Earnings Transcript for LRENY - Q4 Fiscal Year 2023

Carla Sffair: Good morning, everyone. Now we'll begin the Lojas Renner SA video conference. I have Fabio Faccio, CEO; Daniel Santos, CFO; and Paula Mazanek, Head of Realize. Before I hand over to them, I have some practical announcements. This is being recorded and simultaneously translated. It's being broadcast in Portuguese, but you can click on the link for the English version on our IR website. Any questions from journalists should be sent to press relations. And before we begin, I'd like to mention that any statements regarding the outlook and operational and financial targets are based on assumptions that are currently available and that are not a guarantee of performance as they depend on circumstances that may or may not occur. During the Q&A session, your question may be asked via audio. So you can raise your hand or click on the Q&A icon. With this, now I'd like to hand over to Fabio.

Fabio Faccio: Good morning, everyone. Thank you for being a part of our conference call for 4Q 2023. I'd like to start off by introducing Paula. She usually wasn't with us before. She's the Head of Realize, and she joined our team in August of last year. I believe that Paula's experience has been very important in the Realize recovery. So you will have an opportunity to speak to her during the Q&A session. And a few words about Paula, for those who've joined us in the beginning, we have some films from our new collection. The new collection is already in stores and selling in addition to the Head of Realize. I found out that she is a model. Wow. So everybody is wearing Renner. She's wearing a trench coat from the new collection selling a lot. So that's a great moment in this new collection showing that it has a good sales potential. I'd also like to mention before we begin a very special topic about our shareholders' meeting, we've made the material available yesterday together with the press release for this call. Now that we're getting close to the end of Carlos term after presiding our Board for five years. He decided to end that important cycle, 32 years of the company, 27 as an executive, five as the Chair of the Board, and he decided to leave after April 18, 2024, which is the date of the General Shareholders' Meeting. He's still the Chair but he decided not to continue. I know many of you have already read this. This has been in the news. His letter was published not only in the earnings release, but also in the material for the shareholders' meeting. He -- I asked him, and he allowed me to read his letter. So instead of using my words, I'd rather use his. So he -- actually, he asked us to read this to everyone. "I would like to inform that after 32 years dedicating myself to Renner, of which 27 as the CEO and the last five as the Chair of the Board of Directors, I made the personal and planed decision to not offer my name for a new term. Now I wish to have an agenda with more time to dedicate myself to personal aspects and social projects with my family. So I have a brief acknowledgment. Across these three decades, I've dedicated myself fully and with passion to transform Renner. From a chain of eight stores in Rio Grande [indiscernible] to an ecosystem of fashion and lifestyle with over 150 stores in Brazil, Argentina and Uruguay, connecting to millions of customers in digital channels. Today, we have 24,000 direct employees and a direct impact on over 100,000 people. I'm absolutely sure that the culture of enchantment that we've built at the company has been the main driver of these results. And that enhancement, and I'd like to say that I'm very proud of that, goes much beyond just making the company grow. It especially means that we make people happy, making their dreams come true, not only our customers. but also our people. I feel that I've accomplished much as I've seen so many employees develop their potential growing professionally and becoming leaders. During challenging times, people at Renner have worked collaboratively even with few resources and have made extraordinary accomplishments. And that makes it all worthwhile. Renner is an admirable company. And I'm absolutely sure that the next years, the upcoming years will bring on many new opportunities to offer its purpose to many people. I'm absolutely sure that Lojas Renner is absolutely ready and can continue to act in line with the technological transformations, new social habits and behaviors and the sustainability agenda, prioritizing the commitment towards our customers, shareholders, employees, partners and society. And will never rest to maintain the frame of enchantment always there. I'd like to thank and acknowledge everyone who has been with me across all this time and a special thank you to the people that make Renner a company that makes us all proud. " And then after that, I make an acknowledgment on behalf of all board members, employees, I won't read that because I'm here. So I won't go too much into that, because I believe that Carlos words truly reflect everything that we believe. Once again, a planned transition, a very -- a cycle that was very well built 32 years of dedication with many, many contributions. So I would not -- I would like to thank Carlos and all of us here at Renner would like to thank a lot for all his contributions during these 32 years, which were many and extremely relevant. Carlos, you can rest assured that your legacy will remain, and we will do even more. That increases our responsibility, but we do have a very consistent team, that also has a great track record. Many of us have been here for one, two, three decades even at Renner. Some new people have joined us but you can be sure that we can make this company achieve its maximum potential, and that's what we're working on. I'd also like to thank Thomas Herman who is also ending his term on April 18. Thomas had two seven year cycles with us. And as a Board member during the family period, family ownership period of the company. And now -- so those are the older Board members, [indiscernible] 32, Thomas 14. So it's even -- it's great that they can go on to a new cycle, and we will appoint two new Board members to remain with the other for our ordinary shareholders' meeting. With that, I'd like to begin the call and mention some very important points. About 2023, and then Daniel will go into the details about the fourth quarter. So 2023 was a very important year for us. It was a milestone in transformation. We've evolved in the main strategic projects that were the basis, the fundamentals that we can maintain ourselves at the forefront of our segments; and b, the reference of fashion and lifestyle in chanting experiences and all of that in a responsible way. The investments that we've made in the past years and 2023 have prepared our brands for growing results with gains in efficiency in a consistent manner. In operational terms, 203 was a challenging year. We had many nonrecurring effects of these transformations that are important for the present and the future. And when they took place, they put pressure on our short-term performance. But now that's over. That was just the beginning, and now that's ending. And from that, we have been obtaining great levers in efficiency and the distribution center in Sao Paulo is an example of that. We also had a difficult macroeconomic environment with high delinquency that affected the purchasing power of the population and also a nonrecurring basis for comparison comparing 1Q 2022 and 1Q 2023. But that contest brought on the need and made it clear that we had to make some internal changes in maintaining our positioning, of course, but also adjusting some issues. And as of the second half of the year, we were able to fit in much better with our consumers moment. We made some specific one-off changes to the price per pyramid. We improved our competitiveness. We communicated more and better and that brought on a sequential increase in the volume of pieces. So our growth has been mainly based on volume increase. At the same time, we've evolved in reactivity in the speed of our collections there's a part of the collection that's being developed and purchased during that season -- in season. So from now on, that offers us even more important levers to create value, more sort [indiscernible] in collections, more sales, more margin leaner inventory. So it's a gradual additional gain. And those are the levers of growth that we have moving forward. In expenses, we've adjusted the framework in the first quarter of 2023, which had first brought on additional expenses during that period. However, it brought on a better balance after that. And now we're already reaping the results of those changes and adjustments that we made in the beginning of last year. In the year, we transitioned the logistics operations to the new distribution center in Sao Paulo. We say that the distribution center is a milestone, but actually, it's a change in our supply model, our replenishment model. We went through difficult times in 4Q 2023. It was the ramp-up of the distribution center during a moment where we sell the most. So in addition to bringing on additional costs, as we made very clear that also brought on impact to execution, which is normal in that type of transition, especially in the fourth quarter. So many times companies say, and they're absolutely right that when you switch systems, that has a significant impact to sales. So we changed many systems, the distribution center and the full supply model. So that does have an impact. We expected that. We knew it was coming. We know that our potential is much higher than what happened in 4Q. But we did have that expectation. We knew there would be an impact on costs and also an impact to our sales. Sales were better. We had a good quarter, but it could have been much better if we hadn't gone through that transition and transformation. And it will soon end. After that, for the first two months of the year, we can see stabilization already in the first quarter. We're still doing well with a recovery in 1Q even during the stabilization phase. And without a doubt, after that stabilization phase we have a significant lever for sales, margin, improving services and cost reduction, and we will expedite capturing that experience. As that will be possible through the distribution center and changing our distribution model. 100% of our apparel is counted, stored and processed per SKU, and that gives us more speed and that DC is important in that in replenishment and integration of the channel and a great potential to transform our business. At Camicado, we already see a reduction in the level of replenishment of stores and costs. I'd like to remind you that Camicado was our first company to operate from the new distribution center and is already reaping a great part of those gains. Online has gained relevance with more efficiency in service level, a result of many different initiatives that we had to better manage the channel. In brick-and-mortar stores, we inaugurated 35 stores in 2023. 17 Renner of which approximately 75% were in new places, which gives us additional sales without cannibalization and adding to online. And those stores have had a maturation curve that has been faster and higher profitability than stores with the same age in previous periods. So we've increased the relevance in the options and different type of checkout. So we're the only company in Brazil that has RFID in the self-service totems. That's much different than the other [indiscernible] that we see in Brazil and around the world. If we're not the best, we're among the best in the world in that sense. And we continue to install that technology in our stores. Realize was impacted by the credit scenario and delinquency scenario that was very challenging in our country. We've taken actions in capturing and collection Therefore, our vintages have been better. And in the past months, we've seen an improvement in delinquency and results. Without a doubt, these actions have brought on an impact to retail. When we take actions to contain delinquency, they affect sales in retail. However, they were necessary. And now they're enabling us to -- in 2024, bring on origination and rescue that customer base that we lost during 2023. So we made some adjustments throughout this month that have been sharing -- showing excellent results. When I talk about [indiscernible], we're the second in the [indiscernible] and the leading company in fashion in the Down Jones and top 3 of global retail. When we look at generating value for shareholders, last year, we achieved 70% of our net profit to our shareholders. We generated BRL1 billion in free cash flow. It's a historical record, and we aimed at better return. So we could buy back some shares. So we distributed profit, generated free cash flow. We bought shares we advanced the payment of income, and I think we're one of the only retailers that had a positive EBITDA with an exception in retail in Brazil. So 2023 was a year of challenges, but it was also one of great focus. With the adjustments and investments that we needed to do to ensure competitiveness and also ensure our growth with more profitability for the next periods. So it was a year of transformation, transition and made us ready for what is ahead of us, and we have very positive expectations for the future. Now I would like to pass the floor to Daniel, and then I will come back at the end to talk about what is going to happen next.

Daniel dos Santos: Good morning, everyone. Let's start about sales performance. If we look at our operations in apparel only in Brazil, excluding cosmetics, which is comparable, we had a 9.3% growth, double the market. So we had growth above market this quarter and the expectations of the quarter of more growth. And the sales performance were almost totally in per volume amount of apparel pieces. And some of the measures we took that were described in the opening with a greater assortment of entry prices and some pieces that we adjusted price and more active communication during the fourth quarter with a strong campaign in the media allowed us that as of September, we had an increase of slow, both in our brick-and-mortar store and e-commerce and a good conversion. So our conversion were adequate, and we even had a better perception of the customer in the NPS measurements. Our summer collection had good acceptance in all divisions, highlight to young women apparel that grew two digits due to the adjustments we already mentioned and also a series of initiatives that were implemented that made us even more assertive and desired in the eyes of the consumer. E-commerce growing is becoming even more relevant and with more efficiency, I'm going to comment on the following slides about that. Camicado showed stability, but it's important to remember that we are closed some stores at the beginning of the year and also made them smaller. So when we look at the sales per square meter, it grew 12% and same-store sales up 13% in the brick-and-mortar operations. For the eighth consecutive quarter of increase in the breadth, we're happy with the sales evolution in the 4Q, especially because of its profile. Fabio mentioned that we had potential for more. The distribution center in Sao Paulo went through a trial by fire in the third quarter. Size of the operation was not proportional to what we had before. And during this time of transition, we did have some issues, but we know that this period of learning, we face some issues that are not the normal in the operation. We had some ruptures, delay in deliveries and other issues that limited our performance. That's why it was a bit lower. The -- we had increase of pieces per shopping bag, but we increased the number of shopping batch. We have also credit limitations that reduce the amount in the tickets. And our operation outside of Brazil increased our growth in about 1 percentage point. Speaking of gross margin. In retail is balanced, a combination between balance of expenses, exchange rate. And the margin only shows operation in Brazil in around 58%. Retails on a comparable basis with percentage points above due to what we lost -- 0.5 percentage points, also reacted and therefore, we reduced inventory. SG&A [indiscernible] was stable especially because of this DC in Sao Paulo that impacted our SG&A in the period of BRL38 million. In this quarter, we needed more caution. And additional safety measures when we operated RDC in the beginning and end of the year. Otherwise, we would have a greater leverage and $31.1 million a share in the SG&A of the year, reflecting the adjustments that we did in the structures in the first half of 2023. We had BRL15 million additional expenses in advertising and presence of brands. Digital channel increased 3.4 percentage points. We highlight to CAC. In the year, we closed the operations of digital close to the brick-and-mortar store, which was one of the indicators that we had shared in the SG&A of May 2023. The results of [indiscernible] were positive, both year-over-year and also compared to 3Q 2023. Especially because of the lower losses and also the credit profile of the portfolio reduced the portfolio of losses. And we know that the scenario is still difficult for families. We see some positive movements with installments. The full portfolio showed a drop year-over-year due to less [indiscernible]. Also, the credit restrictions also affect consumption. And due to this context, we're leasing -- maintain their restrictions aiming better credit profiles and offering other credit products. We had an improvement in the over 90, both year-for-year and also sequentially. So the over 90 had a reduction of 2.3 percentage points. the new vintages continued with improvement and also increase in the short-term delay. We can see in the chart that we are a historical record of a low. And also there was a decline adopting the improvement of the quality of credit. On total EBITDA, it grew due to the better improvement of credit with increase of margin and the additional expenses with the DC also in ROL and EBITDA compared to the results share and fiscal credit. When we compare nonrecurring it's basically stable. We had record generation of investments in the 4Q especially because of a better operating improvement with good management of working capital. We're very well capitalized. We had BRL1.3 billion in cash flow. And this makes us comfortable and confident to continue investing in our value proposition. I would like to also mention how we will address the tensions in the year of 2024, which is a recurring question for many of you. We're going to provision the amount in around 75% of the total [indiscernible] presume that bring us comfort that we don't need to make provisions. So where we continue 25% of presumed income to be used and some budget and all the other amount will be provisioned. With this, I conclude, and I pass the floor back to Fabio. So we can have these closing comments, and we go to Q&A.

Fabio Faccio: Thank you, Daniel. I would like to share our vision for 2024 and going forward. We expect to continue the dynamic in sales with growth by pieces and balanced prices. It's a trend similar to what we've seen in the fourth quarter of 2023 and will continue to date. As Daniel also mentioned, we will look for opportunities to increase the number of pieces per shopping bag. We have good opportunities to improve even more this indicator and offering credit to our consumers, eliminating inefficiencies of the operation, especially due to stabilization in our new DC. I think we've been having good performance in the first quarter, but we still have effects of the stabilization in the fourth quarter. And we will see this more and more less as a lot and more as a leverage. Gross margin was more impacted with new prices in 2023. Now we have better balanced inventory and better prices. So we think of an evolution of the gross margin throughout the year. For the first quarter, we're focused on the collections, speeding up sales of older pieces so we can work with leaner inventory and soon use the leverage of being more assertive in our new model of replenishment. In expenses, we expect the leverage in 2024. In the first quarter, we will already see this trend taking place with financial leverage. And we have leaner structures and we won't have the additional expenses of adjusting structure that took place in the first half of last year. So this is also a gain year-over-year. Our online channel, as Daniel mentioned, is much more sufficient and should achieve the same levels in 2024 of SG&A as a percentage of sales that we have in the brick-and-mortar stores that are more mature, but we still have a similar performance both online and offline. About the new DC in 2024, we're going to focus in being capturing the benefits of off-line operations where we have greater operation and we can scale gains. And we will reduce about 50% of additional expenses at the DC that added BRL 100 million in 2023. So another lever of improving efficiency in operations, finance and gains of the DC in sales and also reducing expenses. At Realize, I think -- we think that the better economic scenario and improvement inside the company will improve Realize's contribution to the ecosystem. I say that there are 3 levers

A - Carla Sffair: Thank you, Fabio. Now we will begin the Q&A session. [Operator Instructions] We have a line. So I'll start off with the audio questions. First one is from Thiago Macruz from Itau BBA. How are you doing Macruz? Macruz can you hear us? Can you hear us?

Thiago Macruz: Hi, everyone. Can you hear me? I think now it's working.

Carla Sffair: Yes, we can.

Thiago Macruz: Sorry, technical difficulties. I have two questions on my side. First one is for Paula. Paula, pleasure to meet you. So I'd like to hear your vision about the value proposition for the Renner private label. What are the competitive advantages that you see in that specific business? And if you believe it's reasonable to believe that you can decrease the co-branded portfolio step of step on the brakes a little and start extending that in private label in 2024. My second question is about Fabio's final remarks. They were excellent, by the way. I'd like to hear your perception about the expenses. So when we look at back at 2023, not only at Realize, but also in retail, it was a heavy year in expenses. You mentioned that we should have operational leverage in 2024. Can I hear some more details on that. Is it reasonable to say that 2024 will be in a year where SG&A would not increase in nominal terms. Is that the type of impact? Those are my two questions. Thank you,

Carla Sffair: We'll start off with Paula then.

Paula Mazanek: Thank you, Macruz, for the question. Private label has always been a very important product. When we look back at the financial products at Renner's history, it was always the gateway for our customers to relate to us. When I look at the movement in the financial market in the past 10 years with an increase in the competition, especially the digital banks. Without a doubt, and that exactly is the basis of our strategy to moving from private label to co-branding. But when we look at the value proposition, private label plays a very important role, especially for the customers that Class C, for instance, that really need more credit. We have benefits associated to that card. So when they [indiscernible], they have a discount on their first purchase. And now we have a pilot to have cash back connected to that product as well. So we see at Realize and Renner overall, as private label is a significant part of the strategy because in our vision of risk, it lets us have a different type of appetite given that I'm offering credit to be used in our own ecosystem. So I believe as a value proposition for the customer, it's important, especially for a Class C customer. And in the long-term perspective, you'll see that we're going to move little by little and have a better product balance between co-branded and private label because in situations that we're going through such as now with more volatility in the economy and family or household delinquency is high, this is a product that gains momentum because the risk management is much more under control. So in terms of value proposition, I do believe that we are focusing on that. We're doing many project -- pellet projects. Cash back is already being done 45 stores and it includes private label, but especially because our customers with lower income and especially in places with lower income. It plays a very important role in giving access to credit so that they can buy even more in our stores.

Fabio Faccio: Thank you, Paula. About the second part of your question, Macruz, the expectations for expenses in 2024. When we talk about operational and financial leverage. It's about growing more sales than expenses. So the question could be zero growth. We expect very low growth of expenses and the growth comes in revenues. And that's coming from some different actions. First of all, as I mentioned before, in 2023, we had a significant reduction in the framework. At first may have been closing some Camicado stores and some Renner stores have a cost and even reducing back office. We had significant reduction in back office as well. So at first, that brought on costs. This year, those costs no longer exist. So in fact, we do have that framework production that's still coming from 2023, but now in 2024. The basis for that is much more, so that lowers our expenses. In addition, we talk a lot about the redundancies from the new distribution center. And as we mentioned a lot, little by little, we will reduce the expenses of the new distribution center, and that also helps in reducing those expenses and financial leverage because that new DC contributes towards sales. It was "getting in the way", and now it's going to be less expenses in that sense. An important lever in expense reduction, Daniel mentioned online efficiencies, we've already been working with better efficiency in online, be it CAC or more customers. So gaining that and then also reflects in financial important financial leverage. And with that, we also have an opportunity. We're always looking for opportunities. Even in Realize has an opportunity to lower their expenses, but there is always an opportunity in all companies. So when we consider all those levels. That is why we believe a good significant difference between growth of sales and growth of expenses. So not expenses wouldn't increase much. Daniel, would you like to add?

Daniel dos Santos: The general expect is what we consider that could be a nominal reduction. The distribution center expenses go into that. And the framework reductions that we made were back office that also impact that. And when we talk about sales, we didn't bear in mind the store expansion. And in addition, when we're talking about higher volume entry, we know that our operations it needs to bring back more people as we get more volume. So there is efficiency. And at some point, the increase in volume would somehow pressure sales. But as Fabio mentioned, we're working to generate strong operational leverage. That's one of the objectives that we have for this year.

Thiago Macruz: Thank you, everyone.

Fabio Faccio: Thank you, Macruz.

Carla Sffair: Next question is from Joseph Giordano of JPMorgan. Hi, Joe, go ahead.

Joseph Giordano: Hi, good morning, everyone. Good morning, Fabio, Daniel, Paula and Carla. Actually, I have two. One about Renner and the other about Realize. At Renner, I'd like to explore the top line trends. So when we look at the cost environment, it heated up a lot in the past six months. And now we see some sort of spikes in cotton. So looking at the first in the second quarter, what should we think about for product prices? There was a movement in the mix to something towards something more affordable for consumers and a drop in the cost. So what would be the price effect during the year? Should we expect something in price this quarter? And how would that behave in the second quarter? My second question is to Paula about turnover. And I'd like to understand what you see the impact of that of revolving credit. So how should we see Realize's results during the year? And how that could negatively impact the results? Thank you.

Fabio Faccio: I'll start off then with top line. You're right, Joey. The product prices, especially the products that we have now imported products and Brazilian products that are coming in at lower costs, lower raw material. That enables us to have a better cost relation with our customers without affecting the margin. Our entry margins have been very positive, even with a lower cost for our customers. So we've transferred the efficiency gains, be it in lower raw material costs or be it in better negotiations or being in better productivity in our supply chain. We've transferred that efficiency to our customers, which could lead to gains in volume and maintaining the margins. I believe at this time, margin is similar to previous margins because we still decided to lower inventory, working with the older inventories that we had. And as a result of some performance that wasn't that good in 2023. But now moving forward, the trends are positive. We know that there are high margin levels. But we also believe that with the lower costs, we can gain volume. And have a margin increase during the year as well, I believe that's positive in that sense. I would pass the floor to Paula.

Paula Mazanek: Thank you for your question, Joseph. Of course, that revolving credit is relevant in our mix of revenue. But we've been building a strategy throughout the past three years, and this is rounds for us to migrate our operation to co-branded, because co-branded brings a revenue of service that helps balance things and make us less dependent on revolving credit. Now speaking of what happened from 2022 to date, especially the second half due to the credit restriction that we needed to balance the losses, and these movements were important. And we can start with seeing how much it was positive for the results, reducing our volume of losses. We did bring lower risk customers, and this naturally brought impact to our revenue throughout especially 2023. What we've been seeing now, especially after the fourth quarter of 2023, is that both external landscape shows progressive recovery, looking at indicators in increasing of salaries, reduction of unemployment the indebtedness of the families is still high, but there is a trend of dropping in the next few months. This added to the movements that we did internally, evolving credit and collection process in a very robust manner, which is part of our investments that caused generating SG&A, we will, without a doubt, going to 2024, much better prepared to increase our risk appetite, but the good risk throughout 2024, we want to resume granting credit, but with better quality, looking for that person who is the good delinquent, who brings important revenue but no impact in the future. So I think in 2024, we will see a much different performance compared to what we've been seeing since the second half of 2022 and throughout 2023. And you will be able to follow that throughout the next quarters, okay?

Joseph Giordano: Thank you.

Carla Sffair: Thank you, Joseph. Our next question is from Ruben Couto from Santander. Hi, Ruben.

Ruben Couto: Hi, guys. Could you comment a bit about sales performance in same store sales that how was this more quantitatively. And another topic about marketing strategy that you highlighted in the release. How does this will go throughout the year? How are you positioning the brand with initiatives? And we learned that [indiscernible] left the company who will head that area? So thank you for that answer.

Paula Mazanek: Thank you, Ruben. Well, about performance at the beginning of the year. The dynamics are ongoing. We don't see increase in price. We're repassing this gain of efficiency to a more appealing price to our consumers within our positioning. So the growth comes from volume. We're growing in a number of pieces. Growth, by volume. So I think the growth will continue with the same movement. And remember that we're still stabilizing the new DC. When we talk about the new DC, as I said at the beginning, we have to think about cost, but we have to think about sales. During the transition and transformation phase, we had 100% of SKUs. It's a check challenge, but we're stabilizing. We're reducing the redundancies to reduce costs, and this will also bring a plant but it also does affect negatively the sales in some stores. And there's a rupture of products and for retail, that's important. So it also affects our sales. So in the fourth quarter of 2023 affects the fourth quarter, but we still will continue to grow. We grew in the third quarter, and we're growing in the first quarter of 2024. I'm saying this because despite this moment of stabilizing distribution, the movement is ongoing, increasing in volume. If we weren't during this transformation period, we would be growing much more, which is what we expect going forward, both by eliminating the issues of ruptures an increase in lead time and also adding even more having less rupture and less lead time than we had in the past. And this will leverage our sales. So we'll have a different movement and lower costs. So we're in a good sales performance with good expectations for the future. About the marketing structure and strategy, we don't expect increase of cost. We're using this better efficiency on online. We have several investments done throughout 2022 and 2023. They started at the end of 2021, but especially 2022 and 2023 in terms of content, videos, photos, studios. And this is bringing organic traffic that was much higher than it was and a higher conversion rate. So this allows us to have a CAC online that is much lower. And we've been able to balance better our strategy with these investments. So with the same amount of money, we can do much more and much better. We've been able to better orient this marketing funnel, bringing more to the top of the funnel without investing more in the lower part of the funnel. And this helps both offline and only and the brand gains more and more power. So it's not an increase in investments. It's investing better. And about the department's leadership. We did a plant transition [indiscernible] had some personal issues in Sao Paulo and we wanted someone closer to us here at [indiscernible]. So she would like to thank her. She really contributed to the company, but we bought an extremely qualified professional, and we're very happy with her, which is [indiscernible]. She has a very strong track record at Unilever and Motorola. She was the global head in marketing at Motorola. She's been with us for about 1.5 months, and she's already making a huge difference. And a lot of what we've seen at the beginning with the launch of the new collection already has -- not her finger, but her hand, her arm her leg. So we're very happy with her.

Ruben Couto: Thank you.

Carla Sffair: Our next question is from Vinicius Strano from UBS.

Vinicius Strano: Hi, Carla. Good morning. Thank you for taking my question. You've been working with a lower markdown level. If you could tell us how this would translate into gross margin for 2024. And you mentioned that you have 100% of distribution in every SKU in the Sao Paulo DC. How could we think about uplifting in sales because of that? Thank you.

Paula Mazanek: I think I'll start. Thank you, Vinicius for your question. Daniel can add to what I'm going to say. A lower mark than level -- at first is not that lower because we're benefiting for this good moment to reduce our inventory. So we have a lower inventory and better quality. So this not necessarily means that we're marking down less, but we're trying to keep our margins healthy and balance with a leaner inventory that allows us to have even less markdowns in the future and sequential marketing going forward. So our outlook is maintaining close to the margin we have now and then in the sequence, a good opportunity of gains, both because we have newer inventory. And as you mentioned, we can distribute 100% per SKU. So we could have a leaner inventory and more assertive inventory, the right inventory at the right place at the right time. We increased structure, but we will have less. So work with less in return more sales, and that generates less markdown and more margin. So this is what we're going to have going forward. We've been talking about a potential to increase gross margin in 2024. So markdown is a component of this improvement. The base of 2023, especially at the beginning of the first half, and many initiatives throughout the year better assertiveness of the collection, reactiveness, better production and closed orders that we had. All this allows us to have more assertiveness so we can reduce markdown. So markdown within the context of this year will allow us to have an increase of gross margin. Do we want to talk about the DC?

Paula Mazanek: I think I already answered that. I think that only helps even more.

Fabio Faccio: Thank you, Vinicius. Thank you.

Vinicius Strano: Great, guys. Thank you.

Carla Sffair: Our next question is from [indiscernible] from Morgan Stanley. Hi, [indiscernible]

Unidentified Analyst: Good morning. Thank you for taking my question. I want to understand, going back to the DC Fabio. You mentioned that in the fourth quarter and still in the first quarter of 2024, it's a headwind in terms of sales for you. I just want to understand how we should consider the evolution of the stabilization of the DC in the second quarter of this year, we will see this stabilization completely established? Or if it will only be in the second half of the year? My second question about the competitive environment looking at the local players, when we compare growth of top line, better is a little bit below what we saw with other players. I understand that in the fourth quarter, there was this impact of stabilization of the DC. But do you have any other adjustments that have to be done to resume growth above your peers? Thank you.

Fabio Faccio: Thank you, [indiscernible]. About the DC, you used the metaphor that I really enjoy. It is a headwind in the first quarter and even in the first quarter, but it's the same headwind. We have this win against us in the fourth quarter and first quarter, but we are increasing performance, and we are now are almost getting some tailwind. So at the end of the first quarter and second quarter, we will have this tailwind. So we're going to go with the way tailwind and increasing intensity throughout the year. I really enjoyed your metaphor. So I don't know if I was clear. In regards to the competitive environment, we've been seeing gain in share. Maybe we're performing different from other players that were delayed in some issues, and they performed better now. At the moment, we have these effects that we mentioned of the DC, which is a headwind Realize is a headwind, and they hold back our performance momentarily. But like I said, when we look at the new distribution center and when we look at Realize, we're working around that. We're still performing even with that. And the new distribution center is going to help a lot. And the rupture that we had in the fourth quarter -- first quarter did affect our performance. We could have sold much more. Realize by granting with restricted credit granting, obviously affects our performance. And we know at some areas are inefficiency, given the transformation that we had in the past years ago, and now we're in a new phase. We're in a different phase in that sense. So our expectation is to -- especially 2Q onwards. We already have a very good first quarter and 2Q onwards, not just the second one. The first quarter is already good, and we already have positive expectations. And 2Q onward, we continue to gain share. We have the conditions to do that, and our expectations, our continuous gain of market share.

Unidentified Analyst: Perfect. Thank you, everyone.

Carla Sffair: Thank you. Alexandro. Next question is from [Juan Suarez] (ph) from Citi. Hi, Juan.

Unidentified Analyst: Hi, Carla. How are you doing? Good morning, everyone. I'd like to explore that point of the timing. Fabio because you mentioned 2 points that may be jeopardizing the company in the competitive environment. So stabilizing the distribution center and granting credit. Stabilizing the DC, that's clear. But about credit, you mentioned that March, you may be granting more and regarding the approval rates, let's explore that a little more and imagining how much that could uplift sales in the quarter, that would be interesting. The other point is about G&A. So stabilizing the distribution center that really helps sales. And we believe that in the second half is when you'll start to operate all of e-commerce out of distribution center. So you'll have savings in the expenses that you have when you to activate the other one. So I'd like to hear about that your opinion about G&A, would that go down to zero? Do you have any visibility on that?

Fabio Faccio: Let's start off with Realize and credit. Paula go ahead.

Paula Mazanek: Thank you for your question, [indiscernible]. It's important to recap what we've been doing in terms of movement in our portfolio since second half of 2022 when the entire market saw very high delinquency in credit cards. And from 2022 to 4Q 2023 Juan, we had a significant movement of restriction. And yes, we did grant credit because after that because that's very important to leverage the sales at Renner stores, but pretty much for low and minimum risk customers. Those risks are determined according to our risk model, and that was beneficial in relation to losses. But we do believe that now based on the entire external scenario that I already mentioned and also given the fact that we've evolved a lot in our credit model in the past six months, we are ready to within the customer portfolio that we already have, we would identify the ones that have recovered their scores and credit given renegotiation negotiating their debts and the Sinhala government program, we see unemployment rates going down. So what we see for 2024 is offering qualified credit focused on private label because risk management is more suitable for what we believe fits with the current scenario. And we do see that we could have a positive impact in renter store sales, especially in the places that we believe that have a customer profile that are highly dependent on credit to purchase. So we trust that the work that we've done in the past six months. Well, actually, it was the end of February. It wasn't exactly in March when we started this. So we started to have selective opening and monitor that dynamic of the credit that we started giving our operation. And what we've also seen [indiscernible], is that the customers that are coming to that reopening is the short term or that they're not that delinquent. It's just they're a little late or they don't -- they're not late. And that's good because they don't go into more debt, and it helps us for our revenues and results of the operation. So I believe that in 2024, all the efforts that we've had in the past four or five quarters will give us a possibility of granting more adequate credit in a more qualified manner considering our appetite for risk. So we look at 2024. And we believe that not only in financial results for Realize, but also about how much it can contribute to increased sales at Renner, we believe that we will have a different year than what we've seen in 2023.

Fabio Faccio: Great Paula. And to add, there's granting credit and reactivating those customers. And already in reactivation, we see customers that we see that delinquency restricted them, but now in reactivating and granting the credit, we see that delayed a little, that's also positive for leasing revenues, but also in retail revenues. That's a good point to mention to all of you. Because we do disclose that number, and the active customer base was reducing in the past quarters because of the involuntary churn, which was the credit restriction that we had because we believe that the customer was going through difficult moments in terms of their personal budget. And now we're fine-tuning that, looking at those customers and looking at the group to see how many we can bring back into our relationship. And don't forget that in the Renner ecosystem context, we have a universe of 18 million, 19 million customers that we can still explore internally without running the risk of being in open water. So those are the pillars of our actions in 2024. And I believe that the next results will bring in some of that to you. Thank you for your question.

Paula Mazanek: It's hard to quantify how much that would impact sales, but it does, as Paula mentioned. It impacts sales in a relevant manner, especially in some places. When we look at the share of card in our sales, it dropped a lot in that period of delinquency at 5 percentage points. So at the least, we can say that with those actions, it would gradually pick up. And with that picking up, that's already a significant impact. Can I mention something about expenses.

Fabio Faccio: Yes, go ahead.

Paula Mazanek: In G&A expenses, we believe in an evolution that nominally we would have a reduction in the total for the year. With the behavior during the year, we have to remember what happened during the year. So last year, we mentioned that during the year -- first quarter and second quarter, we had some structure changes, but then we expect more in the distribution center in Q2, Q3 and Q4. So a snapshot for the year is that, first of all, we believe 50% to 60% for the distribution center. And there's the framework that was reduced in and that we'll depreciate. We see a reduction for the year. I believe that the reduction could take place quarter after quarter in all quarters. And probably more in the second quarter. That's the idea that we have for general expenses for the year. And in [indiscernible] question, he mentions Rio, the distribution center. I think it's important for us to clarify. It doesn't mean that we're eliminating all the redundancies this year. In 2025, we will still be eliminating redundancies. It's approximately 50% to 60% of that cost this year, but we still have another cost that would be eliminated the year after that because we're working on some other matters to mitigate risks. And with that, we can eliminate 50% to 60%, we can capture value. But it doesn't stop there. We continue to eliminate more in 2025 as well. So a part of that would be eliminated in the first quarter next year.

Unidentified Analyst: Just to confirm, the main part of G&A savings is in retail, right? Should we see anything in Realize?

Paula Mazanek: When we look at that, not only 4Q 2023 year-over-year, but also the whole year, in Realize, we've concluded some strategic important projects, so we can diversify portfolio even and cross-sell more products beyond credit and also had an investment like I mentioned, so that we evolved -- could evolve our collection and credit model. Those expenses are not recurring for 2024 we will look for SG&A efficiencies because that, together with progressive credit granting that we will have and strong work to pursue a qualified portfolio in terms of risk and return. We believe that our SG&A dynamics of return will be different than the past two years because our launch cycle for new products has also ended. Yes. So lower in both, [indiscernible].

Unidentified Analyst: Great. Thank you everyone.

Carla Sffair: Next question is from Irma Sgarz from Goldman Sachs. How are you doing Irma?

Irma Sgarz: Hi, everyone. Thank you for the opportunity. I just have one question. I'd like to hear more details about the evolution that the stores that you've already opened in new places. Fabio mentioned that they've been maturating faster than other stores and without cannibalization. It's great to hear that. But in terms of other variables, I know that the vintages are still new. But when we look at gross margin and credit that you also mentioned, that could be interesting in those places. What are the first things you see? And are you confident that you would have a return that's in line with others or even higher, the ones that are in new places or even outside shopping malls.

Fabio Faccio: Thank you for your question, Irma. That's great. You'll allow me to speak a little more about that. That's an important comment. Yes, we are happy with the performance of the new stores. And most of them Renner 75% in new places for 2023 and moving forward even better, we should have 90% in new places for 2024. That's for Renner. We have more openings expected. The changes that we made to the store portfolio and closings as well. This year will be much lower. So the expansion of square meters should be even higher than 2023 when we look at the net amount. And performance has been positive. One of the things that we see is that it's faster because we have less competition, less cannibalization. Because it's something new in the city. It's always the best city store in town. And it becomes a major event in those towns. So the strength of the brand brings in fast traffic to the store. That's why the maturation curve is faster. But even without using one of the main levers that you mentioned for a new place because when you open in a new place, historically, one of the main levers for us was granting credit. So we've opened a new places with less credit being granted. So even without that, it's been positive and positive margins. And now with Paula here helping us a lot, we've been able to -- we'll probably be able to go back to having this important lever in these new places, not only the ones that are already open, but the new stores that will be opened. So there's an expectation of improving performance in the recently opened ones and the new one -- new stores to come.

Irma Sgarz: Very clear. Thank you very much.

Carla Sffair: Thank you, Irma. Our next question is from Robert Ford from Bank of America. Hi, Rob.

Robert Ford: Hi. Thank you. Good morning, everyone. Thank you for taking my questions. Could you talk about the competitive environment in the beauty category, please? And Paula, what do you think of the product model -- profit model as things normalize, how should we think about retention cost, cashback and CSC. And how are the average tickets behaving with cash back compared to historical levels? Thank you.

Paula Mazanek: Thank you for your question. Speaking of how we are evaluating cash back, we're holding the pilot plan in a few stores to test two things. Customer receptivity because this benefit will replace a historical benefit from Renner which is discount on their first purchase. For us, it's very important to understand what will be, in fact, the customers' perception in regards to this replacement. When we look at the financial balance of cash back, we're still in a pilot test, but we've been noticing important issues like the customer that gears to cash back on her second purchase, still within the time to use the cash back, go comes back and buys more. These were the first figures. It's important to remember that we're still testing this initiative to see if it works and expand it in a way that makes sense both to our customers -- regarding the financial balance and increasing sales, that's the goal. The first figures are very positive, but if we talk about the cash back dynamic and the customer that comes back to stores a few times a year, you have to run this pilot for a few a little longer. So we have more consistent figures to decide to roll out this permanently or in types of opportunity that are important for retail. So throughout the next quarters, we will give you more flavor of how this strategy is behaving. But for the moment, we're keeping a close eye because we want to increase the value proposition, leverage sales at Renner stores and also bring the less impact in margin because we know how this is important for the sustainability of our results. I don't know if I answered your entire question. If I did leave something out, let me know, please.

Robert Ford: Thank you, Paula. No, I think it was very encouraging. Thank you. About the beauty category. Could you talk a little bit about the competitive environment and performance of beauty, please?

Fabio Faccio: I think the competitive environment is like all the others competitiveness is harsher, but we have a good value proposition. So we've been able to perform well. Our performance has been boosted more by apparel than by beauty care I think we also have an important performance in beauty, but it's maybe where we have a stronger competition at the moment. The competition -- People say that some fashion and apparel competition is big, but we've been seeing things increase, and we expect even more competitiveness later. Thank you Bob.

Carla Sffair: Before we take the last question. This will be the last question. We will be able to answer one more. We apologize because we did go beyond our time, but these initial messages -- the opening messages were very important. So next question, making clear that all the other questions that weren't answered, please redirect them to our Investor Relations, and we'll answer you back. So it's from [indiscernible] from [indiscernible].

Unidentified Analyst: Hi, everyone. Thank you for taking my question. Look at the second quarter we had a very slight impact on margin. You're going to prepare the new collection that starts in May. How do you see both private and the demand for the winter of 2024? Thank you.

Fabio Faccio: Thank you, Pedro, for your question. The second quarter of last year, we had temperatures that didn't help much with winter. If we have the same difficulty okay, although it's very warm now, the trend is to have the temperatures declining I don't know if it's going to be warmer or cooler but our collection is much better this year than we had in the previous years. We're very confident in it. We call it fall/winter, we already started the collection. It's already at the stores. Those videos we showed at the beginning is already the launching this -- beginning of this week, we launched with several influencers, journalists, bloggers and clients as well. I think the collection has been very well accepted. As Paula is showing she's our model here today. It's -- and very winter, but they're selling even with these high temperatures we've been experiencing the last few days. We also have a good composition with appealing prices. More so than last year, better products, more peeling prices, adjusted inventory. So I would say regardless of what the temperature will be like we have a very positive expectation for the performance of fall and winter.

Unidentified Analyst: Very clear. Thank you.

Carla Sffair: Thank you, Pedro. So with this, we conclude our conference call. Fabio, Daniel Paula, do you have any closing comments?

Fabio Faccio: I would just like to thank everyone for joining us and apologize for going beyond our allotted time but it was important. It's also the yearly results. So we thank your interest for our company. We're here to answer any additional questions and reiterate that. We're leaving a transformation cycle and going into a harvest cycle. We have very good expectations for the future. And we're going to work hard to deliver everything we promised. Thank you very much. Have a great week.