Alpargatas, the owner of Havaianas and Rothy’s footwear brands, reported revenue reached Brazilian real (BR) 902.5 million ($181 mm) in the first quarter, down 2.7 percent from BR$927.2 million a year ago.

The company said an increase in revenue per pair partially offset the double-digit drop in sales volumes in the quarter.

The company’s net loss reached BR199.7 million, including extraordinary items. Normalized EBITDA was BR$66 million, down from BR$175 million in million in 1Q22

Alpargatas’s management comments follow:

“Since 2019, we have made an important strategic shift at Alpargatas by selling brands that were not connected to our strategic pillars, focusing on accelerating the Havaianas brand, and acquiring 49 percent stake of Rothy’s.

“At Havaianas, we expanded our footprint, added new sales channels and new product categories. The various waves of the pandemic throughout 2020 and 2021, despite bringing a complex operational context, ended up also boosting our sales volumes, creating an opportunity for us to move forward and consolidate our business model in a relevant manner.

“The initiatives to expand geographies, channels, and categories, not only opened new growth avenues but also brought new challenges, such as increased complexity in internal processes and organizational structure. This reality is reflected in a more challenging demand planning process, leading to greater complexity in the acquisition and management of raw material inventories, production planning, inventory management of finished goods, and integration with commercial goals.

“We understand that the Company’s priority at the moment is to focus on strengthening internal processes to handle greater operational complexity, seeking better coordination between commercial efforts, our production chain, and supply processes. We expect that better timing should be reflected in higher cost efficiency, and lower capital employed in inventories, as well as meeting the specific demands in our various sales channels and geographies with more precision.

“We consider that this focus on greater cost and capital allocation efficiency and better coordination of our operational planning process are structural and fundamental components to support our growth recovery trend. In this sense, we started structuring a project that aims to integrate our end-to-end operations, synchronizing our commercial areas with the industrial and logistical departments. This project will continue to be a priority in the coming months, with deep involvement of the entire executive team, as well as having a dedicated coordination team.

“Amidst this scenario, our priorities this year are focused on selected growth levers, reducing expenses, and simplifying structures. We are already working on an efficiency agenda aimed at productivity improvements, reducing industrial and logistics expenses, as well as improving our working capital. We are also reducing our SG&A ex-marketing expenses. In addition to the simplification of the EMEA/APAC structure announced in 4Q22, we are implementing rightsizing initiatives in BMU Brazil/Latam structures and corporate areas.

“It is important to note that these measures require maturity time and we hope to begin to see part of the benefits associated during the second half of 2023, with the full efforts completed by 2024.

“Thus, 1Q23 doesn’t reflect the benefits of these initiatives on our earnings yet. Our consolidated performance decrease was -13.4 percent in volumes and -2.7 percent in net revenue vs. 1Q22. Consolidated gross margin was -4.5 p.p. (percentage points) still greatly impacted by the turnover of manufactured products at a higher average cost during the past year, in addition to additional storage costs in Brazil that we expect to reduce throughout the year as our inventory drops and we progress in the Mixing-Center ramp-up. We have already started to notice improvements in the current cost of production, and we expect that this advance will start to be reflected in our earnings during the second half of the year since we still have a high level of finished goods in our inventory. The -11.6 p.p. decrease in the normalized EBITDA margin was due to the drop in the gross margin, but also due to the growth in Marketing expenses in Brazil as well as the increase in consolidated G&A.

“In Brazil, we are still facing a challenging demand scenario. We noticed some marketing initiatives starting to generate a positive impact on the sell-out in the food channel, although this has still not been reflected in the sell-in. Thus, we registered ongoing inventory adjustments for our customers and ended the quarter with a 13.2 percent volume reduction and 1.6 percent growth in revenue. We understand that the necessary measures for route correction are in progress and growth recovery will be gradual.

“In Europe, pre-sale volumes were in line with our expectations, but the migration to the new logistics partner impacted deliveries and billing. During the quarter, we had -8.0 percent in volume and a revenue variation in stable constant currency vs. 1Q22 in EMEA. This reduction does not only reflect the operational issues mentioned but also the strong comparison basis in 1Q22.

“In the US, volume growth during the quarter was driven by off-price channels and e-commerce, which had a strong promotional period in 1Q23. We started the business model transition at Amazon, with a ramp-up expected for the coming quarters. We believe that during the year we will have advances in the execution of the channel segmentation strategy.

“At Rothy’s, the year began with a more challenging demand environment, which will possibly extend into the coming quarters. 1Q23 had -3,0 percent in revenue and, thus, the need for cost adjustments and expense optimization was reinforced to seek EBITDA improvements in the operation. In this sense, Rothy’s had +2.6 p.p. growth in the gross margin during the quarter and the EBITDA, although negative, was US$0.6M better than 1Q22.

“We are aware of the challenges we face, but confident that we are adequately focused on operational process integration initiatives and efficiency and simplification measures. We understand that this agenda is critical to pave the way for future growth cycles and recover value creation for our shareholders.”

Photo courtesy Havaianas