Alpargatas, the Brazilian parent of the Havaianas, Rothy’s and Ioasys brands, said underlying signs in its 2023 fourth-quarter results confirm significant improvements in fundamental variables for the company’s “recovery.” 

In recent quarters, Alpargatas said it had tried to clarify to its investors the main issues it would focus on in 2024.

“Thus, particularly from the second quarter onwards, we had to adopt strong measures to contain the increasing leverage that the company was experiencing,” the company said in its fourth quarter presentation. “This increase was due not only to the considerable cash burn which, until April, totaled more than R$1.2 billion over 12 consecutive months but also due to the considerable reduction in EBITDA.”

The company said that by focusing on resuming cash generation, it suspended non-essential investments of around R$110 million and drastically reduced its production and purchase of raw materials to accelerate the inventory reduction process, freeing up around R$418 million in working capital since the second quarter.

“We cut expenses, mainly those that are part of the Zero-Based Budgeting (ZBB) packages, ending the fourth quarter with an approximate decrease of 13 percent of these same expense packages in relation to the average monthly level for the first quarter of the year,” the company wrote.

“With this, we managed to reverse the already long and persistent cash consumption trajectory and started freeing up cash consistently since May, which continued throughout 4Q23. We accumulated a little more than R$500 million in cash between May and December. We ended the year with a Net Debt/EBITDA leverage level of 2.6x, which, although above the company’s historical level, was far from the scenario we would have had if the adjustments described above had not been implemented,” the report continued.

“It is easy to estimate in a simple calculation that the non-implementation of said three combined measures could have led us to a Net Debt/EBITDA leverage level close to 6x,” management said. “Looking back, we understand that focusing much of our attention on this adjustment was essential.”

Turning to the Havaianas business, revenues for the fourth quarter declined 8.7 percent year-over-year (YoY) to R$991.8 million. Brazil, which represents 90 percent of company revenues, dipped 0.2 percent in the quarter to R$895.2 million. International revenues were down 48.9 percent to R$96.6 million in the period.

Average selling price (ASP) per pair was up 2.8 percent in Brazil to R$14.92, while International ASPs declined 2.0 percent to R$27.66 a pair.

Gross margin in the Havaianas brand was down 520 basis points to 35.7 percent of sales, with Brazil posting GM of 38.1 percent and International margins falling 35.5 full points to 13.2 percent of net sales.

EBITDA for the Havaianas business was down 59.5 percent to R$59.5 million, resulting in an EBITDA margin of 6.0 percent of sales in Q4, compared to 13.6 percent in the 2022 fourth quarter. Brazil EBITDA margin was down 150 basis points to 17.9 percent, but the International business cratered on the EBITDA line, posting a R$100.4 million EBITDA loss.

In the fourth quarter, the Havaianas sell-out was slightly positive compared to that reported in Q4 2022.

“We observed a sell-out growth for the flip-flop category above 1 percent,” management wrote in the report. However, according to Nielsen data, Havaianas also reported a loss of market share in the grocery channel, with a 4 percentage point decline for the year and a 3 percentage point decrease in Q4 versus Q4 2022.

Alpargatas reported it sold 63.5 million Havaianas pairs in the quarter and 208.0 million pairs in full-year 2023, with a sales drop of 7.3 percent and 15.7 percent, respectively.

Havaianas Brazil sold 60.0 million pairs in Q4 2023 and 185.1 million pairs in full-year 2023, with 2.9 percent and 13.4 percent declines compared to 2022.

“In 4Q23, we observed very close numbers of pairs in sell-in and sell-out, reflecting the completion of the inventory normalization process,” management noted.

Havaianas International’s volume was 3.5 million pairs sold, accounting for a decrease of 47.8 percent compared to Q4 2022. The drop in International volume was said to be driven by distributor markets, with a decrease of 44 percent YoY, as a result of Southeast Asia distributors’ de-stocking process, and Europe, which continues to report negative results, with a 60 percent drop YoY in the quarter due to operational challenges faced during the season.

The operation in the U.S. recorded a drop of 27.4 percent YoY, driven by the lower volume sold in B2B, mainly to key accounts and off-price channels.

The NA&C region, which includes the U.S., saw sales decline 9.1 percent in constant-currency terms in the fourth quarter to R$19.7 million.

EMEA was down 52.8 percent in constant-currency terms and distributors were down 50.7 percent in constant-currency terms.

Alpargatas reports in the Brazil Real currency R$, which has an exchange rate of roughly R$0.20 to one U.S. dollar. Image courtesy Havaiana