Bloomberg Línea — In recent months, C&A’s CEO,Paulo Correa has been questioned by investors about the reasons for the continued improvement in the retailer’s operational and financial indicators, and whether the trajectory is sustainable. The shares have risen 225% this year on B3 and have detached themselves from the double-digit fall of peers in the sector.
Correa says that he offers two possible answers, one short and one long.
“I prefer to tell the long version, which has to do with the thesis we put forward for the IPO [completed just over four years ago]: it’s a fantastic brand with enormous potential, but it had to make important investments to make the business as a whole shine again,” Correa said in an interview with Bloomberg Línea.
“In other words, it’s the fruit of work that has been evolving for a long time.”
“We’re starting to enter a positive circle in which the operating indicators are advancing more and more, leveraging the result on top of the changes we’ve adopted,” said the executive, a veteran of almost 20 years at the Dutch company (CEAB3), and who has been at the helm since 2015.
According to Correa, the path mapped out in 2019 involved four fronts: recovering the ability to grant credit, modernizing distribution, digitizing the company as a whole - increasing the share of sales through digital channels by 2024, a target that has already been surpassed - and expanding the number of stores.
Judging by the most recent figures, such as the recently released third quarter results, Correa will have to give more explanations to skeptical investors in the face of a sector that has stood out for its negative news in recent months, especially those selling durable goods.
Correa told Bloomberg Línea that C&A managed to increase its gross margin for the seventh consecutive quarter, which he classified as a differentiator in relation to its fashion retail peers, and which have been impacted by the still adverse economic conditions, not to mention increased competition from Asian players such as Shein and AliExpress.
The gross margin for apparel rose to 54.1% in the third quarter, up from 51.8% in the same period in 2022. At the same time, clothing revenues grew 12.5% year-on-year to 1.27 billion reais ($262.3 million), while inventories advanced at a slower pace of 2.3%.
“The results are a reinforcement of the strategy we have defined, in a macro environment that is still not favorable, with high inflation and interest rates,” said Correa. “In other words, we believe that this attests to the consistency of what we have built. The prospect is that this will continue in the coming quarters, as we get more and more information about our customers.”
The company’s loyalty program, C&A&VC, already has more than 25 million users, according to Correa, which contributes to the development of new collections.
He attributed the combination of double-digit sales growth and the increase in gross margin to what he described as the “greater assertiveness” of the collections launched.
“The digitization strategy has become a story that goes beyond just selling through this channel, which is also important,” he said. “Our commercial intelligence hub has become a very important platform that helps us make decisions about stock, product positioning, distribution and pricing of each item for each store.”
C&A began to identify and work on the pieces sent to each store by stock keeping units, product units according to their specifications, in the case of fashion, size and color, for example, instead of the previous model by package, i.e. by packages with several pieces of the same characteristic.
According to Correa, at the end of the day this assertiveness comes down to being able to sell the customer a product at full price, with no discount, more often than before. And with fewer leftover parts.
“If I have a forecast of a slowdown in demand for a product, I have the ability to manage that price in a more granular way than before,” explained Correa. “I can reduce or even increase the price without having to wait for a sale date or adopt a discount for the whole store, for example. On Mother’s Day, we only offered a discount for items that we felt had greater appeal.”
‘Clothing as an investment’
Correa said he understands that consumers, in general, are more discerning when it comes to buying, which requires retailers to be able to offer, for example, more versatile garments that can be worn on different occasions. “It’s like an investment: the clothes have to provide a greater return for those who bought them.”
More conscious consumer habits, something already identified by broader surveys, corroborate Correa’s thesis, and who said he believes it will be present for some years to come.
In anticipating that the combination of growth and an increase in gross margin will continue, Correa cited the fact that the commercial operation’s intelligence is still restricted to the equivalent of 37% of revenues. The plan is to surpass the 50% mark, something that could be achieved next year.
“It’s also a technology that relies on learning models with algorithms. It becomes more and more assertive and this translates into better decisions on collections, stocks and prices.”
On the cash and working capital management side, C&A’s Brazil CEO said that this prioritization began at the end of 2021 when interest rates began to rise to higher levels. In the third quarter, operating cash generation was 263 million reais ($54 million), bringing the cash total to 1.12 billion reais.
The cash conversion cycle was 41 days in the third quarter, versus 65 days a year earlier.
Leverage as measured by the ratio of total net debt/Ebitda adjusted for covenant closed at 2.2x in the first nine months of 2023, versus 4.5x in the same period a year earlier.
C&A Pay leverages sales
Correa also highlighted the importance of the financial division - C&A Pay - in the business model, even at a time of higher interest rates and increased defaults - something that, in extreme cases, led competitors to decide to discontinue this operation, as in the case of Marisa (AMAR3).
“Customers with our store card spend on average 50% more over the year than those without. The level of connection and engagement is higher and this is proven in our business case,” said the CEO.
He pointed out that, as a retailer, he has more information to understand the customer profile than a bank which, hypothetically, only looks at the prospect of financial gain and risk. And he pointed out that this is a private label card for consumption only in the chain’s stores.
“We’re seeing loss levels within expectations in the business case we’ve put together, and this at a time when the macroeconomic situation has worsened. On the other hand, we’re happy because the card has fulfilled the role we expect in boosting our sales,” said Correa, saying that C&A Pay already accounts for around 22% of total sales, versus a level of zero at the end of 2021.
According to data for the third quarter, payment delays of more than 90 days were equivalent to 22.9% of the portfolio of 725 million reais in credit granted. There were more than 4.2 million C&A cards issued to customers at the end of the period.
Asked about the prospects for the economy and the start of the downward interest rate cycle to contribute to C&A’s results, Correa said that logic indicates that it will, but recalled what he has been recommending to his internal teams for some years: “let’s forget the economic difficulties and work to improve operational productivity and to offer better stories to customers.”
“We have to keep working to have the capacity to face adverse macro moments and to benefit more when the situation improves,” he added.
-- Translated from the Portuguese by Adam Critchley