Grupo Soma desires to look once more at acquisitions in 2023, after revenue of R$ 130 million
Company had an expansion of more than 40% in revenue and Ebitda increased by more than 90%
After a strong second quarter in revenue, margin and profit, the Sum Group (SOMA3) wants to put potential acquisitions on the radar again. “As of the second half of 2023, we already want to have an active M&A agenda [fusões e aquisições]. We’re getting relatively comfortable with everything we’re seeing Hering. The strategy is already outlined and we are at the moment of execution. We know where we want to go and we will get there.” Roberto Jatahyin an exclusive interview with EXAM IN.
The executive is at the head of the fashion platform that brings together the brands farm, Global Farm, Fable, animal, Cris Barros, foxton, NV, Maria Filo and Off Premium, in addition to Hering, after the acquisition for R$ 5.1 billion last year. Yesterday, the company’s shares rose by almost 7% on the stock market, taking the company to a market value close to R$10 billion.
The reason for this look at the already more appetizing future is the performance that the business, as a whole, has been achieving. The company showed a consolidated net income of R$130.8 million, an expansion of 114%, in the annual comparison with pro-forma numbers (which put Hering within the performance of 2021). These amounts are adjusted for non-recurring events.
The most interesting thing about the last line is that it was obtained with business performance, without extraordinary items. Total gross revenue advanced 41.5% to R$1.376 billion — same-store sales grew 35.2% year-on-year. It is worth remembering that the second quarter of last year already had much of the economy reopened. All brands showed revenue and margin growth. The smallest expansion was by Animale, with 30.2% and the biggest, was Foxton, with a high of 75%. Farm Global’s revenue nearly doubled.
Consolidated gross margin expanded slightly from 59% to 59.3%, despite inflationary pressures and challenges in the production chain. “Here, it is interesting to note that we grew margin, in the combined with Hering, not only in relation to 2021, but in relation to 2019. Compared to the pre-pandemic, it is 5 points [percentuais] margin gain”, highlights CFO Gabriel Lobo. “This gain even comes with Hering, which is recovering margin and has already arrived very close to 2019. The trend is that over the next few quarters it will continue to grow. In the first quarter, the margin was low, but in line with what we expected. Now it is closer to what we believe to be normality and we will scale that over time. And in Grupo Soma, all brands grew revenue and margin, with an increase in turnover at full price. We ended the quarter with a gross margin of over 70%”, he adds.
O EBITDA The adjusted consolidated balance (which excludes the compensation packages developed with a long-term focus) rose by more than 90%, to R$ 210.5 million between April and June. This is the operational leverage effect that Lobo repeatedly explains about the group’s rationale. Austere expense management makes gross profit gains leverage the rest of the balance sheet. “When you see an Animale with same-store expansion of 30%, that increase practically flows all the way to the bottom line of the balance sheet.” And this logic applies to all brands.
Wolf says that the margins of the second quarter were not a point outside the course. They are sustained, according to him, in the full-price turnover of the brands and in the collection assertiveness apparatus, which is now mirrored in all brands. “Our collection risk today is very mitigated,” he says.
The company has also been benefiting from what Jatahy calls the “organic consolidation” of the fashion sector, as many players emerged from the pandemic with their financial situation deteriorated, which makes expansion difficult. “It is very clear to us that our play is to gain market share.”
As the company contracted debt to pay for the acquisition of Hering, it comes from a scenario in which it had financial income for an expense of R$33.5 million. Even so, profitability in the latter increased, with operating leverage plus a tax credit in lieu of payment.
Plans and concerns for 2023
“The big concern we have is next year. What’s been going on for the last two years, I’ve never seen in my professional life. The year 2021 was already exceptional growth over 2019. And now in 2022 too. And how do we budget 2023 with everything we read in the newspaper?”, asks Jatahy.
“We started to believe that there will be growth, but more moderate. Not because of a slowdown, but because the comparatives are starting to get very high”, ponders the CEO of the group.
The company’s doubts are related to the difficulty of knowing how much of the growth comes from gaining market share and how much comes from a transitory consumption peak in the industry. But Jatahy believes that, through the signs of multi-brand channels, there is a conquest of market share. “We are budgeting the company with relative optimism. But without much visibility of this shorter-term future,” he says. “But this is a good difficult: how much we are going to grow.”
The risk that the company wants to avoid is to prepare for a very strong expansion and it doesn’t happen. As this is a long cycle industry, it would amount to a collection error. In practice, inventories would increase and the company’s leverage would also increase, because the sector demands a lot of working capital. Hence, the decision to maintain some conservatism.
“Our focus is on cash generation. We don’t want to grow at any cost. We are not going to put the company at risk, in a very high interest rate scenario. cash is king [o caixa é reai] is the mantra more than ever”, reinforces Lobo. “The idea is to spend this period with greater tranquility to arrive in 2024 prepared. The challenge here is visibility.” Obvious conclusion: in 2022 and 2023, the group’s effort is deleveraging, despite having healthy indicators in this photograph. At the end of June, net debt stood at R$716 million, equivalent to 1.2 times the 12-month Ebitda.
opening of stores
For Hering, the store opening plans and regional expansion will not change. The company intends to work hard on the multi-brand channel and also sees opportunities for franchising in the North and Northeast of Brazil for the brand. “But the biggest growth lever is the perceived value of the brand. And that comes a lot from the megastores. We should end the year with 25 megastores. In this way, we are able to present a much more didactic Hering to the consumer, with a much better experience”, explains Jatahy. The next big store to be opened, in the next few weeks, is in Recife (PE).
In the case of Grupo Soma, the main source of sales expansion comes from the “same stores” concept, that is, the existing units are growing at high rates. At this point, this rise is so great that the CEO believes there is little value in opening a large number of stores.
The company’s objective is to understand how the expansion, from now on, will be balanced, because there was a very strong expansion of digital during the pandemic and now, in a pendulum movement, there is a very intense return of physical stores. “We are also not aggressive in opening stores because we think the price per square meter in the mall is expensive, affected by this pendular movement of physical retail.” In his opinion, there will be a rebalance, yet to be found, between digital and physical sales. The numbers explain: when the gross revenue is opened, what you see is that sales in physical stores almost double, with a high of more than 95%, while online sales retreated 4.5%.
“A very small brand, even considering our current size, would end up being underprivileged within our portfolio. Our sweet spot is to think of businesses with revenue around R$300 million, which we can take to R$700 million, R$1 billion”, explains Jatahy.
However, this is not an easy challenge, as it is rare to find brands in Brazil – the focus of potential acquisitions – that have this size. The fashion sector in the country is extremely fragmented. But the group wants to be on alert and ready to find the next NV, which today has the largest contribution margin of the group, in percentage terms.
This acquisition agenda, however, will only enter the execution phase when the company achieves better interest rate visibility in the country. “We don’t like working with debt”, emphasizes the CEO. “We will not take unnecessary risks”, adds the CFO. “This year, we will generate cash even when growth, which demands effort from the company, and this is the same perspective for next year”, says Lobo.