Investor sees turnaround in retail stocks with Selic cut – 05/16/2023 – Market

With the perspective that the Central Bank starts the Selic low cycle from August, investors have already started to signal that they see an improvement in retail. From the beginning of May until the trading session on Friday (12), of the 20 shares that rose the most among those that make up the Ibovespa, 6 are retailers, according to a survey by TradeMap.

It is a turning point, because in the accumulated result for this year, only Magazine Luiza and Petz represented the retailers among the biggest rises on the Brazilian Stock Exchange. Magalu’s share is in first place in the ranking, with an appreciation of more than 57% since the beginning of the year.

The relative optimism of investors coincides with the forecasts of analysts heard by the Sheet and point to a different scenario from that revealed by the companies’ financial statements at the beginning of this year.

Despite the particularities of each segment, retailers in general have been affected by the high level of the basic interest rate, show the balance sheets for the first quarter of this year already released by companies in the sector.

Financial expenses, pressured by high interest rates, undermined the profitability of even those that achieved robust operating results, with strong revenue growth, and those that are more resilient to high inflation —such as retailers that serve public profiles with greater purchasing power .

An example is Arezzo, which registered record revenues from January to March this year, with R$ 1.3 billion in gross revenue, an increase of 23.4% compared to the same period of the previous year.

The net margin, however, which measures the ratio of net income and company revenues, had a timid advance, of 0.2 percentage points, impacted by the increase in financial expenses. Arezzo saw an increase of 273% in its debt from last year to this year.

The Soma group, owner of the Hering, Farm and Animale brands, also recorded record revenue in the first quarter, with gross revenue, that is, the total value of cash inflow from sales, of R$ 1.4 billion. But the company saw its net margin retreat 0.4 percentage points compared to January to March 2022, in line with the worsening in its financial result.

Investment analyst Bruno Mazzoni sees a better scenario for this financial impact in the second half. “Operating profit may not improve much in the short term, because from the second quarter to the third seasonally it is bad, there is no very important date. But the financial result, yes, should improve”, he says.

Danniela Eiger, who heads the team of retail analysts at XP Investimentos, endorses the idea that companies in the segment must still face a weaker consumption environment in the second quarter. “In the teleconferences of the results of the companies this has appeared”, she says.

The drop in interest rates is what should bring relief from the second half onwards because, in addition to contributing positively to retailers’ debt, it should also help on the side of customers who are in default.

Renner, for example, reported an increase of 6.2 percentage points in the volume of overdue loans in its total loan portfolio from the first quarter of 2022 to the same period of this year, due to the high default scenario.

Another factor that should positively affect the financial situation of retailers, according to Mazzoni, is the federal government’s debt renegotiation program, Desenrola.

EXPANSIONS AND CLOSINGS OF STORES

Retail sector analyst at Genial Investimentos, Vinícius Esteves observes that companies that in the last two years took advantage of lower interest rates to make expansions ended up registering an increase in their expenses, both operational and financial, due to acquisitions. This is the case of Assaí and Pague Menos.

“Even the food and medicine segment being more resilient to the drop in consumption, the performance of these companies was not enough to offset the expenses arising from these acquisitions”, says Esteves.

On the opposite side, companies that started the process of closing stores in recent months —such as Camicado, a subsidiary of Renner—, had a drop in revenue, and the containment of costs with these closures has not yet appeared in their balance sheets. An improvement in these companies’ expenses, therefore, should come in the coming quarters.

The reduction in the expansion and investments of these companies, therefore, should be crucial for an improvement in the retailers’ balance sheets, according to Iago Souza, who is also a retail analyst at Genial.

Another point that is in the focus of companies in the sector is the optimization of inventory turnover, so that the goods are stopped for as little time as possible.

AMERICAN EFFECT

Analysts point out that companies that are highly leveraged, that is, with a net debt/operating profit ratio of more than three times, will face a more complicated situation in the next quarter.

These retailers will have to seek to raise money on the market, such as issuing debentures or seeking a bank loan, in a scenario of difficulty in obtaining credit after the crisis in Americanas and still high interest rates.

Few companies are also willing to bite into the gap left by Americanas in the convenience store market, after the scandal involving the retailer. “Nobody wants the Americanas market”, says Esteves.

The analyst explains that the relationship between the cost of capital and the profitability of the convenience store segment does not encourage retailers to enter this segment.

“This is a highly promotional market, linked to discount coupons, to some specific methodologies. When we put all this into the account, we notice a high cost of capital, of almost 14% a year”, says Esteves. “Companies will not want to put their resources in an environment that is unlikely to bring an attractive return”, he adds.