Digital Expansion And Franchise Growth Will Drive Long Term Upside Potential

Catalysts

About Veste Estilo

Veste Estilo is a Brazilian fashion and lifestyle group that operates multi brand retail, digital and wholesale channels focused on premium apparel.

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

• Scaling of the new VTEX based digital platform and brand apps, including the upcoming Le Lis app, should lift higher margin digital B2C sales, supporting faster revenue growth and incremental operating leverage in earnings.
• Expansion of the franchise model, especially for Dudalina with a pipeline of 30 stores and 15 already operating, enables asset light growth into new cities and should increase systemwide sales while protecting net margins through lower capital intensity.
• Three consecutive quarters of double digit B2B growth, supported by improved assortments and competitive pricing, position wholesale as a structural growth pillar, broadening distribution and stabilizing revenue and EBITDA through the cycle.
• Disciplined inventory reduction and healthier stock coverage, alongside a higher mix of full price sales at 84 percent of B2C, point to a structurally more efficient supply chain that should sustain gross margin quality and enhance cash generation.
• Ongoing store modernization and new concept openings in key malls, combined with a growing and increasingly engaged customer base, should raise productivity per square meter and support higher revenue density and EBITDA margins over time.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Veste Estilo's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.7% today to 18.1% in 3 years time.
• Analysts expect earnings to reach R$264.9 million (and earnings per share of R$2.32) by about December 2028, up from R$20.2 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 10.0x on those 2028 earnings, down from 23.2x today. This future PE is greater than the current PE for the BR Luxury industry at 6.5x.
• Analysts expect the number of shares outstanding to grow by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 24.03%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Fashion and retail cycles are highly sensitive to macroeconomic slowdowns in Brazil, so any deterioration in consumer confidence or discretionary spending could quickly erode same store sales growth and put pressure on revenue and EBITDA.
• The strategy depends heavily on scaling digital channels and brand apps. If customer adoption of the new VTEX platform or future Le Lis app underperforms expectations, the mix shift toward higher margin digital B2C may stall and limit margin expansion and earnings growth.
• Franchise led expansion, particularly for Dudalina, introduces execution and partner quality risk over the long term. Underperforming franchisees or slower than expected maturing of new stores could dilute brand equity and compress systemwide net margins.
• The improvement in profitability is partly tied to recent inventory normalization and a high share of full price sales. Any need to rebuild inventory or resort to heavier discounting in a weaker demand environment would hurt gross margin quality and net profit.
• Leverage remains meaningful with net debt at 6.9 times accumulated adjusted EBIT. If interest rates stay elevated or earnings growth slows, refinancing or servicing this debt could constrain investment capacity and weigh on bottom line earnings.

Valuation

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

• The analysts have a consensus price target of R$12.0 for Veste Estilo based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be R$1.5 billion, earnings will come to R$264.9 million, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 24.0%.
  
• Given the current share price of R$4.1, the analyst price target of R$12.0 is 65.8% 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.