Operational Efficiencies And Global Expansion Will Strengthen Hering And Farm Brands By 2025

Key Takeaways

• Strategic brand recovery and international expansion for Hering and Farm suggest potential revenue growth and market strength in Brazil and globally.
  
• Operational efficiency and restructuring efforts hint at improved net margins and bottom-line growth through cost reductions and streamlined processes.
  
• Integration complexities, declining sales, high leverage, inventory issues, and brand optimization challenges threaten Azzas 2154's margins, net income, and future growth.

Catalysts

Designs, develops, manufactures, markets, and sells shoes, handbags, clothing, and accessories for women and men.

• The strategic turnaround and growth initiatives for the Hering brand, including recovering franchisee trust and achieving strong same-store sales growth, suggest potential revenue increases as the brand regains market strength, particularly in Brazil.
  
• Expansion plans for the Farm brand in international markets, such as the U.S. and Europe, with new store openings and increased e-commerce activity, indicate a potential upward trajectory for revenue growth in the global apparel sector.
  
• Focus on efficiency and simplification in budgeting and operations, aiming to improve margins and cash conversion, indicates potential improvements in net margins and a stronger bottom line in 2025, bolstered by streamlined operations across various brands.
  
• The restructuring of back-office functions, including the creation of a shared services center, will likely result in cost reductions and efficiency gains, leading to improved net margins and earnings through operational synergies.
  
• Strategic efforts to optimize the men’s apparel business, target price adjustments, and improve multi-brand channel management are expected to enhance both top-line and bottom-line growth, particularly through better inventory management and increased market penetration.

Azzas 2154 Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Azzas 2154's revenue will grow by 30.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.3% today to 7.7% in 3 years time.
• Analysts expect earnings to reach R$1.1 billion (and earnings per share of R$5.79) by about February 2028, up from R$530.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting R$1.4 billion in earnings, and the most bearish expecting R$877 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.6x on those 2028 earnings, up from 13.2x today. This future PE is greater than the current PE for the BR Luxury industry at 8.3x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 20.81%, as per the Simply Wall St company report.

Azzas 2154 Future Earnings Per Share Growth

Risks

• The integration process of merging Arezzo, Soma, and AR&Co has led to significant costs and inefficiencies, affecting the company's operating expenses and net margins.
  
• The company's gross margins were pressured by a decrease in sales at the Schutz brand and challenges related to product positioning, which could impact overall earnings.
  
• The high leverage resulting in increased financial expenses poses a risk to net income and cash flow, particularly due to higher interest payments and provisions for income tax.
  
• Inventory management issues, especially in men's apparel, could lead to excess stock, requiring markdowns that strain gross margins and cash flow.
  
• The strategic decisions around brand portfolio optimization and the potential closure or rationalization of certain brands may risk reducing future revenue growth if not managed carefully.

Valuation

• The analysts have a consensus price target of R$52.667 for Azzas 2154 based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$72.0, and the most bearish reporting a price target of just R$42.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$14.2 billion, earnings will come to R$1.1 billion, and it would be trading on a PE ratio of 21.6x, assuming you use a discount rate of 20.8%.
  
• Given the current share price of R$33.87, the analyst price target of R$52.67 is 35.7% 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.