Premium Brand Momentum And Global Expansion Will Drive Stronger Long-Term Margins

Catalysts

About Alpargatas

Alpargatas is a global footwear company best known for its Havaianas brand, with growing operations across Brazil and key international markets.

What are the underlying business or industry changes driving this perspective?

• Scaling premium brand momentum worldwide, supported by Havaianas being named the most desired fashion item globally and top of mind in major markets, is cited as a driver of pricing power that could support structural revenue growth and higher gross margins.
• Ongoing turnaround in Europe, with volumes reported back to growth, OTIF service levels near 80% and a strategy to extend the selling season beyond summer, is described as positioning the region to regain scale and potentially lift international EBITDA margins and earnings.
• The shift to an asset lighter, distributor led model in the U.S. via Eastman Group, combined with existing brand awareness, is framed as a way to accelerate door expansion while reducing fixed costs, which management expects to improve the region’s contribution to consolidated EBITDA.
• Continued mix upgrade toward more premium products and faster growing Kids and Men’s portfolios, alongside disciplined channel and discount management, is presented as support for top line growth and structurally higher gross profit per pair and net margins.
• Ongoing operational simplification, automation and in house shared services, together with a reported 17% fixed expense reduction versus 2022 and ten consecutive quarters of positive cash generation, is described as strengthening balance sheet flexibility and supporting future earnings growth and returns on capital.

Assumptions

This narrative explores a more optimistic perspective on Alpargatas compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Alpargatas's revenue will grow by 8.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 8.4% today to 17.1% in 3 years time.
• The bullish analysts expect earnings to reach R$970.9 million (and earnings per share of R$1.63) by about December 2028, up from R$373.8 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as R$672.3 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 20.4x on those 2028 earnings, down from 22.0x today. This future PE is greater than the current PE for the BR Luxury industry at 6.6x.
• The bullish analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 21.38%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The Brazilian flip-flop market appears mature, with management targeting share gains mainly via specialized channels and Kids and Men’s portfolios. If category growth stagnates or consumers shift toward alternative footwear, volumes in Brazil could remain structurally below 2021 levels and limit revenue growth and operating leverage, ultimately capping earnings expansion in the long run.
• International operations, particularly in Europe, are heavily dependent on a short summer season. Any prolonged macro weakness, adverse weather patterns, or fashion shifts that shorten or soften peak demand could prevent the region from regaining sufficient scale, keeping fixed costs under-absorbed and depressing international EBITDA margins and consolidated earnings over time.
• The new distributor led model in the U.S. relies on Eastman Group’s execution to turn strong brand awareness into broader distribution. If partners prioritize other brands, discount too aggressively, or fail to secure prime shelf space in a fragmented and promotion heavy market, Havaianas could underperform its potential, restraining revenue growth and leaving the U.S. contribution to consolidated EBITDA and net margins below expectations.
• Alpargatas’ margin recovery has been driven by stringent cost control, operational simplification, and favorable commodity and foreign exchange conditions. A sustained reversal in raw material prices, adverse currency moves, or the need to step up structural marketing investment to defend brand positioning could erode gross margin and push EBITDA margin down from current record levels, negatively affecting earnings and returns on capital.
• The strategy increasingly focuses on premiumization and disciplined pricing instead of volume expansion. In a low growth, highly competitive market where luxury and other fashion brands are expanding into flip-flops, consumer trading down or heightened competitive discounting could force Alpargatas to compromise on price or mix, pressuring average revenue per pair and compressing gross margin and net margins over the long term.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Alpargatas is R$16.28, which represents up to two standard deviations above the consensus price target of R$13.0. This valuation is based on what can be assumed as the expectations of Alpargatas's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$17.0, and the most bearish reporting a price target of just R$11.5.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be R$5.7 billion, earnings will come to R$970.9 million, and it would be trading on a PE ratio of 20.4x, assuming you use a discount rate of 21.4%.
  
• Given the current share price of R$12.15, the analyst price target of R$16.28 is 25.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.