In its 2024 second quarter earnings call, Italian furniture company Natuzzi S.p.A. (NYSE: NTZ) reported a slight increase in sales and a significant shift in its business model towards retail and brand management. Despite a challenging market, Natuzzi achieved a 3% rise in brand sales, with retail sales now accounting for 70% of total sales, a 23 percentage point increase since 2019.
The U.S. market saw substantial growth, with directly operated stores increasing sales by 33% and the opening of a new store in Denver. The company's global presence has expanded to 681 stores, with a focus on enhancing partnerships and operational support, particularly in the Chinese market.
Key Takeaways
- Natuzzi's sales increased slightly, with brand sales up by 3% amidst challenging market conditions.
- Retail sales now represent 70% of the company's total sales, marking a significant shift from manufacturing to retail.
- The U.S. market is strong, with a 33% increase in sales from directly operated stores and the opening of a new store in Denver.
- The company has 681 stores worldwide and is focusing on enhancing franchisee support, especially in China.
- Natuzzi is expanding its contract business with architectural designers and real estate developers, contributing to 20% of store revenues.
- Gross margin improved to 38.1%, with the company reducing its workforce by 20% and increasing revenue per employee by 30%.
- The sale of the High Point asset for $12.1 million will fund restructuring and retail expansion, primarily in North America.
- The company plans to open an additional 43 gallery locations and 25 stores by year-end.
- Average U.S. store sales have reached approximately $4 million, with a focus on effective store management and design expertise.
- Natuzzi is enhancing its trade strategy and customer engagement through partnerships and digital tools.
- E-commerce is recognized as an area for improvement, especially for Natuzzi Editions in the U.S.
Company Outlook
- Natuzzi anticipates the opening of 43 new gallery locations and another 25 stores by the end of the year.
- The company is cautiously expanding in North America, optimizing existing locations before further openings.
- Efforts in China are aimed at strengthening the joint venture and preparing for market recovery, though improvements may take time.
Bearish Highlights
- The Chinese market is currently experiencing low consumer demand, with Achille noting softness but potential recovery due to government stimulus.
- E-commerce sales for high-end products are challenging, with Natuzzi acknowledging the need for improvement.
Bullish Highlights
- Natuzzi has seen an 11 percentage point increase in gross margin since 2019, reaching 38.1%.
- The company has successfully completed significant projects in the Middle East and Central America, showcasing its design and project management capabilities.
- The recent sale of the High Point asset will provide a significant cash inflow to support growth.
Misses
- The company has admitted that progress in enhancing digital strategies for Natuzzi Editions, particularly in the U.S., has been slower than desired.
Q&A Highlights
- David Kanen expressed optimism about a recovery in 2025, anticipating lower mortgage rates and increased housing transactions.
- Pasquale Natuzzi discussed the creation of a "Natuzzi brand bible" to guide brand management and retail practices, emphasizing the brand's evolution.
Natuzzi's strategic shift towards retail and brand management is reflected in its improved financial metrics and the company's proactive approach to adapting to changing market conditions. With a focus on enhancing customer experience and expanding its contract business, Natuzzi is positioning itself for long-term growth, despite acknowledging areas that require further improvement. The company's leadership expressed commitment to its strategic restructuring efforts and optimism for future performance, particularly in North America and through e-commerce channels.
InvestingPro Insights
Natuzzi S.p.A. (NYSE: NTZ) is navigating a challenging market environment while implementing significant strategic shifts. According to InvestingPro data, the company's market capitalization stands at $43.95 million USD, reflecting its current position in the furniture industry.
The company's transition towards retail and brand management is evident in its financial metrics. InvestingPro data shows that Natuzzi's revenue for the last twelve months as of Q1 2024 was $352.88 million USD. However, the company has experienced a revenue decline of 25.01% over this period, which aligns with the challenging market conditions mentioned in the earnings call.
Despite the revenue decline, Natuzzi's gross profit margin for the same period was 36.96%, which is consistent with the improved gross margin of 38.1% reported in the earnings call. This suggests that the company's efforts to enhance profitability through restructuring and increased focus on retail are yielding results.
InvestingPro Tips highlight that Natuzzi is "trading at a low revenue valuation multiple" and is "trading near its 52-week low." These factors may present an opportunity for investors who believe in the company's strategic shift and potential for recovery.
It's worth noting that Natuzzi "holds more cash than debt on its balance sheet," which could provide financial flexibility as the company continues its restructuring efforts and retail expansion, particularly in North America.
For readers interested in a more comprehensive analysis, InvestingPro offers 5 additional tips for Natuzzi, providing a deeper understanding of the company's financial position and market performance.
Full transcript - Natuzzi SpA (NTZ) Q2 2024:
Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Natuzzi Conference Call for 2024 Second Quarter Conference Call Financial Results. As a reminder, anyone interested in ongoing this call live can join via telephone by dialing plus +1-412-717-963, then passcode 39252103#in addition to the link already provided to join via video. Once again, if you’d like to join via phone, please dial +1-412-717-9633 then passcode 39252103#. At this time, all participants are in a listen-only mode. Following the introduction, we'll conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. Joining us on today's call are Mr. Antonio Achille, Natuzzi's Chief Executive Officer, Mr. Pasquale Natuzzi, Founder and Executive Chairman; Mr. Carlo Silvestri, Chief Financial Officer; and Piero Direnzo, Investor Relations. As a reminder, today's call is being recorded. I'd now like to turn the conference over to Piero. Please go ahead.
Piero Direnzo: Thank you, Kevin, and good day to everyone. Thank you for joining the Natuzzi's conference call for the 2024 second quarter financial results. After a brief introduction, we will give room for the Q&A session. Before proceeding, we would like to advise our listeners that our discussion today could contain certain statements that constitute forward-looking statements under the United States securities law. Obviously, actual results may differ materially from those in the forward-looking statements because of risks and uncertainties that can affect our results of operations and financial condition. Please refer to our most recent annual report on Form 20-F filed with the United States Securities and Exchange Commission for a complete review of those risks. The Company assumes no obligation to update or revise any forward-looking matters discussed during this call. And now, I would like to turn the call over to the Company's Chief Executive Officer. Please, Antonio.
Antonio Achille: Thank you, Kevin, and thank you, Piero. Good afternoon for the listeners joining from Europe and good morning from the one at least joining from U.S. for our Chairman is. I would like to start with a brief introduction to what has been the second quarter in terms of sales. As you have seen, we reported sales slightly increasing versus the same period 2023, which is not something we are particularly excited about. But definitely, we need to be put in the context where not only our sector has been very soft. And to our knowledge, most of our direct competitors actually are reported in negative comps. But in general, the durable and consumer spending are very much depressed. I believe that one of you is following what's happening to another interesting industry, the automotive where there is serious double-digit decrease in orders. So, we interpret the fact that we have been able to defend our top line. And then if we look at the brand the sales actually has been 3% above last year, is a sign of resilience of our company and also as a testament that our brand journey is very much appreciated and understood our partner and increasing by new partners like real estate developers. I would like to highlight a few elements of our strategy, which has been very much consistent through the cycle. The first element is our effort to continue improving the way we reach our consumer. As you know, Natuzzi has taken the titanic, the gigantic task of turning from a manufacturer to a brand retailer. And one key element is improving the quality of the relationship that we have with our final customers, which can only happen in an environment where we can control the customer experience. Here, retail, which is, of course, the channel where this customer experience can be better control is now becoming very important, roughly 70% of total sales are happening to retail being the DOS and FOS up to 45% in 2019, which still is a good year to compare before the pandemic. So, it's an increase of 23 percentage point, which I believe is very significant, which not only speaks about the fact we are a better way to reaching our customers but also speaks about the very, very intense and deep work we have been doing to transform our competencies because clearly, it's a very different job to be a producer than to be a retailer. So, there's been a lot of effort over the last few months, the Pasquale, myself and in the old organization, has been doing to equip Natuzzi with competencies in the area of retail, retail design, merchandising, customer experience, which are totally new competencies for the group just four or five years ago. As part of the retail, I would like me to -- wait, you can see me? Yes. Yes, you can see. I would like to highlight the performance of our directly operated stores, which have been growing 6% versus last year, and in particular, the performance of our directly operated stores in U.S., which have been growing roughly 33% versus last year. Again, this is a clear confirmation of what we have been repeating in this conference call, which U.S. is central to our strategy and retailing U.S. is central to our strategy. As part of that, I'm pleased to announce that we eventually opened a new DOS in U.S. in Denver is a location, which has been very carefully scouted for is in downtown, First Avenue, very close to other furniture brands that we consider right affinity for Natuzzi Italia, which include Roche Bobois, Restoration Hardware, West Elm, Crate & Barrel, Room and Go. Again, because our experience tells it is very important to be part of a district populated with the brand with a similar position. With this new opening, we now have 23 stores, of which 18 are directly operated and four are in franchising in the U.S. And again, this will remain a priority for us, both in terms of organic growth and in terms of potential new opening. Let me switch to another geography which is central to our strategy, which is China. As you know, more than half of the total store we have, are in franchising in China. We consolidate line by line because we are in a minority JV with Kuka. But we have been, over the last few months, increasingly supporting our partner in China on operational level. So, we're really teaming up with a different department to support the JV team to take the right voices at merchandising with their marketing level. Personally, it’s been more than 5x since the few last months every time really being much immersed in the retail reality. Last year, it was in August, and I was very pleased to witness the christening of a new project, the Hangzhou store. As you know, Hangzhou is a city, one hour north of Shanghai, very beautiful city. We wanted to make sure that Hangzhou store become a flagship fully control in terms of design by our team, which is a total newness because despite the in partnership, our partner, it's been somehow quite autonomous in some choices when it comes to retail. In the spirit now to create a very high consistency of the presentation of Natuzzi Italia globally, we agreed with our partner that a significant opening like Hangzhou, need to be integrating we're working. What does it mean that the fully out of the merchandising, the design of the store and actually been done by our newly created retail excellence division. The Hangzhou event, opening event has been a success. There's been some 40 dealers joining more than under our market. Now, it's still very early, but it's encouraging to see that after nine weeks from operation the Hangzhou stores is pacing at a double speed of the other remaining directly operated store in China, which has encouraged us to say we now have learned the job. We've done a lot of investment in terms of co-defining what should be, and we call it internally the brand retailer lesion, which means very strict guidelines in terms of action of brand merchandising, retail, and we feel the legitimacy to guide more strictly the choice of our partners because we believe that this is not a sign of authority but is a signing of business legitimacy because as I do sure, when you do the right things, then you have a very good payoff. So, on closing on the retail franchising and direct operator store, we now have 681 stores. We believe that this is a very solid platform to regain growth as market condition or stabilized. There's been -- I don't see any more, Pasquale? Pasquale Is with us. Okay. Sorry, you just disappear for one second Okay. So, in parallel to retail, there's been another significant effort in the duration of improving the quality of our gallery. We call it reimaging gallery because it's been really recreated a concept from its fundamentals. As you remember, Gallery is a shop-in-shop experience they go anywhere from 1,000 to 3,000, 4,000 square feet. In some geography in Europe even larger, but they are a shop-in-shops period. Again, in the search of delivering a brand experience, which is immersive. There's been a dedicated team that has been redesigned layout, the merchandising so that we can convey the experiences of the brand at the same time being very modular and very cost effective for our partners they need to co-invest in this format. This is the format for instance, which is, as you know, now there is an eye point market, which is one of the opportunity we offer to our partners they want to invest in a tissue or in some location for Natuzzi Italia where the potential does not sustain a full-scale store. This new concept has been extremely well received. We opened some 43 new galleries, 25 has been reengineered and this is an effort we're going to be progressively rolling out to the 600 galleries we have globally.
Piero Direnzo: Antonio, I'm sorry, but we opened it also 47 or 48 Natuzzi store in 2024.
Antonio Achille: So, Piero, the numbers. We're opening and closing that the balance net number is pretty much stable.
Piero Direnzo: We opened 47 new stores in 2024 with kind of a business environment. I mean -- and these are -- I mean we just opened one store in Denver and Colorado as a direct operating store, but all the others are franchising. So, I mean...
Antonio Achille: That's correct.
Piero Direnzo: It's even in the, yes. Okay, yes, alright.
Antonio Achille: So, in imagining the journey of Natuzzi or visualizing the journey of Natuzzi, you're really to have to understand the distance that Natuzzi has been, covering, which is significant because it’s still operating for very few selective relationships in a way in which it just displayed the product. But other than those relationship which are chiefly with larger -- few larger retailers in U.S. The remaining way that the customer can get in contact with Natuzzi is through a very qualified distribution channel where the brand and the merchandising can fully express their potential. A second direction where we are very excited by deceleration is trading contract. Let me clarify first what we mean by each of you toward trading contract. So, trade is the business that we do mostly to our stores, chiefly Natuzzi Italia where the final buyer rather than be an individual consumer is an architectural designer, which is working for the final consumer. That's a very interesting part of business it's exactly the place where we can deploy our strategy, which is Natuzzi Italia not to sell product but to sell project. We believe we have the legitimacy now to step in and house and do a full project for the living room, for the bedroom, for the full house. And this is increasingly happening. And in U.S., for instance, this part of business represents some 20% of the revenue stores, which is incremental versus the revenues we do with the retail consumer. And this business is channeled mostly to our stores. The second company contract is, I would say, pretty new for our company, but it's very important for several of the Italian brands Natuzzi Italia compete with. For contract, we mean in the business where the buyer is a business operator, typically retail -- sorry, a real estate developer, a retail chain. So, this is a completely different dynamics because the single contract can be significant. The contract can involve as it happened in a couple of circumstances for us given the designing of the site building can definitely involve the design of the units can evolve supply beyond our upholstery, which remains central also fixed furniture. So, it's a very interesting and new arena for us. There is a significant and robust trend in the market for brand and real estate where the real estate developer try to build a layer of additional value by introducing a brand. It started, of course, with the fashion brands Armani, Bvlgari. But those brands, not necessarily then they have the design competencies. They have the strength of the brand, but they don't have the design competencies. Natuzzi can fulfill this opportunity bringing the full breadth of this design companies, competencies. And it happened, for instance, in one of these projects, which is still on their confidentiality agreement but will be publicly announced on the member so we will have a specific press release on it. So, this new area of business already delivered three major projects, two Middle East, and Central America, they are very meaningful in terms of size. But I would say they are even more meaningful because they constitute a strong qualification and a testament, the Natuzzi can plan that came in a game where you need to have competencies, design capability, we need to have project management capability, the ability to aggregate other partners for fixed furniture. So, it's a game where very few people can actually place. To support and accelerate that business, we just established an individual business unit. They will be managing trade and contract. I speak about business unit because it will be assigned target in terms of growth and marginality. But of course, it would be fully leveraging our, let's say, platform in terms of capability, R&D and product. So, moving from top line to the structure of P&L, I want to discuss their work we have done on margins. I must say that here I'm particularly proud of what our team has achieved because compared to 2019, we increased by 11 percentage points, 11 percentage point the gross margin. In a context that could not have been in more turbulent because we went through years like 2001, 2021 and 2022 with hyperinflation with scarcity of assets to materials. More recently, we witnessed a spike in transportation from our geography to the other. So, I believe this year, has been really challenging for many companies, they wanted to maintain the historical margin and our group has been able to increase it by 11 percentage points. Even in this quarter that we are discussing, we continue the trajectory because we reported 38.1% gross margin compared to 36.4% or one year ago, so 1.7 percentage point increase in just 12 months. This in a context where we had, for our specific accounting, severance that got accounted negative in the gross margin without debt, that again, severance in a sense are an investment for the future. Without debt, the gross margin in the first quarter would have been up 39.3%. So almost 3 point -- percentage points above the quarter of last year. which I believe is quite significant. This is in a context where especially our Italian factory, they have a low situation given the scale we are operating. So, if we would consider a proper saturation, you should be adding 3 or 4 percentage points more in terms of gross margin. And this is the blended gross margin. Then when we look at integrated gross margin or retail, then here, we go in the range of more of 65%, 68% because, of course, there some the margin of our retailers and the margin of a producer. So, moving on the fourth point I wanted to highlight is something which has been discretely managed in the sense we didn't read anything about Natuzzi laying off people, which I believe is an achievement per se because we work in a highly unionized market when it comes to workforce, but we have been achieving a lot. Because if we take a midterm perspective, we've been reducing almost by 900 people, our workforce. Some 20% reduction in three years. If we just look at these first six months of the year, reduced by 170 units, our workforce. This has been planned. Even, I would say, before the negative economic market we are facing because it's a major consequence of evolution of Natuzzi. Natuzzi move from being a volume company to be a value company. So, we needed a lower production, we need new competencies and needed to change the shape of our, let's say, workforce. So, this has been planned. It is continued to be a focus. We continue to do this in the most ethical and respectful way, but it is also part of our midterm plan. Just to give you a single number, even as you know, we are not operating at the scale we want in terms of top line. The revenue per employee from 2021, they increased by 30% because we've been reducing our workforce. So, a significant improving our productivity per employee by 30%. Last point I want to mention before talking about I point is something we are proud of because we continue debating the quality of our leadership team. I mentioned before how interesting and challenging is to transform a company that for five decade and now has been working as a vertically integrated manufacturer to transform it -- with transforming into a brand of retail company, which has been the vision Pasquale had some 20 years ago, but it's accelerating now. Clearly, talent play a specific role at all levels, definitely at the store, but in new areas like merchandising, retail, marketing, all areas where the Company can need to learn to fly while flying in a sense. As part of the test for of continuingly elevating our capability in the retail and consumer space, we'd be very pleased to have Nicola Internullo joining us, who is Nicola Internullo and what we'll do in our company. Nicola Internullo is a veteran of the luxury industry I've been working with him even in my previous life at McKinsey. He has been working in Loro Piana, in LVMH, in L'Oreal. Lastly was the HR Director for [Blackberry] for North America, region that you know is very central to our development. He joined us really with the task of helping us to accelerate this transformation into our retail and branded company. He will closely team up with Mario, which remain our group as our director, which has really a deep knowledge in transformation and structure. So, we believe that this kind of teaming is really fit to our new challenges. So having commented more on the, let's say, ordinary matter, let me comment on a point. As you know, I announced an agreement with our Board, our decision to divest a strategic asset as part of a strategy to become a more agile company and free up resource to reinvest in the business. One of those assets which has been identified that not strategic in the sense which is strategic for us as a location for our showroom, and it will continue being, but not strategic for us owning it as we don't own the store where we sell goods is a High Point. High Point has been on the market basically since 2019, then there's been acceleration in 2021, where we appointed two of the major real estate brokers specialize in commercial real estate. The very high interest rate did not help to close some of the discussion we had for potential buyers in U.S. We've been more recently receiving an interest from our inside the shareholder, Pasquale. We've been really at the core of the origin of this building, which is a very chronic building designed by Mario Bellini, one of the more respected and still alive architect globally who asked for a potential transaction. We do have, within our governance, a committee that is tasked to assess transaction that might involve related parties is composed by three independent board members. Giuseppe D'Angelo, who is a senior manager from Ferrero. Gilles Bonan who has been the CEO, a long-term standing CEO of Roche Bobois. Marco Caneva, which is a former partner of Goldman Sachs (NYSE:GS). So, three high-standard individuals. They perform all the requested activity by the committee, including requiring our company to ask for independent evaluation of the building. And after that, they concluded the transaction at the price and the condition proposed by the insider shareholder were at market value. During the last Board, we had last week given this was highly consistent with our strategy on disposal, nonstrategic asset, myself and the Board agreed for the sales which has been in the approved is still, let's say, in the process because you can now expect is some procedural steps to be taken. But in principle, unless there is any let's say, constraining in this step will happen within the year. The amount, the gross amount for the transaction is of $12.1 million. Of course, it will not be commission fee involved. The sale is configurated as dry sales. In the past, we also explore sales and leaseback option which were not very positive seen by myself and the Board because they will require quite significant liability midterm. So having comment also on the point, which I believe was due. I stop here for opening the debate and question, and I thank you for your attention. I believe this time, we've been a bit longer than usual, but I wanted to justify the work that our team is doing the quarter in the region and in the store, which I can assure you is very significant. Our board team is very cohesive. It's working very hard and we are strengthening the Company in a phase of strong headwinds, and I believe that this can only be helping us when the condition will normalize. Thank you, Kevin. You may open for questions.
Operator: [Operator Instructions] Our first question today is coming from David Kanen. Your line is now open.
David Kanen: Can you hear me?
Operator: Please proceed, sir.
Antonio Achille: Now, yes.
David Kanen: Thank you for taking my question and congratulations on selling the building. Congratulations to you, Pasquale. I hope it works out very well. I'm pleased with the outcome. I have a number of questions. I'm going to get halfway through them, and then I'll go back in queue because I don't want to completely monopolize. But could you speak a little bit about, first, the capital that you're going to receive from the disposition of High Point and how you're going to deploy that capital? In the past, we spoke about continuing to fill in white space in North America with Natuzzi Italia stores. I'm hopeful that, that's going to be the continued strategy. So, if you could expand upon that, I'd appreciate it.
Antonio Achille: Okay. So, you want me to do question-by-question? Okay. I thought you had a longer list. You want to go question by question.
David Kanen: Yes, let's start with that.
Antonio Achille: Okay. So, the discussion we had with the Board when we decided in 2021 to start this process of selling nonstrategic assets has been very clear. The proceeding, if any of these disposals happened as it happened today, will go on structural improvement basically in two area. One is restructuring and the payback of restructuring is very predictable because, as you know, Dave, when you ask on cost, that is independent from market context or other conditions. So, restructuring is still an area we will prioritize in using that additional resources, and when I talk restructuring is laser focused restructuring. I will not disclose here too many details because they are trade union involved. But our area where the evolution of our business model require restructuring. So, it's not like a flat bound restructuring. The second dimension, you're absolutely right, is retail. The fact we have money doesn't mean any way, Dave, that we're going to be a rush in opening retail. Why is that? First, because -- for three reasons: First, because we still had plenty opportunity to growth organic. Second, even the most recent opening like Denver, testified that is very, very delicate to find the right location in the right place and the right condition. So, we're going to be continuing looking for retail opportunity, but always with a very structured approach. We don't want to jump in. The retail, it will be predominantly when we talk about retailer to Italian North America. There might be other selective opportunity in other geography, but we will be predominantly North America for Natuzzi. So long answer to say what the proceeding of Natuzzi High Point will be safeguarded and reinvested for restructuring and retail. I'm using this order because also in this context, I believe restructuring assume for you a shareholder offer a more predictable return in the short term, which doesn't mean we will not open stores. But I'm saying those two levers, maybe in this phase will be used in this sequence. No, you're muted, I believe.
David Kanen: Am I still mute?
Antonio Achille: No, we can hear you.
David Kanen: Okay. So, I should have commented at the beginning, I was pleasantly surprised with the operating results in light of the fact that we're in really a very severe furniture recession due to very low turnover of homes in North America. And I'm hopeful that when interest rates are lower, we'll see a reversion to the mean. And implicitly, I think there's probably 20% to 25% organic upside from where we are. But when I do my own math on the adjusted gross margin at 39.3%. And then also some of the preopening expenses and onetime expense that were in SG&A. I come up with a kind of an adjusted if you will, if you were a U.S. company non-GAAP operating profit of $2 million, which I'm very pleased with, and I congratulate you and your team on it and I'm happy that you continue to look for ways to be more efficient. So, I look forward to when we get the reversion to the mean in sales and opening up stores, it seems like we're positioned to do very well. So, congratulations, and thank you for your hard work in that Antonio and team. So, my next question is on China. I know that China has been very soft, and you're levered to that with your JV with Kuka. However, I've been doing my own proprietary work on it. And the Chinese government has aggressively been lowering interest rates to stimulate demand in housing. And we have been tracking furniture sales over the last month or so. And we see a clear inflection. Now we don't -- we do not have data in particular on Kuka or Natuzzi. But we do see that in Mainland China, there has been an inflection. Now, I'm not saying it's off to the races, but are you guys seeing a turn or an inflection there most recently as well.
Antonio Achille: Thank you, day for the positive notes and for the long-term trust in our hard work on commenting on margin for -- we move on to China, not dreaming, sky dreaming, but think 400 is a natural, let's say, revenue potential of this company without progression, 11 percentage points of gross margin almost translates in 20 to 30 EBIT number because then the fixed costs are paid. So, I believe that if there is a rebound in retail real estate, which is a primary driver for our industry. The Company now is set to generate a much higher return on the investments. On China, the market is very soft, as you know. I'm just drawing analogy with other sector, you are seeing caring posting yesterday result, 11% sales down 20% sales down in China. And we're talking about item that, yes, a luxury, but compared with our price point. They are one set of the price of one seat of three-seater sofa. So, the market is very tough. We are lucky to have a partner which is robust. As you know, the government has announced this stimulus package because the situation is so severe that they had to step in as somehow the Fed had to step in the U.S. when there was the COVID crisis. The impact of that still need to be visible because it's very recent. But everyone is hoping, and we are between those ones that this will be gradually easing the situation, which has been extremely, extremely difficult. I've been, as I mentioned, in Shanghai in August last time, restaurants were empty, department stores were empty. The sales bringing to the second floor we're somehow stopped to save energy. And I'm not talking about furniture mall, I'm talking about fashion mall. Then you go to the department furniture mall, the situation was even worse. So, to say I hope it will provide as the intention of the government is a positive acceleration, yet the situation is quite difficult. In the meantime, we are working on what we can control. As I mentioned, we have been extensively worked with the JV to bring them closer to us to make sure the retail and the merchandising marketing choices are taking fully leverage our knowledge, so that we are preparing our operation to intercept this positive rebound of the market, which I cannot predict it will happen next month or in the first part of 2025. Definitely, I believe we are closer to what is the bottom because if the government step in situation can only improve.
David Kanen: Okay. Can you hear me?
Antonio Achille: Yes, we can.
David Kanen: So, after this question, I'm going to go back in queue and then probably have a few follow-ups. But in particular, your initiatives in the wholesale/gallery business, going forward, do you have net new doors that you'll be in? Or is it down the same, I know you're restructuring refreshing you're trying to come up with ways to drive organic growth at the doors you're in. But could you give me an idea, are there net increases or decreases in doors?
Antonio Achille: For gallery, there is an increase of 43 new ones, and we plan to have additional 25 by the end of the year. So, this is a net addition. A lot of venue relies not only the net additional, but in the upgrading of the gallery because gallery has been historically quite a broad concept. There were partners, which were really aligned with the brand that we're representing well, the brand, having right merchandising, right let’s say, the customer experience, other that were using it more tactically more in the live manner. We are elevating the banner of course, gradually because we also recognize that our partner also facing difficult in investing, but we want to show them that by doing the right things at the gallery level, they can have higher returns. And our expectations are increasing in terms of what is the minimum level of investment in customer experience gallery should combine. So, to your question, 43 openings, 25 expected by end of the year, but there is a massive job in upgrading the existing one because a part of it, especially in U.S. where quite a loose implementation of what is the new gallery concept we have.
David Kanen: Okay. You answered the question.
Antonio Achille: Yes. Just one moment and I will link back to what also Pasquale, our Chairman said on China. I can tell you that there is not a lot of happening in China, not a lot of happening in China cross sector is very, very quiet in the market. We had 16 dealers visiting the Milan this week. So, 16 dealers which operate franchising, building our Milan this week, almost half of them decided needed to open new store or to run new stores. So first of all, I want to recognize how brave they are because investing in this circumstance in China is very brave. At the same time, and I say in humble manner is also a result of their work we have done in showing what the strength of Natuzzi can be. So, I challenge you to find other brands which are opening stores right now in China. I don't want to quote, but even the larger fashion group, French luxury group, they mentioned they will not open anything more before 2026. So, I think this is, again, talks a lot about the potential strengths of this group that you only see partially today in the top line numbers. Kevin, I think Dave has been very kind as usual to leave space for other questions. For other participants, maybe you want to quickly check if there's people in queue.
Operator: [Operator Instructions] And we do have a question at this point coming from George Melas from MKH Management. Your line is now open.
George Melas: Just a simple question. I don't know if it's a simple question, but on the U.S., retail results so far, you have open new stores, you have invested a fair amount of money and focus on the U.S. operation. Tell us a little bit more about it, about the performance of the stores, the variability in the performance of the stores and kind of what you've learned? And also, if you've started being able to leverage the presence that you already have in galleries and elsewhere in the U.S. with those stores.
Antonio Achille: Thank you, George. Our Head of Global Retail Excellence was actually invited to this call, and I'm sure it would have addressed the question much more effective than I would do, but he’s busy with some meeting in a point. So, we'll start addressing it and then I will wait for him maybe to get more specific. So first, let me talk about the performance of our store. Piero, you can keep me honest because we use those data a few years press release ago. So, on average, our store before the COVID in 2019 was generating sales in the range of 1.8, 1.9 per store. I mentioned it that by heart, so I might be off of a bit, but Piero meanwhile we're streaming the data. Now, the average is more in the range of four, even those is not clearly the best year for retail, for furniture retail in U.S. So, on average, we improved a lot. Having said that, to your question, there is still a significant variability among stores. That variability depends on many factors. First one is location. We have to recognize that the brand evolved, some stores have been opened a few years ago. So not necessarily, they are in the location to date, we would open Natuzzi Italia store considering where the collection has moved. So, location has an impact. And we are, of course, looking at the tail of stores where we believe location maybe is not a good one which doesn't mean it's not in the right city, but retail really changed, if you change the two blocks, it's already a different environment. So, location is -- our first thing is affecting our performance. The second element is the team quality. We have codified what is the real team. As I mentioned, at learned the way retail because it was a new job for the group. And we recognize that the team in the store need to have specific characteristics. So first of all, we need to have a store manager which is really a manager, which means that it's accountable, it's entrepreneurial can build a strong team around him or her. So, the store manager needs to really respond to some very specific characteristics. Second, we need to have in the stores, at least one, if not more people, which have design background. Because if you have a great seller in the car industry or in the equipment, not necessarily you're able to engage with the designer or an architect to develop a project. So, we also are investing on that dimension. So, the quality team is very important. So, we are assessing our team and making sure we have the right quality. Third element is having the right assortment. So, Natuzzi is doing a great job on upholstery, on dining and accessory with different level of opportunity of improvement. And to go the extra mile that is an area we need to work on because to elevate the average ticket, of course, that also play a role. In telling you how big is the variance, so we have top-performing stores like Costa Mesa that are more in the range of €6 million and above per year and tail stores, which are well below the average. The reason why we produce the retail excellence division easily because we want to codify best practice and to help the store moving, aligning more on the average because steel is quite wide trend. That's also the reason going back to early question of Dave where that makes us, I wouldn't say cautious, but prioritizing this completion of retail excellence journey before opening massively because we want to open stores when we feel that we are very predictable in the results. Now we feel much stronger than a few years ago, but still, we want really to complete this retailing excellent program. So, then we will open a store. We know that it can be 5% to 10% below or higher the average but cannot be necessarily a surprise. So, I hope that address your question. Again, I hope we can connect then you with Diego Babbo. We can also have a separate call so that you can also be more specific on individual store performances.
George Melas: Great. Thank you.
Antonio Achille: I don't know, Piro. Did you retrieve the data from the press caller, the last press caller?
Piero Direnzo: No, I did not. But if George wants, I can provide him with data.
Operator: Our next question is coming from Steve Emerson (NYSE:EMR) from Emerson Investment Group. Your line is now open.
Steve Emerson: Well. First of all, congratulations, and thank you to the whole team to come to a stable point, cut the losses in this very tough retail environment.
Antonio Achille: Thank you, and please go ahead.
Steve Emerson: Yes. The High Point sale, how much is net cash coming back to the Company?
Antonio Achille: Okay. Carlo, I'll leave that to you.
Carlo Silvestri: So, let's say, the process is still in…
Steve Emerson: One sec.
Carlo Silvestri: Yes, the offer, we have received from our major shareholders is $12.1 million. I can't disclose right now the net book value, but the offer is above the net book value we're going to have. And we're going have, all the cash will be net cash on these sales become in our accounts. So, all the sales is of $12.1 million is all cash.
Steve Emerson: Excellent. Will this cash then enable a fairly rapid expansion in the U.S. once conditions stabilize? What kind of growth in new openings do you expect in North America? Let's assume furniture sales and housing start having reasonable growth.
Antonio Achille: So, thank you for the question. As we addressed somehow before with Dave, we definitely are committed to expand Natuzzi's, particularly Natuzzi Italia presence through direct operator stores. We just completed five opening because four last year and one this year. So, we want to really to make sure those stores become at regime, but, we might look at again at new opening in 2025. Definitely, we see potential for additional directly operated store in U.S. And this is, as I mentioned, one of the potential areas where the proceeding of High Point will be going. So definitely, this is confirmed. We're not changing our strategy. I hope you understand that this market and the fact we just opened five new stores advised us to be gradual. Because, opening right store is great, opening wrong stores because you don't have right team or wrong location is one of the worst investment or worst legacy you can add. Because then you are committed with them.
Steve Emerson: Okay. And is High Point sale lease back or actually excess property that you don't need?
Antonio Achille: So, it’s not a sale leaseback in the meaning that, when we were considering sales leaseback to our brokerage agency. They were requiring, the potential buyer for some 12 to 14 years of commitment of minimum lease, which was very significant and which would have caused us to increase by $20 million our liability in correspondence of debt obligation. So, this is absolutely not the case. And that's the reason also why our board and myself, we're looking at those sales and leaseback opportunity quite with skepticism. This is dry sales, how do they say, technically. So, it's just selling the building. The new owner might consider renting us space at market value since we are still using the space for our showroom, but there won't be long-term obligation that will force us to accrue any liability for that. So dry sales, it's dry sales.
Steve Emerson: Okay. So maybe our rent will go up, what, $100,000, $200,000 a year that's all?
Antonio Achille: I mean, it will be a market calculation. But in doing that, remember that right now, we were early spending some €0.5 million and maintenance cost. So that, of course, will not be any more on our book. So, I would say definitely that will be compensating for our rent. Right now, I cannot say what would be our final decision in terms of how many square feet we will ask to a potential lease. It will be quite an easy deal because we have very clear what is the market value for leasing office, the last space and showroom at the first floor. So it won't be, I would say, a complicated this decision to be made, but I will not -- I'm not to be able to give you a precise figure. Just in the question, remember that, yes, we might have some active -- sorry, some lease to pay some rent to pay. But at the same time, we won't have any more the maintenance.
Steve Emerson: And finally, now that you will have the proceeds cash proceeds, would you think that a share buyback would be in the best interest, the best investment you can make now.
Antonio Achille: So, that is an interesting question and it's a material definitely for our Board. I definitely see what could be the rationale of buyback. As we mentioned, there is many opportunity that will also could be a good direction where to invest is proceeding. So, we have not taken otherwise, we would have announced it any decision on share buyback. I understand it's a legitimate question, but I also believe there is a very good opportunity from our operations at this moment.
Operator: [Operator Instructions] We do have a follow-up from David Kanen from KWM. Your line is now open.
David Kanen: Okay. I guess the first -- a couple of more questions. Could you sketch out for -- can you guys hear me?
Antonio Achille: Yes, we do.
David Kanen: Okay. Could you sketch out on trade, what your, let's call it refocused strategy is? I understand like designers generate a lot of business and they can really grow sales in your four walls. What are you guys doing differently? Can you share with me? I'm pleased to hear it. How are you going to execute it? What's a little bit different now versus over the last couple of years in terms of your trade initiative and how you're going to grow that?
Antonio Achille: Yes. So, to cut it short, I would say pretty much everything is given in the sense, we now have a very -- can you maybe mute? There with some rebound -- sorry. So, there is a very well understanding of what it takes to win. And this is in course of being implemented, and there are several new aspects, and I will mention some. First of all, collection. We recognize that the traditional strength Natuzzi, which is still important. And actually, we have doubled down on that for the consumer. This idea of comfort, which we branded into ComfortNet. It's very important to talk and have a dialogue with the consumer. Things for instance about America, where we discuss a lot. The consumer recognized Natuzzi and actually reward Natuzzi for this idea of confidence. But if you want to talk with a designer, you need to have within the collection a different kind of project as well. So, there's a reason why we partner with some of the most renewed architect globally. I'm talking about Marcel Wanders. I'm talking about, Paola Navone, Marino Marini. So really people which sit on the top of the pyramid, which have been reinterpreting with humble approach. The style Natuzzi make it more design oriented. And we came up with a very incredible project that we'll be pleased to show some of you. Like last collection, we have a project from Karim Rashid. He's an Iranian designer who lives in New York, very visionary, but humble enough to understand what Natuzzi mean and design this project. Memoria, really as a tribute to the curve shape of Natuzzi, which then is taken by the Natuzzi R&D to make it a product because then there are very strict R&D element that need to be taken. So first of all, we have now a different collection. An architect entering our store can find material to furnish a penthouse in New York or to furnish a Dubai penthouse, which didn't have before. Second, which again, I believe we should next time we will be in the U.S. inviting you in one of our stores. We created this design studio. Design studio is a working space within our store, which is really intended for design and architect where they can play with a different combination of material to define project. Third, we have -- I would say not, I'm going to say, but, digital support to do project digitally because once you have played with the material, you want to see in a 3D configuration how it could look like. So now we developed a configurator which can actually bring to life this project from a CAD, one dimension, drawing to a 3D project. And this again is something new. Third element, as I mentioned, is training. This sound nice, but who can engage with a designer in New York? We need to have a designer in our store. For instance, now we have a great team in Madison Avenue because they talk the language of designer. And this, again, was something which was not systematically happening in our store. Now, we are very clear that in the store where we want to express the full potential of trade, we need to have a designer in the store. And this is very important. Fifth is the engagement. We recognize that we were passive. So, Natuzzi is a great brand, some architects were entering in our stores. Now we are much more active in reaching the design community proactively. We've just completed the Congress in Sao Paulo, where we're doing a great job on designers and as the core, which is the place to be in terms of magazine for designer with our partner, and we invited hundreds of architectures to see our collection and this has been proactive. So, and I can continue and assure Pasquale can continue more than me. But Dave, just to say before, it was somehow happening because we have a great salesperson in Naples, which came from that word I could do it. Now it's happening because we have developed in the last 12 months, not last 10 years, a well-defined strategy to go and think for the new opportunity and we are also teaching our path and our dealer how to do it.
Pasquale Natuzzi: In other words, Antonio or the gentleman that are asking a question. So, the brand moved from product to project. So, in other words, each individual project we have in our store we can configurate for different type of consumer. So, when the many, many consumers, they go to the architect, to the designer and they ask to decorate their home, they come to us with them in the store people capable to manage this kind of conversation deal or business. And consequently, we have what we call also floor planner. We have all the tools. We have, I mean, project that allow us to design a home for customer where the ticket become 100,000, 80,000, 150,000. That has to do with trade. We have, I mean, some store where 30% or 35% of the business is trade. In other word, there are consumer. They come directly in our store. They choose the product, the project, and we provide to give a service to them and sell the product. But then there are designers, architects. They come in our store and they ask us to design the project for the home of their client, their customer. But there is, Antonio, also, in one of our stores in Miami, I believe, a week ago or two weeks ago, we sold a number of sofa or product for a hotel for €8 million, I believe, just one sale for €8 million.
Antonio Achille: That's correct. That's very correct.
Pasquale Natuzzi: Then we have, I mean, November 12 in Dubai, we should promote and present in the stadium to a number of potential consumers, the Natuzzi apartment home. And we already have a contract in our hands, I believe Antonio for the Natuzzi Harmony Residences for another 55 apartments. So, there is a building which is recovering our name Natuzzi Harmony Residences. We designed the building. We designed the apartment. We designed the furniture. Everything would be just a Natuzzi in Dubai. A lot of things, I mean, we are certainly doing, which is very much different than sending the sofa in other worlds, okay.
Antonio Achille: Absolutely. I believe this is a completely new area. We're going to be holding at least definitely a press release because some of the elements we just mentioned are still under confidentiality agreement, we may have a different call. So, David, this is really -- I mean, this is 65 years of history, but the last episode happening very rapidly. So, some of the things we are discussing really materialized over the last six months, some over the last 12 months is really accelerating. Maybe they were happening here and there, but not in a systematic way.
David Kanen: Okay. Pasquale, thank you for sharing that and sketching out for us with the potential and long-term opportunities in trade and construction. Essentially, I mean it sounds like construction is almost, I mean, a new opportunity. But in terms of the traffic that comes into your four walls, you're engaging more with the customer and rather than just selling them a sofa, you're helping them design their home, which should translate to higher average order volume. That's essentially what you're saying for my interpretation. And yes. I appreciate.
Pasquale Natuzzi: The way you described is way better than mine, and that's because of the language. In Italian, I would explain that they said to me.
David Kanen: You did well. You did well. So, the last two questions, Antonio, I appreciate the fact that were we in the furniture recession and you want to be conservative, and essentially, you're allocating your efforts and resources to organic growth that require little to no capital. It seems like that's what you're focusing on. And you're approaching filling in the white space in North America very conservatively. But longer term, if I could ask you to address this because I think it's helping the results. The North American stores clearly are helping results. Am I correct in saying there's -- again, you want to -- I want to emphasize what you're saying, which is we want to very thoughtfully and judiciously open new stores to make sure we have the right people that are trained in the right location? But longer term, five, eight years from now, can we not add 50 to 60 stores over time, okay, executed well. When I look at our competitors, when I look at our house and RH (NYSE:RH) and their boxes are larger than ours, they're at those numbers. Is that a realistic long-term goal to open up an additional 50 or 60 stores?
Antonio Achille: I will say, long term, definitely, there is opportunity to double and triple our business in U.S. branded business. We're not going to go back to unbranded. A lot of that will happen to stores. We do believe that in some areas the gallery, which basically is a store just within a multi-brand environment is also a line opportunity to reach state, which will not sustain a full fledge store. But definitely, the opportunity in U.S. are massive and some -- significant part of that will happen to directly operated store for Natuzzi Italia. We discussed that in the past, our long-term strategy, if you talk ‘18, ‘19 years, definitely has not changed. I hope you understand that we need to be prudent, first because we want to bring more organic growth also in the last five stores we just opened. Second because retailers need to be an area where we minimize mistake in terms of location.
David Kanen: Okay. And then, here, I appreciate what you're saying. And my last question is on e-commerce. Many of our competitors are generating tens of millions, even hundreds of millions of dollars. Now it seems to me there are two home furnishing e-tailers, e-commerce companies, one of them begins with a W, and everybody knows that are massive, okay. It seems to me like that it's not the right venue for Natuzzi Italia, selling $10,000, $15,000 sofas, but on the lower end with Editions $2,000 sofas, it seems like it's a really good fit. My question is, does -- can Divani & Divani also be sold potentially in the U.S. at these large e-commerce, home furnishing companies along with Editions. And is that something that you're open to? Because I've kind of reached out to one of them, and they seem to be very interested and it kind of got put on hold. They have their own unique issues they're working through. But it seems like there's interest there. Is that something that you're interested in? And then could you do both Editions and Divani & Divani there?
Antonio Achille: That is a very interesting perspective. So just a couple of, let's say, point I want to make. First of all, I agree with you. For Natuzzi Italia, e-commerce will be more a channel to drive traffic to the store because if you want to sell projects, not product, it's difficult to envisage that online. There may be some improved product like revive or other that can be actually purchased online, but otherwise for Natuzzi Italia, there will be more dry traffic to the store. For let's say, the second brand. That is still an opportunity where I feel we have not done equally well like another area like trade, for instance, because we still need to deploy it carefully. On the idea of the Divani & Divani, there is one element, David. I won't be problem solving here, but there is one element that we need to be cautious. The Divani & Divani, which is a completely different banner to a great extent, the same collection. Having said that, I believe that for Natuzzi Editions, the digital opportunity is something we still need to address properly, especially in U.S. So, I don't want to be defensive. I think you are right on that. I don't want to be defensive and let's take the blame on me. We are later than I wish that we could be now. I think we've done great work on retail, great work on merchandising. On any other dimension, a great work on margin that was a bit later than I wanted.
David Kanen: Okay. So, it's something that's on your radar or to do?
Antonio Achille: Yes. Yes. Yes. 100%.
David Kanen: Well, thank you guys. Congratulations on navigating a very difficult environment and again on the sale of the building, and I look forward to the back half of the year and more importantly, 2025, I think, is going to be a recovery year. Interest mortgage rates should decline and housing transactions can only go up from here. So, I wish you well.
Antonio Achille: Thank you, Dave, and thank you all. I'll leave for to Pasquale for closing remark on my side. I really appreciate this conversation and the tone. I don't want to convey the message we accomplished with what we have achieved so far. There is a lot of work we need to be done. We believe the Company definitely deserve higher sales. We focus on the economics of the Company. We focus on the retail transformation and the brand transformation, but there is still a lot that we need to do. Thank you. Pasquale. I'll leave it to you for your final remarks.
Pasquale Natuzzi: As you know, Antonio, I'm, as the founder of the Company, I'm writing down the Natuzzi brand bible. Natuzzi brand bible gives a very clear guideline of what the Natuzzi brand stands for, okay? I'm writing down the DNA, the harmony code, a digitalizing harmony code, retailer religion. I believe that the brand is exactly like religion. And the store, the retailer is the church where the brand needs to be -- where the leisure needs to be practiced. We are doing a really good job in this very difficult time to define clear guideline for the brand management and also for the retailer way we should manage. But I really appreciate the way, Antonio, you have been describing the entire quarter and period, and also all the questions raised by the shareholders. They have been very constructive. I really thank you very much to everyone for the constructive approach, which we need. Thank you again.
Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Antonio Achille: Thank you all.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.