Cenomi Retail, Saudi Arabia’s pioneering retail brand partner, has made a significant turnaround in the third quarter (Q3) posting a net profit of SR19 million ($5.06 million) compared to a huge net loss of SR203 million in Q3 2023.
For the first nine months (9M) of 2024 Ceneomi made a net loss of SR48 million, compared to a loss of SR89 million in 9M-23.
However, the company achieved solid margins, with gross margin improving to 10.6% from 7.5% in Q3-23. This was supported by wide-ranging cost rationalisation initiatives and continued progress on the brands divestment programme announced earlier this year, in addition to the growth of Tier 1 Champion brands in the portfolio.
Sale of non-core brands
During the quarter, an additional 5 non-core brands: Charles & Keith, Estee Lauder, Nine West, Pedro and Call it Spring were sold, resulting in a capital gain of SR47 million. Brand sales completed in 9M resulted in a capital gain of SR212 million, which is being redeployed to strengthen the balance sheet.
Salim Fakhouri, Chief Executive Officer, commented: “Cenomi Retail has achieved an important milestone this quarter by reporting a solid improvement in net profit to reach SR19 million. We have continued to enhance customer experience through store renovations, store openings and strategic retail price positioning, constituting a mix of discounts to sell the highest amount at the lowest selling price possible for the end of season collection while maintaining full selling price for new season collection, which enabled us to achieve a higher gross profit margin of 10.6 % in Q3-24 versus 7.5 % in Q3-23, despite a low demand season.
“In the Kingdom of Saudi Arabia, we continued to cater to the taste of our domestic consumers by providing the latest trends in fashion designs and attracting more footfall. As a result, we successfully achieved an improvement in like-for-like (LFL) sales in the Kingdom of 6.6% YoY for Zara & Inditex, which was supported by our proactive sales strategies as well as effective inventory management.
“We are glad to have achieved an inventory shrinkage percentage averaging 0.93% of revenues, compared to the global benchmark that ranges from 1.38% to 1.62%. We have indeed demonstrated our ability to innovate and tailor our offerings to match the changing preferences of our customers and through such key measures, we expect further improvement in our domestic retail operations in the near future.
Strong sales momentum
“Internationally, we have continued to witness a strong sales momentum, with key markets in the CIS region contributing to a solid performance during the period. We are strategically expanding our operations in select global markets such as Azerbaijan, Georgia, Armenia and Uzbekistan. We are continuing to target prime locations and navigating the economic environment by repositioning our brands, offering attractive discounts and providing the right products that are exclusively customised for each country.
“We are applying a cost optimisation strategy across the 9 countries, in which SG&A decreased in Q3-24 by 19.3% versus Q3-23. The total headcount has been reduced by 22.7% in parallel to the brands divestment programme, leading to a decrease in the total employment cost by 8.1 % in Q3-24 versus Q3-23.
“Looking ahead, we will continue to further reinforce our financial position, with a continued focus on deleveraging the balance sheet and optimising our operational expenses, and with the steady progress on our brand rationalisation programme, we are establishing the necessary foundation to enable us to unlock long-term sustainable value for our shareholders.”
Revenue analysis
Cenomi Retail reported consolidated revenues of SR1.2 billion in Q3-24, increasing 9.0% YoY, and SR3.7 billion in 9M-24, marginally declining by 1.5% YoY, due to the continued progress on the brands divestment programme.
Despite this, the company achieved a turnaround in profitability in Q3 with enhanced profit margins when compared to Q3-23. This is supported by an improvement in performance within the Kingdom, and the sustained growth in the international portfolio, which increased 30.9% YoY in Q3-24.
Saudi retail revenues reached SR709 million in Q3-24, increasing 3.6% YoY and for 9M-24, revenues amounted to SR2.5 billion, decreasing 6.9% YoY. The performance during the quarter was supported by the adoption of strategic sales measures during a low demand season, which resulted in a positive impact, especially on Inditex brands such as Zara (+6.6% on a LFL basis).
In line with the portfolio optimisation programme, Cenomi Retail concluded the sale of 24 brands within the kingdom in 9M. Complementing such measures with several current store renovations is expected to further streamline operations and enhance customer experience, thus driving store profitability and the overall performance of the segment going forward.
International retail operations generated revenues of SR380 million in Q3-24, up 30.9% YoY, and SR980 million in 9M-24, up 20.5% YoY. The key driver for this solid performance was the continued strong momentum in Azerbaijan (+22.5% YoY in Q3 and +22.0% YoY in 9M) and Georgia (+48.3% YoY in Q3 and +28.1% YoY in 9M).
Expanding footprint
Leveraging the favourable economic environment in Azerbaijan, supported by the expected growth in sectors such as retail and tourism, and key events such as COP 29, Cenomi Retail is strategically expanding its footprint in the country, with a series of 7 Inditex store openings YTD. It is worth highlighting that Armenia and Georgia are also witnessing a recovery in margins, driven by the adoption of strategic sales measures, and a thriving tourism industry, with a forecast real GDP growth of 6% and 8%, respectively in 2024, according to the IMF.
F&B segment reported revenues of SR81 million in Q3-24, down 18.5% YoY, and SR251 million in 9M-24, down 13.0% YoY, with a net closure of 3 stores in Q3 and 2 stores in 9M. The segment achieved positive margins with EBITDA margin of 7.6% in Q3 and 6.2% in 9M. The company recently set a new world record with the opening of 12 new Subway branches on the same day, in KSA, including a mix of cloud kitchens, traditional and non-traditional restaurants, and will continue to focus on driving the growth of Tier 1 and popular Champion brands.
Online sales came in at SR84 million in Q3-24, a decrease of 5.0% YoY and at SR250 million in 9M-24, a decline of 17.8% YoY. Online sales were temporarily impacted by the brands divestment programme and the current geopolitical situation. The contribution of online revenue (including F&B) to total revenue has decreased from 8.2% to 7.1% in Q3-24, and from 8.1% to 6.7% in 9M-24.
Bottom line analysis
Gross Profit totalled SR124 million in Q3-24, a substantial rise of 54.6% YoY, and SR446 million in 9M-24, a decline of 15% YoY. This translated to an improvement in gross profit margin to 10.6% in Q3-24 from 7.5% in Q3-23 and for 9M-24, margin reached 12.0% compared to 13.9% in 9M-23.
Gross margin increased from 7.5% in Q3-23 to 10.6% in Q3-24, due to a reduction in employee costs, rent expenses and inventory provision, that were partially offset by a relative increase in the cost of revenues and ecommerce as a result of increased sales orders for Zara and Inditex brands.
Gross margin declined to 12.0% in 9M-24 from 13.9% in 9M-23 due to a reduction in employee costs and rent expenses that were partially offset by a relative increase in the cost of revenues and ecommerce as a result of increased sales orders for Zara and Inditex.
Selling, General and Administrative expenses (SG&A) amounted to SR93 million in Q3-24, a 19.3% YoY decline, and SR337 million in 9M-24, an 8.4% YoY decline. This performance is supported by Cenomi Retail’s focus on cost rationalisation and operational efficiencies, in addition to a number of store closures, which is aligned to the company’s portfolio optimisation strategy.
EBITDA turned positive in Q3-24, amounting to SR140 million versus negative EBITDA of SR17 million in Q3-23, and increased 6.1% YoY in 9M-24 to reach SR359 million. EBITDA margin improved from -1.6% to 12.0% in Q3-24 and increased from 9.0% to 9.7% in 9M, which was driven by the improvement in the operational performance during the period, and the company’s continued focus on cost optimisation.
Turnaround in net profit was achieved, amounting to SR19 million in Q3-24, compared to a net loss of SR203 million in Q3-23, supported by a 31.5% YoY decline in finance charges and a gain of SR0.5 million from discontinued operations (vs a loss of SR31 million).
Net Debt declined 23.7% YTD, amounting to SR1.7 billion, as the company remains committed to fulfilling debt obligations, to reinforce its financial position through deleveraging. Meanwhile, finance charges decreased 7.3% YoY in 9M-24, to reach SR236 million.
Key highlight in the Balance Sheet
Non-current assets: Other investments increased by 51.5%. from SR74 million as of 31 December 2023 to SR112 million.
Equity attributable to the shareholders of the company: Fair value reserves increased by 151.5% from SR42 million to SR106 million, which has positively impacted the total comprehensive income, leading to an improvement from a net loss of SR208 million in Q3-23 to a net gain of SR100 million, and an increase of 28.8% from SR77 million in Q2-24 to SR100 million in Q3-24.
This change is attributable to the revaluation of the company’s current investment in Egyptian Centers for Real Estate (ECRED) resulting from the merger of its projects in Egypt, which is recorded under Fair Value Through Other Comprehensive Income in accordance with IFRS 9.
Operational highlights
Cenomi Retail closed 102 retail stores in Q3-24, bringing the total to 516 store closures for 9M-24, with KSA retail accounting for 95 of the store closures in Q3 and 481 in 9M. In line with the brand rationalisation programme, the number of retail stores in the Kingdom at the end of the period stood at 357. In F&B, 8 outlets were opened in Q3-24, and 11 were closed. For 9M-24, 17 outlets were opened and 19 were closed.
In total, Cenomi Retail opened 13 stores in Q3-24 and closed 113, for a net closure of 100. Of these closures, 41 stores were the result of natural business attrition, while 72 stores were linked to the sale of brands.
For 9M-24, store openings amounted to 49, with 535 closures, for a net closure of 486 stores. 139 stores were closed as a result of natural business attrition, while 396 stores were linked to the sale of brands.
Brand sales completed in 9M-24 resulted in a capital gain of SR212 million.
EGM results
During the recent Extraordinary General Assembly Meeting that was held on October 21, Cenomi Retail’s shareholders approved the recommendation of the Board of Directors regarding the company’s continuation with the portfolio optimisation programme, for the sale of non-core brands. Furthermore, the company’s shareholders have authorised the Board of Directors to take any other necessary actions to address the issue of accumulated losses.
Medium-term outlook
The execution of the strategy will see Cenomi Retail transition from Phase 1, which was focused on the portfolio optimisation programme (“Fix the House”) towards Phase 2 (“Embark on Growth”) from 2026. Phase 2 will see investments to scale existing brands across several markets, identify white space opportunities and secure new franchises in key markets.
The Kingdom of Saudi Arabia
The number of stores to be renovated in Q4-24 for Zara & Inditex are 4 stores at an estimated net capex of SR25 million mainly by contribution of landlord support. These stores are in prime locations and high footfall malls, and we are leveraging the upcoming white Friday and salary pay days sales period.
Fashion: Zara at Nakheel Mall will be expanded from 2,960 sqm to 3,450 sqm. Nakheel Mall is one of the key prime locations in Riyadh as it generates around 8% to 10% of total Zara revenues, and it is expected to be opened by the beginning of December 2024, and to produce an estimated increase of 37.7% revenue in 2025.
F&B: 12 Subway stores were opened in October 2024 and additional new stores are expected to be opened in December 2024, amounting to an increase in the total number of owned Subway stores of 50 stores, which are expected to generate an estimated increase of 500% in subway revenues in 2025.
Online sales: new ecommerce channels through Trendyol will be opened in Q4-24 and Q1-25 for Tier 1 Champion brands, which will be contributing to higher online sales in 2025. Trendyol witness on average 2.1 million daily active user and an average of 25 thousand orders on a daily basis.
International Markets: In Cresent Mall in Azerbaijan, the total number of Zara and Inditex stores are 7 and the most recent Zara store was opened in October 2024, which is expected to contribute to an increase in revenues by 20% for the country.
•Total Debt that has been paid to date in 2024 is SR636 million.
•The successful OPEX optimisation programme and other restructuring plans are now expected to result in more than SR70 million in annualised savings.
Solid steps continue to be taken towards the portfolio optimisation strategy
During Q1-24
•Cenomi Retail finalised the sale of 16 brands (franchise rights) to Al Othaim Fashion Company, with a capital gain of SR35 million.
•Signed a variation agreement to the share purchase agreement previously signed with Al Othaim Fashion Company to add five additional brands to the sale.
During Q2-24
•Sales proceeds from Aldo, Aldo Accessories and La Vie en Rose (franchise rights) were received, with a capital gain of SR131 million.
During Q3-24:
•Charles & Keith, Pedro, Estee Lauder and Nine West were sold to Apparel Group and Call it Spring was sold to Al Othaim Fashion Company, resulting in estimated sales proceeds of SR47 million plus inventory, covering 72 stores in Saudi Arabia.
During Q4-24
•An additional 5 non-core brands are planned to be sold.
•As per year end audit requirements (IFRS standards), goodwill and other assets will be assessed independently and potentially impaired.--TradeArabia News Service
