last year. ISTOR traffic and strong sales in Purim, which helped fuel our SenStor goal to almost 8.6%. Looking at the period from January till the end of April, which eliminated the Passover timing impact, SenStor sales were up almost 3%. gross margin was 41.4 percent up 200 basis points or 18.4 percent versus last year as we continue to optimize our inventory position and saw global shifting cost moderate compared to a year ago going forward we believe that we can remain at similar gross margin if shifting costs and the US dollar exchange rate remain at the current level. These factors were the main drivers beyond our adjusted EBITDA and adjusted net income group. Adjusted EBITDA, which excluded the impact of FY16 and stock-based compensation was up 15.5% compared to the first quarter of 2022, at $36.7 million, with margin expansion expanding 40 basis points, and adjusted EPS attribute to shareholders blew over 20% in the quarter. Again, I will highlight that our GAAP net income attribute to shareholders was up 50%, reflecting everything i described plus the conclusion of our stock based compensation expenses that was 3.9 million in the prior year period and almost zero this quarter as you can see our adjusted and gap eps for this quarter are the same as the only item that we adjusted for in EPS stock compensation was almost zero this quarter and is expected to remain low. Also, keep in mind that our adjusted EBITDA includes a loss of 0.9 million that primarily reflected salaries and consulting expenses for the establishment of our overseas operation. Turning to slide 18. On slide 18 is a look at our main operational quarterly KPI. We already spoke about our physical presence and our sense of self-growth. So just few things to highlight here. Sense of self-growth almost 9% in the first quarter as I mentioned, following a 9.7% percent decline last year as we left massive growth of 37.5 percent in the first quarter of 2021, a period in which we saw increased demand for our product during the pandemic lockdown. And similarly, we again returned to grow in average basket size across our owned store, Full Print, in the first quarter of 23, after a quarter contraction in the first quarter of 22, following a 32% increase in our basket size in the first quarter of 21. Now I will turn back the call to Talia.
spk01: Thank you, Nir. On slide number 19, we present a look at our liquidity and capital deployment strategy. We have a net cash position at quarter end of about $71 million, and pro forma for the dividend distribution that we made in April, we have a net cash position of about $11 million. And as you know, we have very modest capital expenditures and working capital needs. And as a result, we've been actively returning value to shareholders through annual dividends. and our Share Bybit program. And since 2017, we had returned about $309 million to our shareholders. Slide number 20, before we move into the question and answer session, I want to thank the entire Maxtalk team for their hard work that resulted in our strong start to 2023. The dedication of our team coupled with the underlying strength of our business and our long-term growth strategy have put us in an excellent position for continued expansion in the year ahead. As Israel's premier extreme value retailer, we offer significant value to our customers, particularly during economic environments like the one we face today. That strategic position provides a degree of resiliency in our business and has us poised for growth again in 2023, even as the economic environment remains less than optimal today. We look forward to continued execution against our long-term growth strategies and updating you on our progress in the quarters ahead. And we are now ready to take questions. So one moment as we collect the questions, please. How is the health of the consumer in Israel? I'll take that. Okay. So yesterday, actually, the Bank of Israel has increased interest rate by 0.25 percent, an additional 0.25 percent. We're now at 4.75. Overall, the consumer in Israel is still in a relatively good position. GDP growth in annual terms is now 2.5 percent. The labor market is still in a good position. Unemployment is below 4 percent. Inflation rate is at 5 percent, now above what is in the U.S., but still relatively moderate. And we know that at the end of the day, we saw that in this quarter, and we believe we will continue to see that going forward. When the cycles are softer and there is some slowdown in economic activity, more people come to our stores. And most of our growth this quarter came from volume growth as we reduced prices. And again, most of the growth was volume-based. We believe we will see that going forward as well. There is, as Nir mentioned, some shift. From the holiday season in April, we knew it's going to be soft, and it was soft. But overall, we are still confident. We are in a very good position to deliver 3% same-store sales growth for the entire year, as we guided at the beginning of the year. Anything to add?
spk00: No, nothing.
spk01: Okay, another question.
spk00: Of the early reception.
spk01: Okay.
spk00: The reception to the store in Portugal. Make all of us smile now. Okay.
spk01: Yes. I wish we could actually share with you, and you can look, by the way, at our LinkedIn, but we had various videos from the opening of the store with very long line of of people waiting to enter the store, very good reception. We think that Portugal could be a significant growth engine for us, but again, this is very early stages and we have to wait and see how this evolves. Another question, how did comp sales trend progress as you move through this quarter? I believe we referred to it, right?
spk00: Yeah. How should we think about the sales growth in the second half? I think you mentioned.
spk01: Yeah, we discussed that. So 9% for the quarter, 3% for the four months, and 3% for the entire year. That's a target, and I think we're in a good position to deliver that. How should we think about same-store sales? Same thing. So, yeah, overall, 3% for the entire year. That's the main. And is there anything else? Oh, okay. So I should open that? One moment. Just... Please, could you give us a bit more color around the gross profit margin expansion drivers, especially around what you mean by inventory management improvement and how sustainable this level is, especially versus your intention to reinvest savings into prices above 40%? Okay, that's a great question. Okay, so actually one very important question. point, I think, to mention is that the 41.4% gross margins that we've seen this quarter and also in the prior one, which was quite robust, if we stay with current chipping rates and the current or similar exchange rate between the U.S. dollar and the Israeli shekels, we believe 41 percent is sustainable, even if we reduce prices. So this quarter we had reduced prices, and we still were able to deliver the 41 percent. So this is possible for the next few quarters. Again, subject to having same shipping rates and no major changes in foreign exchange. Exactly. Now, in terms of the driver, the first one, I think the most important one is shipping costs, moderation. That is the most meaningful driver on our gross profit. Also, the actual prices of our products in China are actually now lower. And because we are able to physically buy products in China, we're able to do better negotiations and to get better products and better prices. So that is on top of the shipping cost. And inventory management had benefited. We benefited from that. However, I think we are, at the moment, we've probably materialized most of the efficiencies. I don't think we will not be able to reduce inventory significantly beyond the level that we're currently at. With time, I'm sure that we'll be able to materialize further efficiencies, but we will have to invest for that. Anything else? No. Thank you. How are we progressing on the mix of goods from import? What can we expect and with what impact? So the 60-40% impact that we've seen in the annual result is pretty much the composition for the quarter. There's nothing in the material there. Okay, and that's it. All right. Thank you, guys. And hope to see you join us again next quarter. If you have any questions, please contact us. We'll be happy to answer any question that you have. Thank you.
spk00: Thank you.

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