Companhia Brasileira de Distribuição (CBD) CEO Marcelo Pimentel on Q2 2022 Results - Earnings Call Transcript

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Companhia Brasileira de Distribuicao (CBD 0.33%) Q2 2022 Earnings Call July 28, 2022 9:00 AM ET

Company Participants

Guillaume Gras - Chief Financial Officer & Investor Relations

Marcelo Pimentel - Chief Executive Officer

Carlos Mario Giraldo - Chief Executive Officer, Grupo Exito

Ruy De Souza - Chief Financial Officer, Grupo Éxito


Good morning to everybody. And thank you for holding. Welcome to the second quarter 2022 GPA results call. [Operator instructions] We would like to inform you that this call is being recorded and will be made available at the company's IR site where the material is also available.

You can download the presentation in the chat icon. [Operator instructions] All the information offered during this presentation and statements that may be made during the call referring to business outlook protection and operational goals are based on the beliefs and assumptions of the company management, as well as on information currently available. These forward-looking statements are no guarantee of performance. They are based on assumptions and they involve risks.

Therefore they may or may not occur. Investors should understand that general economic conditions, market conditions, and other operating factors could impact the future performance of GPA and lead to results that differ materially from those expressed here. We have with us, the CEO of GPA, Marcelo Pimentel, the CFO and IRO, Guillaume Gras, the CEO of Groupo Exito, Carlos Mario Giraldo, and the CFO of the Exito Group, Ruy De Souza. I give the floor to Marcelo Pimentel.

Marcelo Pimentel

Good morning and thank you for your interest in participating in our second quarter 2022 results call. This meeting is happening at important moment because I have just completed a little more than a 100 days at GPA. During this period, we have worked on defining a clear diagnosis. We have adjusted the strategy and reviewed our priorities.Based on this work, we have been able to set forth strategic pillars and priority projects of the new management and the work plan for the short and medium term. I have had the opportunity of talking to you personally over the last few months in greater detail about the mandala that you now see on the screen, which shows us the six strategic pillars of the new GPA. The basic goal is to maintain the focus on operations, improve execution and pursue growth in a profitable and sustainable manner. In total, we have listed 25 projects that are part of these pillars.

Each pillar has an executive director as a sponsor responsible for following the progress of the KPIs of each project and ensuring its development. The top line is led by our new CEO, Joaquim Souza, who arrived at the company a little over a month and will lead the entire commercial strategy. The goal of this pillar is the sustainable growth of revenue.

And I usually say that sales are our obsession.Therefore we have set forth growth levels such as the on-shelf availability project for different banners. And we will guarantee assortment. In the second quarter, we were able to have the stockout of products with a greater turnover, and we have reduced the total rupture by 1.7.

In terms of the NPS pillar, we improved the customer experience and service level in stores.This quarter, we have already been able to register an evolution of approximately 15% in the indicator vis-a-vis the fourth quarter '21, an advance that we have also noticed in the digital channel. The multi-channel initiatives are concentrated on the digital pillar.

I would like to take the opportunity to announce the arrival of Marcello Rizzi, our new CTO, who took over in June and is the sponsor of this pillar. His priority is to offer a truly omnichannel experience to the customer.

In this quarter, we recorded an important increase in the digital sales reaching 15% growth comparatively. Among the drivers for this evolution, I can cite the launch of the hub stores that create a synergy so that the Pao de Acucar and Extra markets serve both sites, the availability of evening hours on weekends and the express sales coming out of our proximity stores.

Other highlights are the beginning of WhatsApp sales already available in all the Pao de Acucar stores integrated to e-commerce. We are the only retailer in the country with this 100% automated process.

Finally, this quarter, we had the opening of the dark store in Morumbi, focused on the sales of ultra-convenience and an operation that encompasses James, Pao de Acucar, Extra Clube platforms and our last-mile partners. The expansion pillar has allowed us to continue on with our plan of openings, conversions and renovations.

Until the first half of July, we carried out 12 conversions of hypermarket supermarkets into Pao de Acucar, Mercado Extra, and Compre Bem stores. At the end of the third quarter, we will double this number.

We also opened a new Minuto store in the city of Sorocaba Soto Kaba in the hinterlands of Sao Paulo. Another 21 units were remodeled based on the G7 Pao de Acucar model. These G7 stores account for 35% of the current part and register higher stores and margins than the unfurbished stores. The profitability pillar led by our CFO.

Well, there the goal is to improve profitability by focusing on operational efficiency to drive margin expansion. We have identified opportunities to improve shrink management and reduced expenses and have done important work with our suppliers to adjust an improve commercial conditions now without the hypermarkets. In short, we have a lot of work and process and structure review to leverage results on this front.

Now to close this slide and by closing my opening, we have the ESG and culture pillar responsible for the social, environmental and government agenda.

And for monitoring the progress of indicators, such as the number of women in leadership and gas emissions, Guillaume will show you in greater detail our strides during his speech. And as we're speaking about culture, I would like to take the opportunity to mention that GPA was certified for the second consecutive year with a Great Place to Work seal. We were highlighted as an excellent place to work.

Additionally, we were highlighted in the 8th edition of the MERCO Corporate Responsibility, which acknowledges companies for their work in environmental, social and government issues.

GPA reached the second position in the retail sector ESG ranking and the 9th position in the category of the most environmentally responsible companies, great achievements for all of us that make me very proud and very proud of the team. I would now like to give the floor to our CFO, Guillaume, who will continue on with the presentation.

Guillaume Gras

Thank you, Marcelo, and a good morning to one and all. Thank you for participating in the GPA group results call. I will start the presentation speaking about our financial performance and our ESG highlights. Ensuing this, I will return the floor to Marcello who will conclude the presentation.

On slide seven we present the consolidated performance numbers which consider all of the operations of GPA Brazil, excluding the discontinued operation of the hypermarkets, drug stores and stores under conversion and the results of the Exito Group. Consolidated sales represented BRL 10.1 billion sales in the second quarter, up 9.3% vis-a-vis last year.

As a result of the growth in Brazil and the strong performance in Columbia, which represented 44.1% of sales in the period, in the quarter we recorded an adjusted EBITDA margin of 7% with a drop of 1.4 percentage points versus the second quarter '21, mainly explained by impacts in Brazil that I will explain later on.

On slide Number 7 we see that the company continues with a solid cash position of BRL 3.9 billion, 1.4 times short-term debt, and maintains a low leverage level of 1.9 times net debt EBITDA. When we consider a pro forma vision, including Assaí's receivables up to January of 2024 of BRL 2.9 billion, the pro forma net debt adjusted EBITDA ratio is 0.7 times. On slide No. 8 we present the financial performance of the new GPA Brazil.

On the pro forma view, that considers the apportionment of certain expenses that cannot be reclassified to net income from discontinued operations in accounting as they are only partially related to discontinued operations. The new GPA Brazil had total sales of BRL 4.4 billion with same-store growth of 5.8%. In Pao de Acucar, the 4.2% growth was driven by higher customer flow in stores, consistent increase in premium assortment at the banner and a gain in market share vis-a-vis the premium market. In the mainstream banners, Mercado Extra and Compre Bem, same store sales growth was 4.8%.

The result of growth in e-commerce sales and acceleration of the royalty – sorry, loyalty program in the proximity format. The strong growth of 13.6% is explained by the excellent execution of the plan to increase the share of perishables, mainly bakery, fruit and vegetables, growth in the flow of passing stores and a higher number of stores serving the last mile partners.

Finally, our digital channel grew 15% vis-a-vis the second quarter '21 when we excluded the hypermarket sales and total BRL 408 million in the quarter with a penetration of approximately 11% of total sales. This performance confirms GPA's leadership in e-commerce in food retail.

Selling, general and administrative total BRL 804 million in the quarter, accounting for 19.3% of net revenue, improving 0.2 PP compared to the first quarter of 2022. Finally, our adjusted EBITDA amounted to BRL 325 million in the quarter, with a margin of 7.8%, down 2.7 PP year-on-year. This downturn is mainly explained by two factors, both relative to the gross margin. One, not passing on all the inflation to our customers, and two, increase in the cost of transformers in our stores.

For the future, with a focus on the most profitable formats in our expansion and conversion plan, we expect to have a dilution of fixed costs and consequently an increase in our profit margin. We now move on to slide nine with the results of Grupo Exito, which presented significant sales growth with same-store sales growth of 27.7% versus the second quarter of 2022, reaching BRL 6.6 billion in total sales in the period, with gross sales of 12.5%.

This growth was driven by the growth in the three countries in which we operate, but mainly in Colombia, which continues with an excellent trend toward innovative formats. Omnichannel sales reached a share of 9.9% in the quarter.

Selling, general and administrative expenses. Expenses totaled BRL 1.1 billion in the second quarter of 2022, accounting for 17.8% of net revenue, a decrease of 0.3 PP compared to the same period of 2021, reflecting the operational efficiencies in all units of businesses that favor the growth of expenses below the performance of sales. This results in an adjusted EBITDA of BRL 466 million in the second quarter 2022, with a margin of 7.9%, 0.8 PP better than in the second quarter of 2021. Now moving on to slide 11.

I will now address our sustainability agenda. In this chart we describe some of our initiatives and highlights of Q2 2020 in Brazil and in Exito. In the fight against climate change, I highlight the Sustainability Week we had in Brazil.

During the week, we had seven events with the participation of 1,800 employees, where topics such as climate change, food, lower waste, sustainable supply chain, FX and compliance and social impacts were all addressed.

At Exito, I highlight the volume of 408 tonnes of those consumer recycled waste in the first half of 2022, 39% more than in the same period of 2021. This waste, in addition to being recycled, is a source of funds for Fundacion Exito projects. On the promotion of diversity front, I would like to highlight the conclusion of the development program for blacks with the participation of 130 employees and the beginning of a new exclusive training program for black women, which has 70 employees involved. As a result, we ended Q2 2022 with 52% of black employees and 39.3% of blacks in leadership positions.

Grupo Exito celebrated for the second year in a row the LGBTQIA+ Pride Month, and this month three training programs were held involving about 1,700 people. And finally, in social impact where we raised more than BRL 2 million in partnership with ahead on that movement, benefiting 11 partners, social institutions that work in the causes of food and education for people in situation of social vulnerability.

Through Fundacion Exito foundation, Fundacion Exito, we reached 36,200 children favored by the zero malnutrition program, an increase of 51% when compared to the first quarter 2022 and in line with the year's goal of assisting 60,000 children by the end of 2022. I end my presentation here.

And I would now like to hand over the floor to Marcelo.

Marcelo Pimentel

Thank you, Guillaume. And to wrap up, I move back to the slide addressing our strategic priorities. Here in Brazil, we continue with initiatives to the structural growth of the top line. We have started in an effort to leverage the share of perishables in the stores.

For example, with the shipping of – via DC. And we follow with the initiatives to make advances and indicators of assortment multichannels. I can mention the initiatives of expanding the client bases using the Coalition 6 and My Discount program with an incentive to attract clients with the actions of buy-and-win and also redemption of points at the checkout. We also increased the share of same-day delivery with expansion of service hours, optimization of fleets and the use of James delivery personnel.

Throughout the second half we will also begin operations in the BEES platform. We will be the only food retailer to be part of their digital platform. This is a result of a new partnership we entered with InBev. We will have the implementation of ultra-convenience at - with deliveries of up to 30 minutes, and we have opportunities mapped with potential sales growth with partnerships in 3P as well in addition to the results of improvements in the digital operations in stores that we have in progress in our stores.

As to expansion, we have initiatives in 12 stores, and we plan to open from 25 to 30 Minuto Pao de Acucar stores, still in the second semester. Finally, we have a lot of work ahead, a lot of opportunities mapped out and already in progress. The prospects are positive for the business in the next quarters and I am convinced that with focus, pragmatism and with the right leverage, we will resume the results level that to be and may reach with this powerful team that we have.

At Exito Group, we continue making headway with constant investment in innovative formats, expanding the participation of omnichannel, which is an international benchmark and the ESG initiatives with a solid and significant agenda for the group. Thank you all. And we can now move on to the Q&A session. Thank you.

Question-And-Answer Session


We will now open the Q&A session. [Operator Instructions] Maria Clara Infantozzi, sell-side, Itau BBA. You may proceed, ma'am.

Maria Clara Infantozzi

Good morning, Marcelo, Guillaume. Thank you very much for answering our questions. We would like to understand the short-term perspectives in relation to profitability. In terms of sales, we saw a relevant recovery in this quarter.

When we think in the short term, can we expect that the company would show some improvements in terms of profitability from now on? Could you also provide more details in relation to the initiatives focused on gains in efficiency that you commented on during the presentation? Thank you.

Marcelo Pimentel

Thank you, Maria Clara. In relation to the first part of the question, considering the context of profitability. Our prospect is that it's likely to quarter-on-quarter have some recovery. We have the ambition of reaching an EBITDA of double digits in the next year.

However, there's a lot of work to be done in this regard. So here we are talking not only about operational efficiency in terms of management of offices, stores and distribution centers, I mentioned that we have been working on, since Joaquim started. We have been working intensely with our suppliers as partners, and we are reviewing all the commercial model and all the logistics model as well. And now without the hypermarket.

But now we have the opportunity to see Pao de Acucar go back to the place of innovation, with the place where we launch a new product. And the industry is very interested in this movement. So this is our focus. And the third pillar related to stock management, where – which is an area on which we have been working and we are going to be working on the structural reduction of inventory so that we can have more optimization so that we can reduce the levels of markdown that we still have some because of the liabilities of Extra inventories that have been decreasing dramatically in the past few months in relation to the previous year, but that affected the margin when we were having to address those inventory levels.

So the expectation is, yes, we want to be able to show a recovery of the margin in the next quarters. In relation to efficiency, we are – we have been working on this, looking at the opportunity of gaining efficiency in all dimensions. And when we talk about efficiency, we're not referring only to costs. As you saw in the numbers, we continue showing good management of all our expenses.

And what we really need is an efficiency in the operational model to leverage our top line. And we have already shown some improvements, and we want to move on, gaining more efficiency in the top line, so that this can come from the dilution as well or the results. And we have seen opportunities, for example, as I mentioned before, in the digital side where we are opening inventories for the third shift for deliveries on the same day. And also to include deliveries – the orders that were made up to 6 p.m., we are going to start delivering those products.

And also, we are going to increase the delivery on Saturdays and Sundays. And this is an opportunity that we had not tapped on before. We have also seen, as I mentioned, especially in the renovated stores with the G7 model. We can see the perishables have been leveraging and going beyond 50% of the total sales.

And again, this will help us increase the margin and also resume this. So I believe that in order to summarize an answer, both in profitability and efficiency, they're moving together hand in hand, and we are likely to see a gradual improvement quarter on quarter.

Maria Clara Infantozzi

That was very clear. Thank you very much. Thank you.


Our next question comes from Joao Pedro Soares, sell-side analyst of Citi. You may proceed, sir.

Joao Pedro Soares

Good morning, everyone. Thank you very much for answering my question. Marcelo, I would like to just a little bit more the point you talked about the legacy inventory of Extra and also something you mentioned in the release that you're not passing on the total costs. How do we put those two fronts together? What is more related to macro and where you are having some difficulties depends on costs.

We understand the inflation is high, and we have – we would like to understand what is related to legacy and what is macro. I would like to understand what's weighing down more. So this is my first question. The second one is related to profitability.

Because I remember that we had not really a guidance but some information that EBITDA would be above 9% in the second half. So we would like to understand how you see those dynamics, whether or not we are going to be able to reach those numbers in the second half.

Marcelo Pimentel

Well, thank you for your question. OK. The first part regarding the inventory management. Well, it is doubtless that the macroeconomic situation that we're undergoing exerts pressure, especially in comparable items and baskets and commodities, especially in the Extra markets and everything that does not refer to impulse purchases.

GPA is somewhat more protected in this sense despite the fact that we could not ignore the fact that at the beginning of the month, this customer has had the opportunity of having access to different market players in terms of cash and carry. We know that this happens. Our strategy therefore is geared toward understanding. And this is the work that we're doing in our partnerships, understanding the ideal assortment and sales.

Now these are the two important points that underline our SGA. Once we have the ideal assortment in our stores, we should not have to increase assortment in some of the categories, we have to reduce the assortment for other categories. We will have a greater assortment. So category per category, we will gain an understanding of the ideal assortment and thus guarantee assortment on the shelves.

Now this will help us to have less nonproductive inventory and reduce the process. Now having said that, we still have some work to do and ever more we're going to reduce this. But the remaining inventories of Extra which nowadays are much lower if we compare the levels to last year, our inventory has already been halved adjusting to the new model of the new TPL. But categories of wine, for example, this is a category which is a true fortress for us.

We still have a significant inventory that we will be using up in the next months where we have important commercial dates that we can make advantage of. Now regarding the EBITDA margin, what we have observed as part of our strategy of double access Pao de Acucar and being the premium point and Pao de Acucar Minuto stores, proximity stores and Extra stores, what we have done is carry out important tests that have helped us to deal with our price positioning in a smarter way. For example, if you look at Minuto Pao de Acucar, we have two models for the location of these stores. We have stores in neighborhoods and stores in pass ways.

And in the pool of the pass ways stores, we are able to have greater elasticity in terms of margin. The audience that we receive is more based on impulse buying. And we have better margins there. Nowadays, we have 15 stores that are on a pilot program.

And in August, we will begin to roll them out. In Pao de Acucar, the great lever here will come from a better share of perishables, especially in bread, in the butcher and FLV categories, as well as on a consolidation of the areas where we stand out, the dairy products, premium dairy products and wines. These are categories that help us strengthen not only the sales, but to stand out online. We believe that in the second half, based on your question, we will continue to see enhancements.

The macroeconomic scenario, which is highly competitive, puts us into a conservative mode. We want to achieve our figures this year. This is the direction we are following. We are going to reach perhaps not the 9% level, but we will have a double-digit vision of EBITDA for the year 2023.

Joao Pedro Soares

Well, thank you. Thank you very much, Marcelo.


Our next question is from Victor Fuzihari from the sell side of Santander Bank. you may proceed victor

Unidentified Analyst

Good morning, Guillaume, Marcelo. Thank you for taking my questions. I have two. The first question refers to the NPS evolution.

I would like to know if you have operational metrics that have made headway in terms of assortment and other categories. Secondly, regarding your results this year, some of them seem to be less relevant vis-a-vis last year. If you could refer to this, please.

Marcelo Pimentel

Victor, regarding the NPS, and thank you for the question. The NPS ended up being a great surprise. We began to work strongly in April in all of the banners, as well as in our digital channels. During this quarter, we collected 15%, and there is a highlight here for Pao de Acucar, who is the leader in this.

To give you an idea, we're looking at all of the banners and all of the channels, including our gas station operations. We want to make sure that the customer experience will become ever better and in the multichannel environment. And I have mentioned this to some of you, 40% of all of the digital sales are carried out on click and pick up. It's very important that this experience become interconnected.

It begins in the digital world and ends up in a brick-and-mortar store. Now when you look at our G7 stores, we already bring all of the digital parts to the forefront of the store. The customers don't have to go to the back. And we wait for the customer as soon as they come in with this excellent purchasing experience.

Another point that we have made strides on in terms of NPS and the digital experience was to simplify the model of Meu Desconto, my Discount in the app. Formerly, you had to release the discount. And doubtlessly, this was a point of friction that we had with some of our customers based on their feedback. Nowadays, we have the one click where you can release all of your offers through a single click, and this has had very good acceptance on the part of our customers.

I should also highlight that in terms of experience, we have a partnership with Stix. And through our CRM, we have received new customers. We put in place the automatic discount for cash payments this year. And nowadays, this represents 90% of the redemption of points.

They are being done at the cash payment and increase the loyalty of our customers. We're doing very well there. Now when we look at the two main points of NPS, they come from assortment and product availability. And queues, of course, in these two points we have significant reductions, double-digit reductions, a reduction of queues at the checkout point and an increase in availability of products on their shelves.

We have a pilot program called top 30 for the 30 top stores of the group. And in those stores, the NPS evolution is from 7 to 20 percentage points. And all of this learning, once it matures, is being replicated in other stores. Now regarding the discounts.

Okay. This is the time when the online business in Europe is undergoing difficulties. We understand that this is something cyclical. There is very little to do in terms of sales discounts in terms of this, and we do hope that there will be a recovery in the near future so that we can benefit from this.

Obviously, this quarter did have a negative impact for us.

Unidentified Analyst

If you allow me a last question regarding your reading of sales in the month of July. If you could refer to this, please.

Marcelo Pimentel

Well, we cannot offer guidance, but July continues at levels that are very similar to what we have observed in the second quarter.

Unidentified Analyst

Thank you very much.


Our next question is from Irma from Goldman. You may proceed, ma'am.

Irma Sgarz

Good morning and thank you for taking my question. To go back, very quickly to your shares, you have already spoken about this, but I would like to know which has been your stock-out level, your rupture level at the peak where it is now and where it is that you would like to get to? And which are the main measures through operational changes that you will put in place. You have already spoken about the work category per category. But perhaps you can work with logistics, as well as with vendors.

I would like to better understand the cycle of this project. My second question, the G7 model, if I'm not mistaken, has already been in existence since 2017-2018 as a prototype. Have there been evolutions in this prototype during the years? Does it include all of the modalities? Is it sufficiently refined at present to deal with everything? Or are you thinking of creating perhaps another prototype? You had spoken at some point about G8 and G9, a subsegment for the remodeling of the Pao de Acucar stores for consumers who still need more innovation, considering the G7 that has already been around for some time.

Marcelo Pimentel

Thank you, Irma. Well, the first part regarding rupture, stock out. As I mentioned, we are being very cautious to carry out important work in this context. We have several points that we have to tackle.

First of all, so that we will not increase the number of problems and to guarantee that we know which is the ideal assortment for Pao de Acucar, Mercado Extra and the Proximity banners, it's very important to work with category management. We're enhancing this area, as well as the processes to ensure that when we design a category projection, or a project, this will remain stable for some time. And this will enable us to go into phase two, which is the work of the supply team. And this is a change that we're implementing in the supply chain to guarantee that the chain will have full independence in terms of the inventory and the organization, ensuring that we have what we need so we can have the right product at the right store at the right time.

And the third pillar of this tripod is the issue of the logistic mesh. Of course, we're going to begin to benefit from the reorganization of our distribution centers, as you know. But there is important work that will still have to be done with the commercial team on supply and our suppliers for direct deliveries to the store. We have a rupture or stock out here that is almost double the rupture of our own logistic management at the store.

We need to understand the logistic capacity of our suppliers to guarantee that at the end we can obtain a better situation or a better level compared to the levels we have in our DC, in our internal logistics operation. As we have mentioned before, we come from an original position of disruption, double-digit disruption. And today, we are already standing at a high single disruption. But every week, we are making improvements.

Last week, for example, we had the best disruption in the last two years of GPA. So we are absolutely sure that the team is really into it with a lot of clarity to make this reduction year after week in terms of disruption level. And whatever is core, all the things that cannot be missed, we are below 5%. And once again, this is very important, not only for the perception of availability of products by the client side, but also to our margin or sales because these are extremely important product.

So we are sure that we have the project that is considering all the pains, all the difficulties. We see everything that needs to be improved, and the team is committed to those changes. And for sure, in the months to come, we are making the structural decisions that will allow us not only to have improvements, specific improvements, but also structural, consistent improvements for the months and years to come. In relation to tier seven, today we are already at 35% of all the infrastructure of the stores already renovated in the G7 model.

Obviously, this model underwent some adjustments when compared to the original model of 2016, 2017. But for sure, at this time around, we do not have the ambition of our – in other words, the distraction to look at other models. The G7 model that has been implemented in all those stores show performance above 5% of delta of five or more percent in comparison to the nonrenovated stores. And the share of perishables is above 50%, and this is something that we do not see in the non-renovated stores.

And we really believe that the model is a winning model. And before attempting anything new, we are going to complete the renovation of 100% of all Pao de Acucar stores in this model so that we can offer this to the client and so that we can offer the stability of experience of Pao de Acucar. We are also focusing on the model of proximity. This model of store is very successful.

Our expansion shows a level of maturation, which is quicker. It shows an EBITDA margin which is quite healthy when compared to Pao de Acucar. And we also understand that we are also making some adjustments, assortment adjustments. We're also making adjustments to the strategic vision that those models will help us not only with the in-person sales, but especially in the Express sales that-whose delivery will be within 30 minutes for high population regions.

We are making partnerships, and we're doing tests with our partners so that we can make the deliveries within 30 minutes, and we are doing very well in this regard. And we believe that for this model, not only will we have the good news that we already see in the physical experience, but we also migrate this to multichannel dimension as well.

Irma Sgarz

Thank you very much. Thank you.


Our next question comes from Vinicius Strano, sell-side analyst of UBS. You may proceed, sir.

Vinicius Strano

Hello. Good morning, everyone. Thank you never much for taking my question. Considering the long-term expansion of Pao de Acucar, you mentioned 100 new stores along the period of three years.

I would like to know whether you maintain the strategy or if there was any changes. And if you could tell us what you think in terms of marginal return for the new stores. And just a follow-up in relation to G7 format stores. Could you also compare what you see as margin in this format when you compare to the other stores?

Marcelo Pimentel

Thank you, Vinicius, for the question. In relation to expansion, as I arrived here, I'm reviewing all the models of the business models and all the capex allocated to the models. So I hope in the next quarter I can give you a more assertive answer in relation to numbers and figures. Without any doubt, we are very committed to the expansion of premium dimension of the business, both considering Pao de Acucar model and also Minuto and Proximity.

What I see is that we have opportunities to strengthen and leverage the home banner in both formats. Obviously, in relation to expansion for sure for the short term we have bigger opportunities in the Proximity stores considering the opportunity that we have in greenfield in the field that we see that has not been populated yet, especially in the state of Sao Paulo. When we compare to an expansion of [Inaudible] whose work would be very painstaking to be done. Considering cost of construction and also a higher interest rate, it's important to validate the model and to ensure that the expansion should be done.

However, I reserve myself the right to review all the models and the strategic proposals so that this can be one that would add profitability to the business, not only numbers. So we are going to have numbers from a model or another model. And I believe we are going to have an aggressive combination of both. But in this initial moment, I believe that we will have more alignment in the proximity models.

In relation to the G7 model, I would like to say that we have seen improvements both in top line and margin delta as well. Considering the higher share of perishables, as I mentioned before, also the share of wines and special cheese, these are highly important for us. And we want those stores to gain a new way of exposure so that they can be connected to the environment of cheese, and this is – this has improving the department. And this is also an area where we offer special beer.

And this is a strength for the group. And it's also connected to the barbecue area. This has provided us with a lot of success. And this has made us successful in the category of beer, especially special beers that brings us a lot of differentiating factors.

So we have seen important deltas in terms of improvement in the margins in this model.

Vinicius Strano

Thank you, Pimentel. Thank you.


Our next question comes from Joseph Giordano, sell-side analyst of J.P. Morgan. You may proceed, sir.

Joseph Giordano

Good morning, Marcelo. Guillaume, good morning. I have two questions, quick questions. The first one is related to the adjustments that we have seen in relation to the structure that you say have to provide support to Extra.

So I would like to know in terms of BRL what would be the amount. So what kind of savings could we have along the second half of the year? And the second question goes back to the expansion discussion. Some categories of cheese and wine. So we would like to learn more about the market opportunities, where can we see them thinking about Brazil at large? Maybe we have more prevalence in the – in Sao Paulo, more competition in the segment in Sao Paulo.

But I would like to understand what would be the direction of this expansion. And how can we think about the distribution structure, the tripod that you mentioned and if it's ready to ensure a homogeneous level of service across the areas.

Marcelo Pimentel

Thank you, Joseph. Let's start talking about expansion, and then Guillaume will talk about the reduction of the supporting structure that we have been experimenting after Extra left the business. Expansion market opportunities. What we see here is something large.

But I believe that specifically Pao de Acucar banner has a very important opportunity in the state of Sao Paulo. The brand is without any doubt the very strong, the strongest in the market. We still see opportunities to move into the interior of the state of Sao Paulo. Our presence is very concentrated in the capital.

And – but we see opportunities to migrate from the capital to other areas. We have already had some experiences with Limeira CD. Last week, for example, we opened [Inaudible] activities. And in this expansion model, considering the opportunities to be more present in the state of Sao Paulo, considering the strength of the brand in the state of Sao Paulo.

Of course, when we have this completed, and this can be done in parallel, and we will see opportunities to grow. And I believe that the best opportunity that we have at the moment is to grow where we are already present and where we are strong. Also considering the logistics presence so that we can reduce the logistics cost. So we are talking about regions such as Rio de Janeiro.

And in the northeast of Brazil, which is very concentrated, in Fortaleza and Recife. By the way, at the end of this call I'm going to fly to Fortaleza and where we are going to open a new store in Fortaleza, Iguatemi. So in other words, we are going to go for growth whatever we already have the brand with a very strong presence. And we believe that in the short term or in the medium term, we are not going to look into new regions where we would have to make greater – much greater effort to introduce the brand.

The logistics of course is going to be much higher. So while we see opportunities in those places where we are already present, we are not going to lose the focus and try to do something different. So yes, we are going to look at the banner, proximity banner with our focus basically concentrated in Sao Paulo in the neighborhoods of AB class level where we already have a share and participation and a presence which is very strong. And we have already seen in this model complementarity where the client would purchase at Pao de Acucar and would complement the weekly purchases at Minuto where the experience is very similar with the same banner.

I turn the call to Guillaume so that he can talk about cost structure.

Guillaume Gras

Well, when it comes to the structure, it represents 10.5% and 2.5% for the hypermarkets. Now the size or the dimension of the improvement that we can expect is of one point.

Joseph Giordano

Well, thank you very much for your answers.

Guillaume Gras

Thank you, Joseph.


The next question from the sell-side of GPA. Thiago, you may proceed.

Unidentified Analyst

Good morning, everybody. Thank you for taking my question, and congratulations for your results. We have three questions, and I promise to be very brief. If you could perhaps give us more details on other revenues and operating expenses.

You mentioned that you had labor contingencies and expenses with restructuring. If you could explain this in greater detail, and what we can expect from this line item going forward? The second question refers to your working capital dynamic, which I have seen in your balance. You spoke about a reduction that is happening naturally as you no longer have the impact of procurement for the hypermarkets, but I would like to get your feeling on the main lines, the suppliers, inventory and receivables and which will be their behavior in the new GPA that is more aligned. And to end, a question that is geared to Marcelo.

During the call, we have spoken about your focus on the six main pillars, your operating challenges, of course. And the question is, which is the main challenge now that you have been in the company for some time. And where do you have greater room for improvement? That is all and thank you for taking our questions once again.

Marcelo Pimentel

Well, thank you for the question. Now, regarding our expenses. This quarter we had the closing of eight stores. We do have of course those labor contingencies that you mentioned, which are due to the reduction of personnel that we carried out in previous quarters.

We also have tax contingencies. We have to focus on this line item, contingencies perhaps that are somewhat fragmented. Now what I can say at present is that this line item will be reduced in the coming quarters.

Unidentified Analyst

Thiago, on my behalf, and to be highly objective, I believe that this focus arises from putting the entire organization, the board of management, which is also aligned with the six pillars, as well as all of our store personnel, same message so that we will not disperse a company of the size of GPA and because of this opportunities can of course become distracted with things that could be opportunities. But for the present time, we will have to say no to them and put all of this into a parking lot so that we can return to growth. When you ask about the main focus, now what the company urgently needs is to have further sales growth. The entire organization has to care for their customers in an obsessive fashion.

When I speak about caring for their customer, I refer to do this integrally throughout the organization. First of all, to have a very clean and fully supplied store with the right prices and with the right products. And as we deliver the basics in the retail market in a consistent way, we will once again have growth, and the opportunities will increase for the multichannel market. They will be enormous.

I'm highly optimistic with this moment. We have to guarantee the work that is being done to truly invest in quality and to do this carefully to ascertain that issue of the ideal supply. Well, we don't want to reinvent anything at the moment. We don't have outside management.

We want to go back to working with consistency in the food retail market, which is what customers expect.

Thank you. Thank you very much for your answers.


The next question is from Joao Paulo Dias Andrade from the sell side of Bradesco BBI. You may proceed, sir.

Joao Paulo Dias Andrade

Good morning and thank you for taking my question. Well, most of the questions have already been answered. I do have a follow-up in terms of sales. July is very similar to the second quarter.

If you could remark on Pao de Acucar vis-a-vis Extra. Now your cost, if it comes from inflation, from works or service, revamping of supermarkets. Thank you very much.

Marcelo Pimentel

Now, regarding growth, proportionally it has been maintained among the different banners. And it is very similar to the growth that we observed at GPA, a growth that is gradually better. Now Exito has grown quite fast with a very good performance. Regarding cost, I believe Guillaume has already answered this.

Anything to add?

Guillaume Gras

Well, we do have the cost of transformers. They are people who transform their merchandise in the stores but also service the customers. We also have the cost of inflation for the salaries of these people, which are part of the line item for the group. And all of this comes hand-in-hand with a strategy of strengthening the perishables.

And these are categories that are of the utmost importance for us. We have invested heavily in terms of the training of our professionals so that they can ensure a return and leverage. Well, we have observed not only at the G7 stores, but also at the top 30 stores, and that will consequently be replicated to other stores that have not undergone this transition so far.

Joao Paulo Dias Andrade

Thank you. Thank you very much.


Our next question is from Andrew Ruben, sell side from Morgan Stanley. You may proceed, sir.

Andrew Ruben

Hi. Thanks for the question. Most of mine have been asked as well. Just one follow-up on the digital strategy.

You mentioned the use of – or the addition of BEES as a partner this quarter. How do you think about in general which partners, how many to work with? And then how to ensure a good customer experience when using this partner strategy? Thanks very much.

Marcelo Pimentel

Our digital strategy is made up of two parts. 50% of our digital sales through the James platform or directly at the Pao de Acucar and Extra markets. Now this platform has become revitalized, and we plan to continue to grow it as we increase the use of technology at the stores and as we open up slots for evening service and services on weekends.

Now beginning in August, when it comes to technology, we will be launching the operation for express delivery, which is a same-day delivery for 100% of our connected stores.

This will represent 50% of what we do. When we speak about our partnerships, and I would like to speak about our B2C partnership, initially we have had significant growth with three platforms. iFood that has grown and has more than doubled its share vis-a-vis one year, Mercado Livre with whom we have expanded, and we foresee opportunities for a further expansion to the northeast and to the south. And once again, this has been a very successful partnership for us.

And minor groups shopping and other groups that have also gained in terms of share in our sales. And together, they correspond to the other 50% of our multichannel sales. Now the launch of BEES will be very interesting for all of us because we have exclusivity of food retail on that platform. They have more than 1 million customers registered, and they deliver beverages.

We can complement that order with grocery items, and this brings about opportunities for new sales. And we're quite optimistic of being able to service these customers and evidently benefit Pao de Acucar through this new delivery model in partnership with BEES. This will reduce the logistic cost of the delivery and making it a highly profitable delivery for GPA.


Our next question, Mr. Vinicius from the Bank of America sell side. You may proceed, Vinicius.

Vinicius de Souza

Good morning, Marcelo, Guillaume. Thank you for taking our question. In the release, you mentioned an improvement in the customer flow in GPA. How much of these sales have increased and which was the increase in ticket? And if you could speak about the initiatives to enhance the customer flow at stores.

Marcelo Pimentel

Vinicius, thank you for the question. Yes, we have had a very positive impact. We have seen a resumption of customers, as well as a growth in number of customers. There is an increase in customer flow, an absolute enhancement in the number of visits, more frequent visits, but with a lower ticket.

Customers visit the store more often, purchasing less. And what we would like to do is include more products in their shopping basket. We're working with CRM in obtaining new customers and seeking out customers based on the customer data platform, where we not only offer generic promotions or offers, but through discounts we're also able to make more customized offers for the customers. The second point is that we are looking into the future with a lot of optimism.

I mentioned about expansion, and we have a partnership with six Coalition where GPA has a majority share, and we have access to the pool of clients of Drogasil and Raia drug stores. And we can filter clients, qualified clients. According to Mercado Extra profile, and we have access to them, and we can bring those clients to the base and with expressive benefits into the program. So this is what we are trying to do.

We have a team which is highly focused on this process, and we have identified more than 1 million people who are have not purchased that GPA. And we have – we can see a very good opportunity to go after those clients that already have Stix and these clients can be offered a discount in our stores and this is something that we are looking at, so that we can increase the basis.

And from the commercial side, as I mentioned, we want to bring in more clients and once the clients are with us, we want them to purchase more and part of this buying more will come from an initiative of making headway into work that we have been doing. With this customer date platform, we customize ever more the offers to our clients.

Vinicius de Souza

Excellent. Thank you, Marcelo. Thank you.


We would like to inform you that the Q&A session has come to an end. I would like to turn the call back to Mr. Marcelo Pimentel for his final remarks.

Marcelo Pimentel

Thank you very much. I would like to thank you once again for attending this conference call. I want to give a special thanks to the team. We continue focus, we have a lot of work ahead of us and we are confident that we are gradually advancing. The macro scenario is still very tough, very challenging. We are in a moment of an important structural transition for GPA.

Adjustments take time, but I am convinced that we have the right plans and the best positioning and the right team, so that the new GPA will continuously move toward more consistent and sustainable results. Have a nice day everyone, and thank you again.


The conference call has come to an end. The investor relations department is available to take any further questions you might have. We would like to thank everyone for attending the conference and have a good day everyone.

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