Edited Transcript of FALABELLA.SN earnings conference call or presentation 14-May-20 4:00pm GMT

Moving over to Slide 3, I would like to highlight our main strategic priorities as we continue advancing and transforming Falabella into a digital and physical ecosystem. These are differentiating our value proposition, scale up logistics, financing and payments, data analytics and business intelligence and technological platform development.

Let us turn to Slide 4. We are pleased with the performance of our online channels that continue delivering strong growth across the board. Total GMV reached $281 million in the first quarter of 2020, a 24% increase over the previous year. GMV associated with our marketplace operations increased by 97%, boost by high-growth in sellers and digital, across all of our portals and apps.

It is worth highlighting that the 180% growth we saw on registered users on our falabella.com app. Linio continues delivering attractive performance with a 57% growth in terms of GMV. Overall, online penetration reached 12% across the first quarter of 2020, which compares favorably with the 9% of last year. Also worth highlighting is the online penetration for department stores that reached 28%.

Let us begin reviewing from Slide 5 onwards to go over the key financial figures of the period. Consolidated revenue decreased by 0.6%, reaching $2.6 billion during this quarter. Chile operations, particularly department stores and home improvement showed the lower performance but were partially offset by improvements across our Peruvian and Colombian operations. Gross profit decreased 3.2%, totaling $894 million, and EBITDA decreased 24% down to $248 million. Net income for the period posted a 76% decrease down to $20 million. Retail operations explained close to 60% of the decrease, with home improvement in Chile and Peru being the main drivers. The remainder is explained by lower profitability at Mallplaza and in Banco Falabella Chile.

Let us turn to Slide 9. Here, we present our financial leverage ratios. As of March 31, 2020, our net debt-to-EBITDA reached 4.1x with a debt duration of 4.1 years.

Before turning to the Q&A segment, I would like to share one final key takeaway. As we have indicated in the past when facing major challenges and disruption, we at Falabella feel confident that this situation will present us with opportunities, and we will work hard and in a disciplined manner to capture them, leveraging on our physical and digital capabilities to capitalize them.

We will now open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And then our first question is from Andrew Ruben with Morgan Stanley.

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Andrew R. Ruben, Morgan Stanley, Research Division – Research Associate [2]

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I had 2 areas to focus on. The first is on margins. Understandable about the expense deleverage in March and the increase in provisions. But do you have any framework to help guide us on, say, how much of your pressure on margins was in March? And then what we should think about for margins going forward? And then I’ll have a follow-up.

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Alejandro González Dale, Falabella S.A. – CFO [3]

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Thank you, Andrew, for your questions. When you say margin, I would understand you’re asking about the general business. And then we can actually, if you want, we can follow in the financial services business. But in general, we have been seeing — I’m sorry?

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Andrew R. Ruben, Morgan Stanley, Research Division – Research Associate [4]

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Yes, yes, perfect.

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Alejandro González Dale, Falabella S.A. – CFO [5]

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Okay. So I’ll go to general margin outlook, and I’ll let Gonzalo to give you some flavor on the department store business. But in general, what we have seen is, I would say, some efforts from the company side to achieve new levels of efficiency. You see the situation that we’re seeing today is relatively volatile. The physical business that we have has been in different countries affected in different ways.

The numbers that we presented as of March basically reflect between 2 weeks, 2.5 weeks of some, I would say, relatively hard lockdowns that we faced in Chile, Peru, Colombia, mainly, but also in Argentina. And I would say that the different measures that we have, the safety and health measures that we had to take in order to be able to participate in the business and also some, I would say, adjustments on the different measures that different authorities took during this period, basically didn’t allow us — so the pressure that we had, I would say, margins was relatively high in terms of us not being able to address the market needs.

What we are seeing basically moving forward is that in the different retail businesses, the digital part is becoming a big part of that. There are some mixes that are changing that I’ll let Gonzalo to get through that. But in terms of home improvement, so for example, we are still getting very, I would say — home products are getting, I would say, good traction on the demand.

Margins, on the other side, in total, I would say, they look — they should look relatively stable moving forward. And before getting to the — allowing Gonzalo to go through the department store, what we’re seeing in terms of the margin in the financial services, there has been, I would say, some pressures in terms of provisioning that we’ve been basically having to do. We haven’t seen, I would say, a strong deterioration on the performance and specifically on the collection on our loans. It’s true that we saw an impact towards the end of March.

There were some, I would say, some increase in the deterioration, not so — relative the margin on the month of April, but we have been seeing, moving forward, I would say, some degree of a stabilization of that pressure on margins and the financial services. And what I’m telling you is relatively common in the different markets.

The only market in which we have been seeing generically some, I would say, changes in that was that also was relatively harsher than what we saw in the other markets was Peru. But we have been seeing lately in Peru that the situation has improved this week particularly because we have been able to operate on online with all of our businesses.

And if you give me a second, I’ll allow Gonzalo to give you some more flavor on the department store, which is pretty relevant.

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Gonzalo Somoza Garcia, [6]

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Thank you, Alejandro. I believe that for the next quarters in the department store, we are confident about the online results that we are achieving, growing very, very positively, particularly what we are seeing in April and May, given that March is not a good month to look at because most of the countries were shutting down during the second quarter — during the 2 last weeks of March.

We are growing depending on the country in online sales between 160% and 200%. So we are very confident about our online sales, but that implies that we will have a pressure in margin because of 3 things. The first one is our product mix. Given the situation, electronics are doing very good with positive results in sales, and — but it affects the — our gross margin because it’s a low-margin category.

And apparel has been much more affected because the penetration in e-commerce is — are lower in apparel rather than electronics. So we are expecting a contraction in gross margins because of the sales mix and also because of the channel mix and the e-commerce channel is much more competitive than the store channel.

And a third factor that we have worked, but it will happen given the shutdown of the stores, we are expecting by the end of the season higher markdowns, even though we defer a lot of our shipments for our private labels. And we have managed to arrange and cancel most of our local orders. We will have some pressure in terms of markdowns by the end of the season, which we believe will be manageable.

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Andrew R. Ruben, Morgan Stanley, Research Division – Research Associate [7]

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Great. And you touched upon the e-commerce side, which has really been the bright spot. I’m curious how you’re thinking about the marketplace business and where you’re targeting your investments, whether it’s Linio or other marketplace properties. Just kind of an update on your overall strategy for that side of the business and how that is being impacted in the current environment.

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Gonzalo Somoza Garcia, [8]

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Thank you for the question. Well, marketplace is one of the main pillars of our growth strategy in e-commerce. I mean in the first quarter, we — our GMV grew almost 100%, so we are completely focused in growing our SKU and seller number and also increasing our seller value proposition.

In terms of investments, we highly concentrated our investment in marketplace in developing our seller center, one — the platform that we acquired from Linio, which will be operating for all the marketplaces of the group and also in strengthening our logistic capabilities for the sellers. We are — we have almost — for a year, we have started to offer fulfill value services for the sellers in Falabella, and we have just started to offer fulfill value services to the Linio sellers, too.

So the main concentration of investments for marketplace will be in IT and logistics.

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Operator [9]

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Our next question comes from Andrés Ortiz with Crédit Suisse.

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Andrés Ortiz, Crédit Suisse AG, Research Division – Research Analyst [10]

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I have 2 questions from my side. The first one is related to Banco Falabella in Chile. We saw during the first quarter that there was a strong margin compression both on gross margin and EBITDA margin for this business during the quarter. But how much was it due to the impact of COVID-19 during March? And could you tell us more about the nonperforming loans? How will the — how was the performance of those during the first 2 months of the year? It appears that you have quite a lot of pressure there. So could you provide us more color, please?

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Alejandro González Dale, Falabella S.A. – CFO [11]

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Yes. Thank you, Andrés. About the performance, it’s true that I’m trying to see some — give you some color on the way it evolved until the month of — but just give me a second. Basically, it’s just to give you some flavor on this. In most of the cases, the increase in NPLs that we’ve seen, don’t forget that we were coming from the end of last year with the social unrest that we had. So in that sense, the total amount of risk that we had on the month of January was relatively, I would say, worse than the standard that we were having before. I’m sorry. Yes, yes. Sorry.

So the month — what we had during the month of January and February basically was somehow — January was relatively worse, February was relatively better compared to what we had before since we were starting to see some degree of recovery. And the most relevant part, I would say, is the part of increasing, I would say, in provision that we had during the month of March, specifically the application of IFRS model, which is a forward-looking model, basically is the most, I would say, the main explanation for the impact that we had.

How should you see that moving forward, it’s hard to come out with a view on that. What I can tell you, as I said before, which is also something very relevant that we’ve been monitoring closely the level of collection and the level of behavior that we have seen in our loan book. To this — that we see — we have seen, I would say, in terms of sales with a credit card, some degree of contraction of that number. Yet the collection that we were able to see, not only during the first week of April, don’t forget that the most relevant day — collection date within a month for CMR card is the 5th. So we see a deterioration in the month of April, but we have been able to see — it’s a marginal deterioration, nothing that is, I would say, very harsh. But what we have been able to see during the month of May is some degree of stabilization of that.

And yes, this is going to be very, very relevant on how much — how relevant are the reaction of the customers, and why I mentioned this is because, well, we have seen this is very similar to what we saw during the last quarter of last year, when you have some degree of effect of opening different branches. Through this, the collection and the performance of our customers that they are close to the digital world basically working through our app or our websites, that tends to be relatively stable and tends to work.

In terms of the different performance of our loan book, we have seen, as I said before, some degree of deterioration, but it has not been something that relevant. And also as I mention, something that I would say, basically leveraging on our digital application, the digital channels that we have, we have been able to stabilize that during the month of May.

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Andrés Ortiz, Crédit Suisse AG, Research Division – Research Analyst [12]

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Understood. And another question, if I may. Regarding e-commerce and your new payment solution, Fpay, how many users you currently have? And what’s your target there? And lastly, at the moment, it appears it’s a closed loop, right? So it’s just accepted in the Falabella home improvement stores, but are you planning to make this platform an open loop platform?

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Alejandro González Dale, Falabella S.A. – CFO [13]

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Thank you. Allow me to give you some flavor on Falabella pay. We will launched it, I would say, strongly during the month of — I mean even though we started in March, but in April, it has basically started to get traction. Today, we don’t have that many users. We have roughly speaking a little over 4,000 users, but the trend has been very strong. As of about a week ago, you can actually pay with our QR code in our stores. You were already being — were able to do that in our stores. But given the physical restriction that we have in our stores, that’s not been as possible. But today, you can — sorry, you can put any credit card you can have. You can put a bank account that you have in another bank. And the traction that we have been able to see in the last 2 weeks that’s been very strong.

And if you think on the traction that already CMR is having at the digital card, which you can — today, you can have a CMR 100% digital, the expectations that we have on Fpay are very strong. It’s relatively hard for me to give you a forward-looking trend on how much we should or we expect to get. But given what we have been able to see in the digital, I would say, businesses that we have, not only e-commerce, as Gonzalo was mentioning before, but also in the financial services, the potential of the expectations that we have here are relatively high.

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Operator [14]

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And our next question is from Irma Sgarz with Goldman Sachs.

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Irma Sgarz, Goldman Sachs Group Inc., Research Division – Equity Analyst [15]

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And one question I wanted to ask is regarding leverage. I know it’s obviously a little bit more nontraditional, looking at your business, given that the large size of the financial portion of the business. But could you just sort of talk us through how we should think about how comfortable you are with the current degree of leverage and what you’re doing in sort of on that side in terms of when you think about towards year-end potentially like getting onto a track to deleverage the company a little bit?

And then maybe connected to that, I see — I think there was a recent meeting that confirmed the dividend payout. But if at any point, that would be an area to think about in terms of adjustments to the dividend payment.

And then connected to that, third question, if I may. Really sort of talking about the e-commerce strategy that you have, where would you sort of say that you’re leaning in more in terms of investments? Is it much more the Falabella side or the Linio side that you’re sort of leaning on in terms of when you think about allocating spend and investments? Or is it sort of equally distributed across the different properties that you have? Just trying to think like whether it makes sense to sort of divide the funds across the different properties? Or if at any point, it would make sense for you guys to try and consolidate everything much more into — sort of into one flagship site.

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Alejandro González Dale, Falabella S.A. – CFO [16]

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Thank you, Irma, for your question. I’ll address the first one, and I’ll allow Gonzalo to basically take the second one. Related to the first one, about the leverage level that we presented, 4.1x, certainly, it’s not a number that we’re used to have, and it’s not a number that the company historically has had with one sole exception, I think, was in 2009. But in this case — it was in that case, in ’08, ’09, with certain specific reasons.

So to your point, I would say the main financial position the company took when we basically saw this coming, and I mentioned saw this coming because we started working on this towards the end of February, more than just the second week or the third week of March. We realized that we needed to take care of the liquidity of the company. And as we mentioned in the press release, we took some different — by different sources, but we were able to gain and manage liquidity level in — instant liquidity level and I’m talking about the nonbanking business, but we did the same thing with them also, of over $1 billion. We — today, we have a number that’s relatively close to that.

And so to your point, basically, we’re managing this situation on a weekly basis. Through this, as Gonzalo mentioned, the performance that our online businesses are having has been better than we were expecting. So in that sense, that’s a good piece of news that we have from there. And to the point, we are expecting to basically follow and keep looking at the situation to see what further reaction we can do in terms of taking down the leverage to the numbers that we had historically that were close to 3, slightly over the 3, but not the 4x that we are presenting today.

And the company, as I mentioned before, is committed to defend the financial strength. That’s why we took the financial resources that we did to support and to build the liquidity level that we have today. And that basically places us in a very comfortable situation to avoid any financial stress for, I would say, a relatively long period from now on.

And going through the dividend, I don’t know if you’re all aware, but Chilean law basically set a minimum dividend percentage, which is 30%, which is what Falabella distributed. Historically, we had been distributing around 40%. In this case, we took it down to 30%. By the way, this is Chilean law, and it’s supposed to protect minority shareholders from control shareholders. But there’s been a lot of discussion in Chile about that.

But in the meantime, we cannot take it down from 30%, but we took it to the minimum we could. As another clear proof, I would say, from the Board and also from the shareholders’ meeting to defend the financial situation of the company and the way we see it.

Having said that, we haven’t seen, I would say, major deterioration on the source of liquidity that we can get from the market, that line. Even the capital markets is relatively open for good issuers like Falabella or any subsidiary of the Falabella Group. And if we have to do something different from that, we have a lot of, I would say, firepower to go to the market in case we need something.

But as I said before, we’re going to be monitoring the situation closely. And to see how we can, in a relatively short period of time, take these — the ratios that we have to the same standard that we used to have, I would say, a year ago.

Gonzalo?

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Gonzalo Somoza Garcia, [17]

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Yes. Regarding the e-commerce and marketplace question you asked, I mean, the strategy is to have all the same common capabilities among all the e-commerce platforms, particularly between Linio and Falabella. So all the investments that we are doing in technology and logistics and data management, which are the key areas of investment, our strategy is to share that capability. So we are concentrating those investments for all the sites.

As I mentioned before, the seller platform that Linio is using will be used shortly during — we expect during this year by Falabella. We are also in plans in moving all the commerce — the other e-commerce platforms of Linio to share the same platforms with Falabella. And in logistics, it’s the same thing. I mean all the capabilities are being shared by all the sites.

Another example is our international. I mean we have all the international marketplace that we have an office in Shenzhen and that we got from the Linio acquisition. It’s also shared with Falabella and Sodimac to acquire international sellers.

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Irma Sgarz, Goldman Sachs Group Inc., Research Division – Equity Analyst [18]

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That’s very useful. Just, if I may, just one follow-up on the last question. And when you think about customer acquisition, I understand there’s probably quite a lot of organic traffic coming through your sites right now. So maybe customer acquisition cost in that sense has come down a little bit. But when you think of maybe in a more normalized environment and you had to decide sort of on customer — like where to be more aggressive in terms of driving customers to your site. Is there sort of anything to single out there?

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Gonzalo Somoza Garcia, [19]

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I mean there hasn’t been any change, I mean, with the e-commerce growth that we are experiencing since March to this day is coming from several sources. Part of it is higher traffic of new customers. Part of it is increasing in tickets. And another part of it is that our current online customers have increasing frequency, but we haven’t changed or make any major shift in terms of performance marketing.

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Irma Sgarz, Goldman Sachs Group Inc., Research Division – Equity Analyst [20]

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I think my question was a little bit more sort of longer term of whether it makes sense to be out there for similar categories with 2 different sites and maybe the rationale behind that.

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Gonzalo Somoza Garcia, [21]

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Yes, I prefer not to speculate on longer-term strategy in terms of market and acquisition.

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Operator [22]

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Our next question comes from Antonio Fernández (sic) [Hernández] with Barclays.

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Antonio Hernández Vélez Leija, Barclays Bank PLC, Research Division – Research Analyst [23]

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My question is regarding working capital. Where — if you could give us more light on your — I mean how are you working through with the different tenants in your shopping malls and purchases, how are you working on that? And a follow-up would be your currency exposure, your FX exposure. If you could remind us a little bit of a percentage of purchases that are exposed to the U.S. dollar and a little bit more light on that.

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Alejandro González Dale, Falabella S.A. – CFO [24]

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I didn’t hear so well that — part of — the first part of your question, but I’ll go through and if I miss something, Antonio, please, let us know. But in the meantime, towards the working capital approach, I would say, that we’ve had in the company is basically, I would say, first, we took a strong reduction on the CapEx plan, roughly taking 40% of what we initially announced, specifically, the part related to physical stores, real estate. What we didn’t, I would say, scale down was the investment in logistics and IT because we have been seeing that not only the strong traction that it’s getting from the market today, but it’s also putting us in — I would say, in a privileged position in the markets in which we operate, and it is creating a differentiating factor with the other players that we see in the market.

But also in terms of that, in terms of the OpEx that we see, every single business in which we participate, has been taking different, I would say, efficiencies process. There’s been adjustments. For example, we’ve said — some things that we were already working before this, like, for example, centralizing a lot of the back office functions that we have, accounting, accounts payable, for example. There’s also some different efficiencies that we have been working in terms of how to manage stores, and there’s so many — there’s, I would say, a big number of different initiatives that we had in the different businesses in order to, I would say, track an SG&A basically moving forward.

We realized that this is going to be a very challenging period. So we are — similar to what we did in ’08 and ’09 when Lehman Brothers went down. We are taking a big, I would say, efficiency program throughout every business in Falabella. So that’s what we’re doing today to handle and to tackle the working capital needs that we can have moving forward.

The inventory measures is what Gonzalo already mentioned. And aside of that, the most relevant, I would say, outlook this company has is the investment plan. And that, as I already mentioned, just by stopping or delaying physical investments like stores or the shopping malls already gives us a lot of air. And I would say — and that’s something that I already answered in the previous question, something that we’re monitoring very closely. So if there’s any further action that we may have to take, we’re very flexible and we have the capacity to do that.

You also mentioned something about currency exposure. Just for you to be aware, even though we have $1.3 billion in notes issued internationally that are in US dollars, those are fully hedged back to local currency, in this case CLP. So we don’t have exposure from that. We do have some degree of exposure from the inventory. But that’s something also that we handled with short-term hedging. So we don’t face major short-term exposure to currency risk. And I don’t know if there’s anything that I didn’t talk about. That’s the way we’re handling working capital in the company today.

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Operator [25]

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Our next question comes from Joseph Giordano with JPMorgan.

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Joseph Giordano, JP Morgan Chase & Co, Research Division – Senior LatAm Healthcare Analyst [26]

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I hope that everyone is safe and healthy. My question is related to the e-commerce side. It seems like the performance is quite strong and probably accelerating throughout April and likely remaining here in May. So I’d like to understand from you guys. So if you’re seeing like new clients joining Falabella, so people that you didn’t see in the past and now they became like more active kind of clients in the platform.

And the second one is, how are you guys seeing the change in this mix? So you already mentioned the frequency is higher. But I couldn’t understand like what has been changing on the mix side. And what did you have to do to adapt for that? So basically, trying to understand like how different this like demand is from like a regular demand.

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Gonzalo Somoza Garcia, [27]

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I mean regarding the last part of your question, the mix side, as I mentioned, electronics and home appliances are doing very good. I mean all the eating at your home and entertainment and working at home, all those categories are having a huge impact in demand. And also, the home categories are doing quite good. Apparel has been the category that has been the most affected in negative terms. Obviously, comfortable apparel is doing well, but most of the apparel is experiencing decrease in sales.

And what was the first part of your question?

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Joseph Giordano, JP Morgan Chase & Co, Research Division – Senior LatAm Healthcare Analyst [28]

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Concerning like if you’re getting like new clients or those are mostly recurring clients?

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Gonzalo Somoza Garcia, [29]

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I think I mentioned before, I think it’s a mix. It’s a mix of recurring clients. There’s a lot of people that were Falabella clients from the off-line world and right now are starting to try the online, and there are also new customers for the group.

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Operator [30]

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Our next question is from Sebastián Ramírez with Banchile.

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Sebastián Ramírez Fuentes, [31]

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I wanted to follow up on JPMorgan’s question regarding the mix in the department stores. So with what you said, should we expect a decrease in gross margins with the shift to online? Not only — so just trying to figure out with April numbers, you’re seeing gross margin much lower level than before, given that now the mix is still to electronics and those type of items?

And also, if you can make a comment in regard of inventory and how overstocked are you in the most fashionable part of the department store.

Second question is in regards to Linio. We’ve seen a massive growth within the quarter, and probably, April and May are looking the same way. Should we think that now, Linio, with this level of growth, is in on breakeven side or we’re still far from that?

And the last question is in regards to home improvement, we saw a deterioration in numbers, even though the impact on COVID and restrictions in mobility were only for the last 2 weeks of March. So can you give us some color if the weakness of the numbers is still over March and especially the last 2 weeks of March? Or it was something that it was mostly brought — taken through the — all semester — or all quarter, sorry. That’s all from my side.

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Gonzalo Somoza Garcia, [32]

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Yes. Regarding the margin, as I mentioned, I mean, given that the mix is going to electronics and home goods against apparel, yes, our margin will be impacted, negatively impacted. In terms of inventory, we have been working a lot during March with all the international and local sellers. In general, on the international side, most of the merchandise was on the water or already arrived. So we are the deferring shipments and moving some merchandise that is not on the season for the next season. And there will be some higher markdowns, as I explained, given that the stores were closed in April and March.

Regarding your Linio question, no, we are not expecting breakeven.

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Alejandro González Dale, Falabella S.A. – CFO [33]

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Yes. If you allow to me complement, Gonzalo, about the Linio part, don’t forget that Linio is part of this ecosystem. So on a stand-alone basis, we’re not expecting to break even, but Linio brings a lot of other things to the company as a whole. It brings a lot of — now it’s bringing a lot of traffic also. So there are some other sources of value. But as Gonzalo mentioned, it’s not breaking even today.

And to your question about the home improvement, in the home improvement, we’re seeing something relatively similar to what we’ve seen in the other businesses. It’s true what you said that even though the last 2 weeks of March, they were not — with some stores, but they were not mostly shut down. But it was the case of the department store. We also saw a relatively slow reaction from the customers throughout the beginning. Even safety protocols were not in place — were not defined. And a lot of our customers keep some — I would say, some — this 2 weeks in order to get — I don’t want to say to get accustomed, to get used to, but to see and to understand how to react to this new reality and to the health and safety protocols that had to be implemented. So that’s why there was a relatively negative impact compared to what we have been seeing in March — compared to what we have been seeing, sorry, in April and even these first 14 days of May.

So the reaction has also been very positive, not only in the stores, but also online, even though the percentage of sales are not — is not a size as what you can have in the department store, but also the online business of stores effect is also having a similar performance in terms of growth that has been presented in the department store. So the performance has been way better in April and in May.

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Sebastián Ramírez Fuentes, [34]

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Perfect. If you can add one follow-up is in regards of the banking division. With this shift to online, it seems that within the sales in online, the share of your sales with your own card are much higher than in physical terms. So have you seen any meaningful change in pattern in that sense? Should we expect that this is a way to grow your loan portfolio even more rapidly in this low-growth scenario?

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Alejandro González Dale, Falabella S.A. – CFO [35]

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It is true that the chip — I mean the use of my credit card in the online business is higher. But it doesn’t get to the point to compensate the sales that we’re not getting on the physical world from a credit card perspective. So the loan book that we have — and don’t forget that the loan is basically built up on the transactions that I have with my credit card that are with credit. So the loan book that we have is — even though it grew 10% during the first quarter, the trend basically that we’re seeing this part is that it’s not growing the amount of loans that we have as it’s — because the number of sales that we’re seeing is not growing in that sense. So it’s not growing that, okay?

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Operator [36]

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And our next question comes from Bob Ford with Bank of America.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division – MD in Equity Research [37]

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Gaston, could you talk a little bit more about your inventory position, how it’s distributed or any seasonal or fashion risk you might see there? And going into winter, I can see that your trade payables down — are down and that you’ve made some real efforts to limit new commitments. But I was curious how you’re thinking about having the right inventory or maybe a little bit more additional risk because you weren’t able to stop as much fashion as you would have liked given some of the commitments you had on already.

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Alejandro González Dale, Falabella S.A. – CFO [38]

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We didn’t hear correctly your question. I don’t know if you can please repeat that.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division – MD in Equity Research [39]

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No, of course, I will. So I was just asking a little bit more — if you could speak a little bit more about the inventory position, how it’s distributed and any seasonal or fashion risk you might see there. And then, Gaston made some comments with respect to trying to cancel orders or defer orders and you can see that in the payables. But I was curious how you felt about the inventory that is coming in.

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Gonzalo Somoza Garcia, [40]

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I’m not — we — as I said before, I think the fashionability and the risk for fashionability in the season is quite manageable, and we are very — and we will be very strict by the end of the season of not moving any fashionable item to the next season. That is why I mentioned that probably, by the end of the season, there will be some manageable pressure on margins.

But in general terms, I would say that our main objective is how to handle all — logistically, all that merchandise that is coming while the stores are closed rather than the fashionability risk.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division – MD in Equity Research [41]

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And could you maybe explore some of the strategies that you’re considering in terms of how to handle that incoming inventory?

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Gonzalo Somoza Garcia, [42]

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It’s a mix. I mean it has been a lot of cancellations for all the orders that were not on production. Mostly with all the local vendors, we have been able to cancel and delay most of it. And with international vendors, they were quite flexible for all the merchandise that was already produced and not ship for delaying shipments for the next month.

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Operator [43]

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Our next question comes from Gustavo Oliveira with UBS.

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Gustavo Piras Oliveira, UBS Investment Bank, Research Division – Head of LatAm Research & Latin America Consumer Analyst [44]

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In the press release, you have a very interesting table where you show the details of your operation status as of, I think, May 11 for Chile, Peru, Colombia. Can you provide some guidance? In Chile and Peru, you’ve been — especially the policies like for containing the disease, they’ve been quite different, right? And if I understand, in Chile, I think there are going to be several waves.

So what I wanted to understand, in Chile, the status as of May 11, as you presented, but has there been any progress on the status before that — meaning that before that, you had many more stores closed and now you have — you are at this stage and you expect stores to open going forward? And could they actually close again?

And for Peru, because the way that the isolation policy was implemented as much more severe than in any other country in Latin America, most likely, what is the expectation? I imagine that these stores have been closed for — since March, right? What’s the expectations, especially for these 2 countries where the operations are very important — where you drive most of your revenues and EBITDA here? If you could provide some update on that for us.

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Gonzalo Somoza Garcia, [45]

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(technical difficulty)

we haven’t any store opened in Santiago City or in Buenos Aires. And Colombia and Peru, all the stores or department stores have closed. We are quite satisfied and confident about all the safety and healthy protocols that we establish. I mean all we — all the people is quite safe in terms of working conditions and also for our consumers. So we are quite satisfied about that, and we expect that to follow the same procedures that we are following in Chile in all the countries as soon as we open. And the authorities have been very, very pleased and put Falabella as an example of the safety measures.

Regarding the sales mix, it’s what I said. I mean in the stores, also, the sales mix is shifted toward electronics and home against apparel.

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Alejandro González Dale, Falabella S.A. – CFO [46]

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And about the home improvement and supermarkets, most of our supermarkets, all of the markets in Peru are open. Supermarkets in Chile with 3 exceptions of stores that were, if you remember, affected by social unrest towards the end of last year are closed, but the others are all open. And in home improvement, we have 73 out of 88 stores open. And as Gonzalo was mentioning, it’s pretty relevant to point out that part of the reason why we have been able to be open, and this is because we’ve been following very strict health and safety protocols.

And I would say the only country in which our stores aside of the supermarkets are closed is Peru. The others, home improvements are also open. And as I said before, fully with new safety protocols that basically a certain number — they’re restricted people per square meter, or limited amount of people with — per stores, everyone wears — wearing a mask, temperature measure, gloves, things like that and alcohol gel in the entrance and in the exit. Those are the things that we’ve been working, but those are the things that we have been able to do in order to basically be able to serve our customers in the different stores that we are able to open.

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Gustavo Piras Oliveira, UBS Investment Bank, Research Division – Head of LatAm Research & Latin America Consumer Analyst [47]

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If I may, just a follow-up, it’s still the same question. For the Chilean department stores, the Falabella stores that you have open, what’s the level of traffic or the average traffic — level of traffic you have into these stores? Are you running — they’re open, but after — I don’t know if they close, but assuming that they close, and then when you reopen, at what level of traffic you’re seeing? You’re like at 50% of the average traffic you had last year because of the restrictions you have to implement or the consumer could be afraid of coming back to the stores, and if that traffic is improving week on week?

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Gonzalo Somoza Garcia, [48]

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There are 2 factors. The first one is given that we are limiting the quantity of people that can get into the store and people know that, so this is affecting also the sales level. We — obviously that we — 2 weeks ago, the traffic was lower than normal, but it has been increasing day by day. So we are confident that if the situation improves, that the sales level will improve.

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Gustavo Piras Oliveira, UBS Investment Bank, Research Division – Head of LatAm Research & Latin America Consumer Analyst [49]

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But right now, you would — is it fair to say that right now, you’re probably like at 70%, 60% of the levels of the average level of before for the stores that are open?

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Gonzalo Somoza Garcia, [50]

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It started in the levels of 30% to 40%, and there are some dates that we achieved 70%. So I think we should wait for how the health situation improves.

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Operator [51]

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And our next question comes from Nicolas Riva with Bank of America.

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Nicolas Alejandro Riva, BofA Merrill Lynch, Research Division – Research Analyst [52]

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Yes. And I apologize if you answered some of this already, I just dialed into the call. The first one is, you provided guidance for CapEx to be about 40% below the original guidance of $800 million for this year. You also mentioned in the press release, the company-wide efficiency program to cut costs. Can you provide some guidance in terms of the OpEx savings that you have identified a number for this year in the same way that you provided the guidance for CapEx?

And also in terms of your revenues, you just mentioned the level of traffic flows that you are seeing in the stores that have already been opened versus a more normal number, and that number has been increasing. And in April and so far in May, how are your revenues? If you can give us some guidance, some color on how your revenues are performing versus last year given the closures across different formats. But yes, so if you can give us some numbers for revenues today versus last year in April and May.

To have an idea, basically, when we think about cash burn, how much cash you are burning? Worst case scenario, yes, if you can give us some color in revenues right now versus last year?

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Alejandro González Dale, Falabella S.A. – CFO [53]

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Thank you, Nicolas, for your question. About the, I would say, the CapEx — the OpEx more than CapEx. CapEx — already mentioned the OpEx savings, it is something that we actually — we’re still working on that. It’s hard for me to give you a number for that. It’s sizable, I would say, but it’s hard for me to come out with a number today.

What we have identified so far, but it’s just a part of that. And I — as I mentioned before, since we’re monitoring the situation closely, it is something hard to come out with a number for the year. What I can tell you this far is, is part of the things that we’ve identified and measured and already took some part of that, which, by the way, may, as I mentioned, the centralization of our some back-office functions that we already took, the centralization of some, I would say, stores back-office functions that we already took, that’s basically, give or take, in the range of close to $80 million, but there’s more to that. There’s more things that will come into the table, things that we are working today and — but we’re not yet in a position in which we can put a strong number into that. But the minute we have that, we’ll certainly reflect that.

And this is — as I mentioned before, this is very similar to the situation that we faced during the last quarter of 2008 and the first quarter of 2009 where we had also a big number of different measures but come in every different business, different, I would say, geographies that we had, but we’re making a lot of things. As I said before, the only relevant part that we are not basically scaling down also, in case you didn’t hear this before, is the part that’s related to investment or CapEx or OpEx in IT and logistics, which we think is very strategic, and it’s becoming a differentiating factor in the markets in which we are operating.

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Nicolas Alejandro Riva, BofA Merrill Lynch, Research Division – Research Analyst [54]

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Okay. And then regarding the second question on revenues right now versus last year.

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Alejandro González Dale, Falabella S.A. – CFO [55]

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The only flavor that we’ve shared is that given the — and this is simple numbers that we’re mentioning. You have the numbers of the online business that we have. If you take that and you put that between close to, I don’t know, 160%, 200%, you can come out with numbers. We mentioned in the shareholders’ meetings the department store level numbers, where as of the end of April, give or take, [50%] to 70%, given the huge increase that we’ve seen in online.

It’s really hard for us to come out with the numbers, given the volatile environment that we’re facing this. But it’s going to be very, very dependent on, one, how many stores are opened, and this is — this applies to every single business in which we are; and two, how — I would say, how much can we efficiently operate, which has been the case so far, in the e-commerce part.

And in that sense, something that’s also becoming very strong in the last few weeks has been the, I would say, the — I don’t know if you all saw this, but the introduction of the on-demand delivery app that we had [Fácil]. It’s also having a big traction, started relatively slow in March, April. But now in the month of May, it’s getting good traction.

So as I said before, what’s relatively clear is that everything that’s become in digital has become very strong. We’re seeing positive numbers. Every single day, we’re seeing positive numbers. Some days, we get online being able to beat last year, but it’s very relevant. It’s very volatile so far to give you a very strong, I would say, a firm number that — like the one that you would like to have.

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Operator [56]

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And our next question is from Emilio Acevedo with Santander.

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Emilio Acevedo Caro, Santander Investment Securities Inc., Research Division – Equity Research Analyst [57]

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I have 2 questions. The first one is regarding how Falabella has managed more stressed logistics under the current scenario, specifically, for example, with more tariffs in the distribution center or more waiting hours in delivery or last-mile management. So I would like to know more color on how you are deal with this virus.

And the second question is regarding maturities. What about the maturities for this year and the next? If we are expecting to refinance, sorry, some of them? This is all from my side.

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Gonzalo Somoza Garcia, [58]

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Yes. In terms of logistics, given the growth that we are experiencing, obviously, that all our logistic operations are stressed on a daily basis even though our structural capacity, in general, we are okay. We are in levels of — depending on the country, of 50%, 60% of full capacity, but this is average. But we have paid promotions that we are stressed. So we are working in some short-term increments of peaking capacity and having capacity for June and July that we are expecting to also increase like 30% more to have more idle capacity for peak. So I’m quite satisfied with our logistic capacity in our distribution centers.

The shipping capacity of the carriers, it really depends on the country. In general, in Chile, even though we moved some — we needed to move some capacity to third-party logistical operators that do not have the same service level as our fully dedicated capacity, I think we are quite satisfied handling with that. Colombia is the same. In Argentina, right now, we are experiencing some delay because we need to get more carrier capacity. And Peru is just now open. But so we are working right now in terms of increasing carrier capacity and also handling capacity.

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Alejandro González Dale, Falabella S.A. – CFO [59]

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And to the second part, Emilio, your question about the maturities, what you saw towards the end of March is basically the construction of this liquidity base that we mentioned before for this year. That’s a base that we basically finished building towards, I would say, mid-March. And we are already working into the financing of that, so we’ve already taken part of that long term. So — and we don’t see any major problems with this given the strength — the financial situation that we have today. With the [CMB] issue and the planning, as I mentioned before, basically take this.

By the way, all this liquidity base that we built is different — relatively small loans. This is not one big maturity that we’re going to be having, and most of this was taken towards the year. So we feel very comfortable, and we are already, as I mentioned, started to basically extend the duration of this and take it to the long term.

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Operator [60]

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And I don’t see any other questions in the queue, sir. You can — I will pass the floor back to you guys for any final remarks.

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Juan-Luis Carrasco, Falabella S.A. – Head of IR [61]

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Thank you. We would like to thank everyone for joining us today on Falabella’s First Quarter 2020 Earnings Call. Our Investor Relations team will remain available for any follow-up questions you may have. Thank you and have a nice day.

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Operator [62]

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And thank you for your participation in today’s conference. This concludes the presentation, and you may now disconnect. Good day.