In the third quarter of 2024, Alsea (BMV: ALSEA*), a leading operator of restaurant chains, reported a sales increase of 9.3% year-over-year, hitting MXN 20.3 billion. The company's earnings before interest, taxes, depreciation, and amortization (EBITDA) also grew by 9.3% to MXN 2.85 billion, sustaining a 14% margin. Despite the positive sales and EBITDA growth, Alsea faced a significant decrease in net income and is navigating currency translation challenges and external economic pressures.
Key Takeaways
- Alsea's sales rose by 9.3% year-over-year to MXN 20.3 billion, with same-store sales up 7.7%.
- Digital orders represented 32.5% of total sales, amounting to MXN 6.6 billion.
- The company opened 66 new stores, focusing on high-traffic areas, and saw a 38% increase in loyalty sales.
- Net income decreased by 60.56% to MXN 186 million, largely impacted by currency translation effects.
- Alsea has a strong cash position of MXN 4.6 billion and plans to manage a €90 million payment through cash and debt.
Company Outlook
- Alsea is cautious about new store openings in South America but maintains a strong pipeline in Mexico.
- The company is optimistic about achieving its EBITDA guidance despite economic pressures.
- A resilient consumer environment is noted in Mexico, with expectations of mid to high single-digit growth.
Bearish Highlights
- The net income was significantly affected by negative currency translation effects.
- In Europe, Starbucks operations have seen a decline in traffic.
- Alsea did not meet top-line expectations due to foreign exchange impacts.
Bullish Highlights
- Digital transformation initiatives resulted in a 38% growth in loyalty sales.
- Alsea's strong cash position demonstrates confidence in meeting debt obligations.
- The company is optimistic about recovering half of the traffic losses in Argentina by 2025.
Misses
- Alsea's net income suffered a substantial decrease despite the increase in sales and EBITDA.
Q&A Highlights
- Alsea plans long-term to have over 700 stores in France.
- Repayment of €50 million of a €90 million leverage to minority shareholders is scheduled for December 2023, with the remainder in February 2025.
- The company projects a net leverage ratio of 2.3x by year-end pre-IFRS 16 adjustments.
Alsea's third-quarter performance reflects a company navigating through currency translation challenges and external economic pressures while maintaining growth in sales and EBITDA. The company's digital initiatives and loyalty program growth indicate a strategic shift to bolster customer engagement.
Despite the setbacks in net income and the cautious approach in South America, Alsea's expansion and consumer resilience in Mexico provide a balanced outlook for the company's future. The next earnings conference is set for 2025, where Alsea will provide further updates on its progress and financial health.
InvestingPro Insights
Alsea's recent financial performance, as reported in the article, can be further contextualized with additional insights from InvestingPro. Despite the challenges faced in the third quarter, including currency translation effects and external economic pressures, Alsea maintains some strong fundamentals.
According to InvestingPro data, Alsea (ALSSF) boasts impressive gross profit margins, with the latest figures showing a gross profit margin of 62.15% for the last twelve months as of Q2 2024. This aligns with the company's ability to maintain a 14% EBITDA margin as reported in the article, suggesting efficient cost management despite economic headwinds.
An InvestingPro Tip highlights that Alsea is a prominent player in the Hotels, Restaurants & Leisure industry, which is consistent with its position as a leading operator of restaurant chains mentioned in the article. This industry leadership could provide Alsea with economies of scale and bargaining power, potentially helping it navigate the challenging economic environment.
However, investors should note that the stock has taken a significant hit over the last six months, with InvestingPro data showing a 6-month price total return of -39.29% as of the latest available data. This decline may reflect the market's reaction to the challenges outlined in the earnings report, particularly the substantial decrease in net income.
For those interested in a more comprehensive analysis, InvestingPro offers 11 additional tips for Alsea, providing a deeper understanding of the company's financial health and market position.
Full transcript - Alsea SAB de CV (ALSSF) Q3 2024:
Gerardo Lozoya: Federico Rodriguez will be presenting the results. Before we continue, a friendly reminder that some of our comments today will contain forward-looking statements based on our current view of our business and that future results may differ materially from these statements. Today's call should be considered in conjunction with disclaimers in our earnings release and our most recent Bolsa Mexicana de Valores report. The company is not obligated to update or revise any such forward-looking statements. Please note that unless specified otherwise, the earnings numbers referred to are based on pre-IFRS 16 standards. I will now hand it over to Armando for his initial remarks. Please go ahead, Armando.
Armando Torrado: Thank you, Gerardo, and good morning, everyone, and welcome to Alsea's Third Quarter 2024 Earnings Video Conference. I would like to thank our team members and stakeholders for their continued hard work and support despite ongoing macroeconomic changes and challenges in some of our key regions. We have again delivered solid results. Today, I will provide an overview of our performance for the quarter, covering our financial results, regional highlights and key developments across our brands. I will also highlight our progress on digital transformation, ESG initiatives and expansion strategy. To begin, here are the key highlights from the quarter. In the third quarter, sales increased by 9.3% year-over-year, reaching at MXN 20.3 billion. That's an 11.7% increase when excluding foreign exchange effects. Same-store sales grew 7.7% year-over-year. EBITDA increased by 9.3% year-over-year, reaching MXN 2.85 billion with a margin of 14%. Through strategic pricing and cost measures, we were able to offset minimum wage increase, thereby maintaining both our margin and financial strength. We served over 32.2 million digital orders in the quarter, totaling MXN 6.6 billion sales, which contributed for 32.5% to our total sales. Regarding our brand performance in the quarter. Alsea Starbucks same-store sales increased by 2.6%. For Starbucks Mexico, same-store sales increased by 1.9% despite tough comparisons and a normalization of customer habits. During this quarter, we are slower in the travel and channel stores, reflecting lower traffic in airports, which accounts for roughly 10% of our sales. There were also disruptions in more than 30 stores driven by weather-related events, also impact on security measures implemented in certain parts of the country. Also during the quarter, and particularly in July, increasing rainfall affected our sales by 1%. Additionally, we had lower sales from merchandise, which pressured our average ticket during the quarter. For Starbucks Europe, same-store sales declined 12.3%, mainly affected by the ongoing pressures in France and Benelux and reduced consumer traffic in popular tourist such as Barcelona and Valencia. Finally, in South America, same-store sales increased by 29.7% and decreased by 6.3% excluding Argentina. We are implementing different commercial strategies in the market where we operate, and we are expecting to generate a recovery in transactions during the fourth quarter. During the first 9 months of the year, we opened 100 new Starbucks stores globally, reflecting an increase of 27% compared to last year. Domino's Pizza (NYSE:DPZ) Alsea posted a 4.6% increase in same-store sales. In Mexico, Domino's Pizza same-store sales increased by 8.1%, driven by successful promotions like Domino's Mania. This year, it marks the 35th anniversary of Domino's Pizza in Mexico. We are proud of the brand's accomplishment of this period and look forward for an exciting future. In Spain, same-store sales were relatively flat, reflecting store performance in the carryout and dining channels, while we continue to experience delivery challenges. In Colombia, same-store sales were up 7.7%, supported by an increased traffic for successful operation and commercial campaigns. During the first 9 months of the year, we opened 45 new Domino's Pizza stores globally, reflecting an increase of 36% compared to last year. In our Burger King sector, same-store sales excluding Argentina increased by 2.3%. In Mexico, we reported a sales growth of 0.9%. This was mainly driven by the strong growth in delivery channel and digital initiatives such as digital kiosk installations, which increased our average ticket. Regarding the Full-Service Restaurant segment, we delivered a very solid 6.3% growth in same-store sales. Vips achieved a solid 8.9% year-over-year growth in same-store sales, fueled by strong operation performance, expansion of delivery channel and successful seasonal promotions. Here, we are marking our 60th anniversary and we are moving forward with the remodeling plans to improve the customer experience and continue building on the brand's success. Chili's and Italianni's in Mexico reported strong same-store sales of 9.6% and 9.5%, respectively, boosted by an increased traffic following effective marketing and commercial campaigns such as 3 Para Mí and Paradiso Italiano. In Spain, Vips and Ginos also reported a very solid 4.3% and 5% increase in same-store sales, respectively, supported by commercial strategy such as our breakfast platform and a very success Club By loyalty program. Our global expansion strategy is focused on capitalizing on the most profitable opportunities across all our markets. During the third quarter, we opened 66 new stores, including 56 corporate units and 10 franchisees. Most of the new openings were in Mexico and Europe, especially targeting high-traffic areas. While expanding in high potential regions, we are also remodeling existing locations to enhance the customer experience and drive future growth. We are confident in our ability to meet the expansion targets outlined in the guidance provided early this year. Our digital transformation continues to fuel growth. By the end of the quarter, loyalty sales grew 38% reaching MXN 4.7 billion, accounting for 24.1 million orders and contributing for 25% of our total sales. Additionally, by the end of the quarter, Club By has surpassed 2.4 million members, which represents almost 5% of all the Spanish or the Spain population. While Starbucks Rewards reaches over 2.1 million active users across all Alsea regions. Regarding ESG and people, we made a solid progress in executing our ESG initiatives in the third quarter, reflecting our commitment to sustainability and social responsibility. We keep advancing in our people strategy as our global turnover rate remains very healthy at 60%. Additionally, 28% of leadership roles are filled by women, and we support more than 2,100 employees from priority groups. In Mexico, Fundación Alsea donated MXN 10 million to support 12 communities kitchens operated by the Save the Children in Sinaloa. And additionally, through our Va por Mi Cuenta initiatives, we provide over 200,000 nutritious meals during the quarter. Our second charity run, Alsea con Causa, led to the donation of over 4 tons of grain to support more than 17,000 people. In Europe, we installed more than 600 solar panels in our support centers, stores and factory, reducing our CO2 emissions by over 343 tons. In addition, we carried out aperturas con causa to brands like Domino's, Vips, Ginos and Starbucks, which supported over 18,000 people. We remain focused on delivering our ESG commitments, ensuring that our business positively impacts the communities in which we operate. I would like now to hand it over to Federico Rodriguez, our CFO.
Federico Rodriguez: Thank you, Armando. Good morning, everyone. Moving on to Alsea's third quarter performance. Despite a challenging macroeconomic environment, quarterly sales increased by 9.3%, driven by effective commercial and promotional strategies. Excluding the FX, sales would have increased by 11.7% for the quarter. In Mexico, sales were up 7.9% to MXN 10.6 billion. In Europe, sales increased by 13% to MXN 6.4 billion, while in euro terms sales increased by 0.9%. Finally, South America sales increased by 7% to MXN 3.2 billion. In Mexico, the adjusted EBITDA increased by a strong 14.8% to MXN 2.6 billion for the quarter. This growth was driven by lower material costs, increased sales, successful commercial and promotional campaigns and effective expense management. Additionally, the 4.9% growth in same-store sales continues to enhance operating leverage. In Europe, the adjusted EBITDA decreased by 1.3% to MXN 883 million for the quarter and by 11.3% in euros due to a decline in same-store sales arising from the macroeconomic pressures we are facing as well as some other external factors in France. In South America, adjusted EBITDA declined by 28.8% to MXN 445 million, driven by the devaluation of the Argentinian peso and a reduction in the operating leverage. The net income for the third quarter decreased by 60.56% year-over-year to MXN 186 million. This was mainly due to a negative noncash effect from the currency exchange translation, which increased the cost of the U.S. and euro-denominated debt in Mexican peso terms by the end of the quarter. For the third quarter, the EPS were MXN 1.98; post IFRS 16 EPS, rose to MXN 3.65, an increase of 54% year-over-year. Regarding the CapEx in the third quarter, this was amounted to MXN 4.2 billion. We anticipate CapEx to slightly exceed the initial guidance due to the start of the construction of the new distribution center and factory in Guadalajara. This strategic investment will strengthen our logistical capability and support future regional growth. We allocated 58% of the CapEx to store openings and remodelings, 28% to maintenance CapEx and 14% to other strategic projects like digitalization projects. Throughout the quarter, we prioritized prudent and responsible investment with a clear focus on profitability and payback. Our pre-IFRS 16 gross debt increased by 5.6 -- MXN 5.5 billion year-over-year, reaching MXN 32 billion by the end of the quarter. This rise is due to the debt taken for the minority shareholder acquisition in Europe as well as to the impact of a weaker Mexican peso on our foreign currency debt at the quarter end. Turning to financial ratios. The total debt to pre-IFRS 16 EBITDA ratio closed the quarter at 2.8x, while the net debt-to-EBITDA ratio stood at 2.4x. At the end of the quarter, 92% of the debt was long term with 63% denominated in Mexican pesos and 37% in euros. We remain committed to a strong balance sheet and are confident in comfortably meeting all debt covenants and obligations, thanks to our healthy capital structure. At the end of the quarter, we posted a cash position of MXN 4.6 billion. Before we go to the Q&A session, I want to add detail to our other current liabilities line and cash flow. This is with the intention of being more transparent with the market and keeping you informed of what's happening with those two lines. Hopefully, this will help you to get a better understanding of the business and the operations of Alsea. The increase in the other accounts payable line is due to a pending €90 million payment to minority shareholders of the European entity that we acquired earlier this year. Additionally, more than 80% of this account is explained by the following items: the derivative instruments for hedging risk; the recurring and variable compensation, which includes the long-term bonus, the store manager bonus, et cetera; operating and supply provisions such as water, electricity, Internet, et cetera; legal and labor reserves, among others. During the first 9 months of the year, Alsea has increased the pace of openings in comparison with the first 9 months of '23, reflecting a consumption in working capital during the year. Besides this, working capital consumption is related with a onetime supplier payment in Argentina and lower operating leverage in Spain attributed to regulatory changes affecting perishable products. I will now pass you over to the operator for the Q&A session. Thank you.
Operator: [Operator Instructions] The first question is from Mr. Alejandro Fuchs from Itau BBA.
Alejandro Fuchs: Congratulations on the results. I wanted to ask you two quick ones on my side. First is on Starbucks in Europe. We saw same-store sales down 12% during the quarter, which actually was better than what China reported yesterday, right, with Starbucks Corporation (NASDAQ:SBUX). So I want to see how you're feeling about the overall France operation of Starbucks for the medium term and if your perspective for growth, maybe your prospects have changed in the country. And then the second one would be in South America. Wanted to hear your thoughts of what you expect for consumption environment in Argentina, Chile and Colombia for next year.
Armando Torrado: Related to Europe, I mean, we continue to see similar trends, on the other hand, that we have in France and Benelux with double-digit traffic still declined, which some of that time was partly because of Olympics, 2 weeks that really helped us over there. Now we are implementing commercial and our promotion campaigns such as bundles, and we are attracting customers again in our store. We expect them to deliver one-digit number for this quarter down there in Europe, the last 4 weeks that we've been doing this. It's a 360 program. I won't say this is only bundles. This is -- we have a 360 program with EMEA, Starbucks France and also Alsea helping. And we are recovering transactions in a good manner. And hopefully, by the end of the year we are hopeful to be flat. So I think the deep problem is already down as much as it can be. And now we can -- we are looking for a recovery, and it's progressing well since week 37 from week 42 with gaining of transactions over the same period of last year.
Federico Rodriguez: Perfect. Regarding your question around South America for 2025, Alejandro, for Argentina we are expecting to recover half of the lost traffic in 2025. As you know, we have had a loss of more than 10% in terms of traffic during '24, obviously because of the macroeconomic in Argentina. And regarding Colombia and Chile, for 2025 we're expecting to have a low to mid-single-digit growth in terms of transactions. That would be the guidance for South America. But remember that South America is less than 7% of the total EBITDA of the company. It's relevant as a country. We are still thinking to develop the pipeline of other brands like Starbucks or Domino's Pizza, but it is not relevant in terms of the whole pie of Alsea.
Operator: Our next question is from Mr. Ben Theurer from Barclays (LON:BARC).
Ben Theurer: Also two ones. So the first one, really just quickly following up on Starbucks and obviously the changes, and there's likely going to be a little bit of a change in the global mandate. I wanted to see how this is going to affect you in terms of like your growth commitments, particularly in Europe, but also in Mexico where we've seen a little bit of a slowdown. So what should we expect in terms of new store opening as we look into 2025? And then the second question really is just related to the option, the €90 million, roughly MXN 2 billion. How is that going to impact your leverage? And is that anything that you work on as you look into potential financial solutions, be it debt financing or anything that you might need for those MXN 2 billion extra as you start having to pay them in 4Q and the 1Q?
Armando Torrado: Ben, thank you for your question. First of all, I mean, just -- I mean, as you've been seeing in the news and what Starbucks U.S.A. has been reporting, our new CEO right now is very focused right now on the result of the American business. We've seen him in a video yesterday. He's completely focused on the U.S. business and also on in the China situation. We had a call with him 2 or 3 weeks ago. We are -- actually tomorrow, I do have a call again with Domino's Pizza International, where we don't -- we'll be not having any changes. The changes that they've been doing are internally from the U.S., not from international. But I think the communication is clear and well done. We are not experiencing nothing as much as the problems that they are doing, even though in Asia, even though in the rest of the world, China. Mexico and our countries, a lot healthy with operation in the best way and with great results in all the KPIs in operations, staffing, people, image and everything else. So the sentiment that we measure of the customer for us is still very high, and we're going to believe that. Regarding growth for Mexico, as we've been saying in the papers, the stores that we've been opening -- the past stores that we've been opening are tremendous -- there has been tremendous success, even though better margins and better return of investments since the base, since the beginning of the stores. So also, we are gaining better margins, the average of sales because the stores that we've been opening in the last months of the last year are more profitable than the portfolio. So we're going to step up and be -- we have a great pipeline for next year that we're going to achieve. Of course, we will be more cautious in South America regarding the macroeconomic environment. And of course, we've been very more focused also in France. And for us, Starbucks has been friendly regarding how and where to open. And if there is a circumstances in France that we have to slow down the pace, we will do so and we will have in our number. But as I've been telling you, this company, CapEx allocation is the key of the game. And we will stay aiming and focused on that strategy.
Federico Rodriguez: Perfect. To complement our Armando's answer, Ben, the white space that we have targeted and we presented to you on Alsea Day in the last March is pretty much the same. As Armando said, we have a slowdown in France because of the macroeconomic pressures we have suffered during this year and other external factors. But in the long term, we believe the market space is there for -- to have more than 700 stores in France. And regarding the €90 million leverage we have with the minority shareholders, we will be paying €50 million out of the €90 million in December, as we said in the last February, and €40 million in February '25. So this implies that the net leverage ratio for the end of year is 2.3x pre-IFRS 16. That was included into the initial guidance that we delivered in the Alsea Day.
Ben Theurer: Okay. And just the source of payment for that, will that be cash on hand? Or you're going to look into some sort of solution in debt markets?
Federico Rodriguez: Cash on debt. Cash on debt, yes.
Operator: Our next question is from Mr. Ulises Argote from Santander (BME:SAN).
Ulises Argote: I think also a couple on my side. So first, maybe you can make some comments there at least directionally on how you're seeing trends in early fourth quarter. I think on the release and on your remarks, you're citing kind of that loss of operating leverage obviously impacting your margins there. So any comments on how that could look and maybe what other initiatives you guys are doing in terms of things that could help with that turnaround in margins. And maybe the second question, just if there's any kind of update to the guidance that you guys have provided. I think in the last quarter, you said maybe there could be some updates in this one. So just to double click on that.
Federico Rodriguez: Do you want to -- it is too soon to give you a clear trend regarding the fourth quarter consumption. Obviously, we had a terrible July, a bad August and a really improved September. We are quite confident, and maybe I can mix both answers, Ulises, that we will be accomplishing with the guidance that we delivered on the Alsea Day, not in the top line because of the FX we suffered -- impacts we suffered during the first half of the year. But we are quite clear that the seasonality that starts in mid-November to mid-January will work a lot to accomplish with this. Regarding the trend, and as Armando said, we are starting to see an improvement in the different same-store sales, especially in traffic in France. But it is too soon to say this will last for the next months. But regarding the forecast and the guidance, we will be accomplishing the EBITDA and the EBITDA margin.
Gerardo Lozoya: And if I may add, Ulises, a little bit more color on what we're seeing in the fourth quarter. I would say in the -- I would say last weeks, we've seen very similar trends than the ones we saw in the third quarter, Ulises, overall. So I would say on a consolidated basis we should be, I don't know, mid-single, high-single type of growth. So we're still seeing, I would say, a resilient consumer environment in most of our markets, particularly Mexico, I would say.
Operator: [Operator Instructions] That was the last question. I will now hand over to Mr. Armando Torrado for final comments.
Armando Torrado: Okay. Please -- thank you. Thank you very much for joining this, our quarter video conference. Please, if you have any further questions, please contact our Investor Relations team. And thank you very much for connecting today. Have a great day, and see you in the next conference in next year, in 2025. Thank you.
Gerardo Lozoya: Thank you very much.
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