Magalu (MGLU3) and Casas Bahia (BHIA3): Stock collapse in 2023 does not favor market that supports retail beliefs

Is the stock market really retail? With a year-to-date fall of nearly 80% for the sector’s big names – with Casas Bahia ( BHIA3 ) falling in the spotlight – analysts and managers are wondering if there’s even room for profit in bets on what are considered “cheap” stocks. ”, with some of them costing pennies, or if taking a position in the asset would simply fall into a “value trap” (or value trap, when a stock or market looks discounted but is actually undervalued simply because it is a bad trade).

It should be noted that among the main losses are mainly shares of companies focused on electronic commerce and with a large share of white goods in their portfolio.

In addition to the assets being the highlight of the year, with BHIA3 down almost 80% and Luiza magazine (MGLU3) down around 50% for the year, the assets of these two companies – and of course Americanas (AMER3) , are in legal recovery – analysts and managers are the least aware of investment opportunities, which highlights what is still a very difficult scenario for companies.

Specifically for Magalu: from November 5, 2020, when MGLU3 reached an impressive R$ 27.40 (earnings adjusted value), to the previous day’s close, when it closed at R$ 1.44, the asset fell by strange 94 . 74%, according to data from consultant Einar River,

This fall even exceeds the fall recorded between 2011 and 2015, when Magalu shares fell by 93.52%. That is, until they rebounded after December 14, 2015 and achieved impressive gains of 91,736% in less than five years. It should be remembered that in 2020 the share was strongly driven by the demand for e-commerce products at the beginning of the Covid-19 pandemic with restrictions on mobility, but then began to fall sharply in the stock market with less hot demand, the entry of competitors and pressure on margins.

By the way, profitability is an object of attention for the company. XP expects a mixed result for Magalu in the third quarter, with weak revenue and margin improvement but no market excitement.

Bradesco BBI also emphasizes that the main key performance indicators (KPIs) should continue to be profit and profitability (BBI estimates an Ebitda margin of 5.5%).

According to the bank, specifically for e-commerce, local players are still under pressure from gross revenue to net profit. “Times remain tough for durable goods, so we expect the overall sales trends of 1H23 to continue into 3Q23,” he noted.

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As for Magalu, the bank also expects a modest sequential improvement in earnings before interest, taxes, depreciation and amortization (EBITDA) and losses, but the company should still feel strong pressure from the numbers in the statement of financial position.

As for the Casas Bahia Group, BBI believes that the results are among the most difficult, as this is the first effective quarter under new management and a major restructuring is underway. As such, the bank notes that it will monitor the speed and effectiveness of the transformation plan, with key KPIs being inventory levels (planned to sell R$1 billion between Q3 and Q4) and normalization of profitability timelines. The level of cash receipts/burns in the coming quarters is also fundamental.

Macro scenario: How will it affect retailers?

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The current weak numbers expected in 3Q23 confuse the resilience of the Brazilian economy until then, which has led many analysts to question this factor, initially important for the sector’s operations and shares.

BTG Pactual notes that in the first half of the year, inflation in Brazil eased, GDP surprised positively, employment increased and interest rates began to fall.

But the latest results and forecasts from retailers show new signs that consumer spending in Brazil is under pressure, looking ahead to the second half of the year, in a scenario that is still difficult for consumers, with high interest rates, debt and defaults, and which should remain in the short term.

Given this, the bank’s analysts note that the third quarter should present a weaker-than-expected sectoral trend compared to expectations a few months ago.

“Retailers have also been rattled in recent months by a temporary measure regulating the taxation of tax relief and withdrawing JCP tax relief, which has caused a lot of noise in the sector, exacerbating weakening short-term fundamentals. The macro environment continues to be responsible for most of the credit impact and is a true indicator of consumer health, supporting our cautious approach,” the bank emphasizes.

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Meanwhile, Itaú BBA is also being studied, underlining that the fundamentals supporting GDP recently are not directly related to retail trade, but mainly to the agricultural sector.

BBA analysts still don’t see much improvement in consumption, even with inflation under control, unemployment at historic lows since 2015 and a cycle of lower interest rates. This is precisely because of household debt, a factor that makes it difficult for BBA to recover consumption.

For them, a downward revision to 2024 earnings estimates remains a risk, given the weak momentum they expect from 3Q23 results overall. “Since January 2023, we have reduced the sector’s profit forecast for 2024 by almost 50%,” they say.

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BBA believes the sector is down from historical levels and that Brazil remains an attractive option for foreign investors compared to other emerging market markets, with the attractiveness bolstered by its exposure to improving macroeconomic trends.

However, the bank also believes that it is difficult to argue that the entire Brazilian retail sector is “beneficial” from a foreign investor’s point of view, such as when analyzing the current opportunity cost in the US. “Given the substantial increase in the 10-year US Treasury yield, coupled with a massive downward revision to final retail sales forecasts next year, we conclude that the current spread does not suggest that the sector as a whole is cheap,” — he notes.

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A similar sentiment can be conveyed to local investors, as noted by Itaú BBA itself in a previous report, as well as by XP in recent conversations with institutional investors.

“Despite the recent selloff in the sector, most investors we spoke to remain weight deficit (with low exposure) in retail. The main concern is the possibility of negative revisions, given the still fragile short-term outlook,” highlighted the BBA mid-month report.

XP, listening to more than 80 institutional investors, including only managers (74%) and hedge funds (23%), highlighted that 80% of them have a neutral or negative attitude towards the sector (against 36% in the last survey, in June) resulting in easier positioning as i) about 56% are either neutral or under-indexed in terms of positioning; and ii) only 35% have recently increased their exposure to the sector, while 30% have decreased it.

When asked what would lead funds to increase their exposure to the sector, improving company results (52%) was chosen as the top driver, followed by greater visibility on tax discussions (20%) and macro dynamics (8%).

In addition, the dynamics of short-term results have surpassed the valuation factor and are now the main event for adding a retail company to a portfolio, followed by comfort regarding long-term strategy and execution risks.

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XP analysts emphasize that the macro scenario remains the main risk for the sector (35%), despite a smaller magnitude compared to the previous survey (45%). “However, it is interesting to highlight that concerns about earnings revisions have increased significantly over the past few months, now being mentioned by 26% of investors and coming in second place, up from 1% in our last survey, while the tax debate follows in third places”, evaluate.

For XP, despite the caution in the sector, some factors could contribute to better results in the fourth quarter.

They are:

i) Warming weather due to the El Niño phenomenon, which may have contributed to clothing sales during this period (a factor that initially caused controversy, as Citi noted that the impact could be negative, which could lead to SSS, or even to sales, variable and increased discounts);

ii) More working days compared to last year, which helps to improve sales – in 2022, the end of the year was marked by the presence of many holiday amendments, the World Cup and elections;

iii) Promotion of the Desenrola program, which can alleviate consumer debt;

and iv) the continuation of the process of falling interest rates and slowing inflation in Brazil.

High income is preferred

While many stocks are still in limbo, others in the sector are in the spotlight for investors, as XP points out, with similar names standing out on both the sell and buy sides.

XP highlights that high-income retailers remain the most agreeable investment among institutional investors surveyed by Dom, with 72% of investors in this segment, followed by food retailers (40%) and low-income retailers (38%).

Vivara (VIVA3, 45%), Mercado Livre (MELI34, 30%) and Arezzo (ARZZ3, 29%) are among the institutional favourites, while Lojas Renner (LREN3, 24%) and Smart Fit (SMFT3, 24%) also they got a good rating.

Grupo Soma ( SOMA3 ) is the most closely followed entry point name, followed surprisingly by VIVA3 (24%) and SMFT3 (24%), which were also named as the names with the most conviction in the sector, XP highlights.

XP analysts, in turn, retained Vivara, Assaí (ASAI3) and Grupo Mateus (GMAT3) as their favorites in a recent sector review, while they noted that they were keeping an eye on SmartFit due to its growth profile and see Lojas Renner and Grupo Soma with asymmetric assessments, with possible actions aimed at recovery in the macro scenario.

Itaú BBA, in turn, noted that it likes Vivara, Mercado Livre, Smartfit and Lojas Renner. “We believe the first three names offer a vision of a positive trend in operating results combined with a long-term narrative of consolidation in their respective
markets,” he estimates. Like XP, the bank also recommends Renner as a stock with an asymmetric valuation, in which many downsides are priced in and most of the growth potential is left out.

For BTG, the preferred mix is ​​companies with stronger dynamics, Mercado Livre, Smart Fit, Raia Drogasil (RADL3) and Arezzo (ARZZ3), which provide less scope for negative earnings revisions.

Among the managers surveyed by BBA, Vivara attracted the most interest from the perspective that the company offers solid fundamentals in both the short and long term, while Smart Fit was a name that gained strength during the year due to an accelerated expansion in the consecutive margin of the last quarters. “Overall, investors expect capital liquidity to continue to improve and appear to be waiting for better entry points to increase their exposure to the name,” BBA says of SMFT3.

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