São Paulo — Persistent inflation has impacted the purchasing power of a considerable portion of Brazil’s population, but some retailers are managing to maintain not only sales but also their profit margins.
This is the case of Arezzo&Co (ARZZ3), a group of brands that includes Arezzo, Schutz, Anacapri, Alexandre Birman, Reserva, Fiever, Alme and Vans, among others, and which is expecting to close the second quarter with a new sales record, the company’s CEO, Alexandre Birman, said in an interview to Bloomberg Línea.
Arezzo’s CEO points to digital sales performance, cost and supply chain control, the fruits of increased investment in logistics and marketing, and the international expansion of operations as the backdrop for the next financial result to be released.
“We are experiencing very strong growth. We will end the second quarter with record sales. One of the reasons is influenced selling. We don’t wait for the customer to come to the store. We take the store to them”, Birman says.
Sales through WhatsApp account for 38% of the total, he says.
“When there is no client in the store, they contact us through WhatsApp. The productivity of sales staff has grown absurdly.”
It is an equation that allows the company to invest in the opening of new stores in the second half of the year and on the advance of its M&A agenda, while reinforcing its focus on the sales force driven by digital influencers, Birman says.
In recent months, Arezzo has been hinted at as a candidate to acquire a company in the sector whose market value has fallen due to a sharp drop in its share price and interest rate hike.
Birman refers to the rumors that Arezzo aims to buy direct competitors as mere speculation, and says the goal is to seek acquisitions that are complementary to the existing portfolio.
“We continue with a strong expectation for the year, which is moving at a very strong pace. This can strengthen our M&A agenda. It all depends on whether the timing is right to acquire the brands we consider interesting for our portfolio.”
Among the new openings is the largest store of the Carol Bassi brand on trendy Oscar Freire street in São Paulo and, on the marketing front, the hiring of Juliette Freire, winner of Big Brother Brazil in 2021, as the face of the Anacapri brand.
“We will open three large Carol Bassi stores in the second
half of the year,” Birman says, referring to the brand aimed at the high-income public, which the company acquired for 180 million reais ($34.3 million) last year.
Shares suffering
However, despite the positive recent results, the company’s shares are down 11% so far this year, which reflects the effects of inflation, high interest rates and risk aversion among investors, according to analysts. That combination has also brought down the share price of other retailers aimed at the higher income bracket, such as Grupo Soma (SOMA3), whose share price has dropped 26.39% and Renner (LREN3), which are down 7.04%).
Brazil’s Ibovespa index has dropped around 4% in the year.
In the first quarter, Arezzo reported an adjusted net income of 57.5 million reais ($10.9 million), which is a year-on-year increase of 97%, and consolidated gross revenues of 1.04 billion reais ($199 million), a 64% increase on the same period of 2021, with a gross margin of 53.4%, up 3.4 percentage points.
Digital sales from January to March this year totaled 223 million reais ($42.5 million), an increase of 43% on the same period of last year.
Commenting on Goldman Sachs’ recommendation to buy Arezzo’s shares following the release of its Q1 results, observing that the company’s operating margin was above market estimates, Birman says the recipe for growth without sacrificing profitability is through discipline with costs, with suppliers and with product pricing.
“I control the supply chain even without having factories. This is the great differential,” he says.
The following interview has been edited for length and clarity.
Bloomberg Línea: The Goldman Sachs report reiterated a buy recommendation for Arezzo’s shares and highlighted Q1 results, especially the increase in margin. How can the company grow while maintaining its margin in a scenario of rising interest rates and inflation?
Alexandre Birman: I can tell you now: we are about to close the second quarter and the results will be even better. The company is seeing constant evolution, which gives us a lot of agility and control over the supply chain, while also giving us flexibility.
Our business model is based on the triple bottom line: product creation, brand enhancement, and the management of our distribution channels. And we have one of the largest footwear supply factories in the world, with more than 20,000 square meters and 600 people working exclusively in our creation and product development area.
For every Arezzo product, we develop what we call “shoe software”, that is, all the know-how on how to produce that product. We develop all the raw materials and own the know-how.
Today we already produce 16% of what we sell. The vast majority is from external suppliers who receive our orders. We control the whole way the product is made. We are very fortunate to have found suppliers that will be able to produce our products. And I deal in large quantities of raw materials for all my suppliers. I control the supply chain even without having the factories. This is the great differential.
What contributes the most to maintaining the company’s the profit margin?
All our pricing is born by the creation of the product. When the design team is creating the product, there is a team that works together, and which makes an assessment based on the perceived value of that product, and defines the retail price. Then, we negotiate the cost, based on our markup.
When we develop a product, we stipulate that it has to be sold in the store for 390 reais, for example. We already have a fixed markup, i.e., when I negotiate with my supplier, I show them why that shoe is going to be sold at 390 reais, how much it will cost in terms of leather, soles, how much it will cost to cut and sew it and how much their margin will be. I don’t have to negotiate prices.
If the price doesn’t fit the proposal made by merchandising, what we do is work on the process in which the product was developed: I can remove a buckle, a seam, change the raw material, do some reengineering until I get to the price established. This ensures the margins, our gross margin. And it results in simplicity and transparency in the supply chain. The franchisee, in turn, also knows how much the product costs. There is no price war.
How is the company navigating these times of high inflation?
We have a product engineering and supply team that searches for the best raw materials. Our product can use several types of raw materials. We create thousands of models per year. We have managed through large investments in marketing to further strengthen the value of our brands, and we have high sales growth.
How are the company’s online sales doing?
Since the beginning of the pandemic, we have strengthened something that was already very present at Arezzo, which is our e-commerce business, and which has existed for more than 12 years. And we have strengthened the way sales staff get in touch with customers without waiting for them to come to the store. During the most arduous times of the lockdown, we were able to maintain an average of 60% to 70% of sales, even with the stores closed.
The sales staff use an application that generates a daily contact list, based on who has a birthday on the day and if it is 30 days since their last purchase. And they contact the customer in a very personal way. It is not a banal WhatsApp. The sales rep writes the person’s name, and sends a product that is associated with the client’s purchasing history. Today, 38% of sales are made through digital influence. Now in 2022, with the reopening of the stores and the return of the flow of customers, we have maintained digital sales. In other words, we increased sales.
The sales staff, besides the classic work of serving and convincing the customers that come to the store, are in contact by WhatsApp during the time when the store is without customers. In other words, productivity has grown absurdly. All this has given Arezzo&Co really strong sales.
During the company’s Investor Day at the end of last year, Arezzo highlighted projects for 2022 such as the entry of Reserva into the women’s clothing line, and the expansion of Vans stores in Brazil. How are these projects going?
They were initiatives that were already underway and have continued, especially the opening of Vans and Reserva stores. The core brands - Arezzo, Schutz, Anacapri and Reserva - saw sales growth. Projects that we announced on the Investor Day are being structured and we are in the initial phase. We have already opened two stores and launched the new Schutz apparel e-commerce platform. We introduced women’s clothing in 18 Reserva stores.
We have grown the Carol Bassi brand a lot since the acquisition was announced. We are in the final phase of projects there, and we will open three large Carol Bassi stores in the second half of this year. We are well in line with our forecast, and achieving results well beyond our goals.
Why are Arezzo plans with the ‘thrift store’ niche with the TROC brand?
It is not that we are betting on thrift stores. It is a new business, an innovative fashion line, in which people put clothes from their closet that they no longer use on the market. This is the circular economy. We acquired a relevant percentage of TROC at the end of 2020. We are investing more and more. It is a business that is part of our venture capital strategy, but not our core business, rather a business of innovation, of growth, of creation of new initiatives. We are happy to be helping the entire circular economy, which has a role in sustainability in the future.
Recently, Enjoei withdrew from an announced deal with Gringa [an online high-priced clothing store owned by influencer Fiorella Mattheis]. How does Arezzo see this niche?
It is the same business: selling used clothes. However, the business model is quite different. Within TROC, we do the curating. We receive the product from all the clients in our warehouse, and we undertake the whole selection process based on quality and hygiene. We leave the product as good as new. Those that are not in good condition, we return to the client. Only after that, the products are made available on TROC’s website. We are responsible for quality and delivery.
The Enjoei model, on the other hand, is ‘peer-to-peer’: the person wants to sell the product, they make it available on the site and put the product up for sale. The purchase is direct from one individual to another.
Analysts have highlighted the international expansion of Arezzo. How do you evaluate the recession risk forecasts in the US? To what extent does this impact your plans?
The external scenario is quite challenging. Our company continues to have a very strong growth in the US, gaining market share, mainly because we have our own production. In the case of Schutz, 70% of the production is in-house. We dominate production.
Most of the brands with which we compete produce in China and had serious supply problems. China was in lockdown recently, in full lockdown for months. All the factories were closed. Whoever produces in China has a very hard time delivering, apart from the logistical issues, the bottlenecks.
We had the competitive advantage of being able to offer the product, besides the strengthening of our brands, Schutz, Alexandre Birmann, and our e-commerce. Consequently, we had strong sales growth. So far we have not felt any decrease in demand. The result in the second quarter will be very strong.
Arezzo made a stock offering of about 830 million reais at the beginning of the year and generated expectations of acquisitions among analysts. Is there anything on the radar in the short term?
The sell-side analysts from banks, who are close to the company and who officially have interactions with our team, have written absolutely nothing about this. One can speculate in the way one finds interesting.
Our follow-on offering aimed to strengthen our growth, because to grow you need working capital. The company is growing more than 60% per year. We have a pipeline of stores to open, and we are continuously increasing the number of store openings.
The follow-on was not done for the main purpose of acquisitions. It was done mainly to support our working capital and our investment in stores, and also in the infrastructure of the company, which is very much in the logistics area.
We have already inaugurated our distribution center, we tripled the area of the old distribution center. We innovated in technology and are building another distribution center. We will start 2023 with 65,000 square meters of space, and that is consuming a lot of our investment.
What is the company’s M&A strategy?
Our objective is to make complementary acquisitions to our portfolio, which is already very rich. We already have the largest women’s footwear brands, we have a large international brand, which is Vans. We have the most important brand and the largest market share in premium menswear, which is Reserva.
We are gradually starting to penetrate women’s clothing. We acquired a handbag factory, HG, a category that accounts for 20% of our sales, and another acquisition focused on sourcing [Sunset], because today the biggest challenge of every sector of the economy is the supply side, the scarcity of raw materials and labor.
We continue with our M&A agenda, which is in a continuous process of evaluating which are the really good assets that we could acquire have in the market.
Could uncertainties in the macroeconomic scenario postpone the company’s M&A agenda?
It may even be that the challenges that we are going to face will accelerate [the M&A agenda], because we have really strong results. Regardless of the macroeconomic and political challenges that our country faces, the company’s prospects remain very good for the second half of the year. Our product is driven by desire. It is not a planned purchase, something that you need a lot of capital or debt to acquire. Or finance. It is an emotional purchase.
We continue to have a strong expectation for the year, which is at a very strong pace. This could strengthen our M&A agenda. It all depends on whether it is the right timing of the brands we think are interesting to be part of our portfolio. We can’t plan a date, it is part of the constant negotiation process. It is not possible to specify if it will be in the second half of the year or in 2023. The company has an M&A area that is doing the due diligence and analysis of the assets in the market.
Translated from the Portuguese by Adam Critchley