Brazil Retail Will Falter Amid Digital Competition

Key Takeaways

• Growing digital health adoption and demographic shifts threaten store volumes, limiting revenue growth and the effectiveness of physical expansion strategies.
  
• Intensified competition and rising regulatory burdens risk squeezing margins, increasing operational costs, and dampening overall profitability.
  
• Strong execution in prescription drugs, digital sales growth, store productivity improvements, and market share gains position the company for sustained profit expansion and margin resilience.

Catalysts

Operates a chain of pharmacies in Brazil.

• The rapid adoption of telemedicine and online prescription services in Brazil could bypass traditional pharmacy retailers, causing a sustained decline in Empreendimentos Pague Menos' in-store volumes and eroding revenue growth, especially as digital competitors capture more of the ongoing shift in consumer health habits.
  
• A demographic slowdown or further regional aging in key areas of Brazil may limit the long-term expansion of the company's physical footprint, capping addressable market growth and impeding new store productivity, ultimately pressuring top-line revenue over time.
  
• Store network saturation and aggressive expansion-especially after the large-scale integration of Extrafarma-risk leading to diminishing returns per store, cannibalization of sales, and rising operational costs, likely resulting in stagnant same-store sales and tightening net margins.
  
• Consolidation among large pharmacy chains and possible entrance of global or non-traditional players (such as grocery stores or direct-to-consumer online models) will intensify price competition, compress gross margins, and reduce Empreendimentos Pague Menos' pricing power, negatively impacting profitability and long-term earnings.
  
• Escalating regulatory and ESG compliance demands, such as stricter packaging, labor, or emissions standards, could drive up the cost structure for large chains, eroding operating leverage and lowering net earnings despite short-term efficiency gains.

Empreendimentos Pague Menos Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Empreendimentos Pague Menos compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Empreendimentos Pague Menos's revenue will grow by 7.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.4% today to 1.7% in 3 years time.
• The bearish analysts expect earnings to reach R$284.7 million (and earnings per share of R$nan) by about August 2028, up from R$59.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.9x on those 2028 earnings, down from 39.7x today. This future PE is about the same as the current PE for the BR Consumer Retailing industry at 15.9x.
• Analysts expect the number of shares outstanding to grow by 6.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 21.45%, as per the Simply Wall St company report.

Empreendimentos Pague Menos Future Earnings Per Share Growth

Risks

• Structural same-store sales growth above 17% for nine consecutive months, with key drivers being volume increases and successful execution in prescription drugs and weight loss categories, suggests durable revenue expansion potential which could challenge expectations for declining share price.
  
• Enhanced omnichannel and digital strategies have resulted in digital sales rising more than 50% year-on-year, contributing 18.7% of total sales and driving not only incremental customers but also improving margins, indicating the company could realize continued profit growth and expanding EBITDA in the medium to long term.
  
• Ongoing productivity gains, especially in the integration and uplift of Extrafarma stores and the conversion of underperforming stores to millionaire stores, demonstrates clear levers for improvement in sales per store and operating margin, supporting robust net income and return on invested capital.
  
• Secular demand tailwinds, including rising utilization of chronic care and prescription drugs (with over 5% of current sales from GLP-1s and further upside expected from patent expiries and generic launches), position the company to benefit from demographic and health expenditure growth, suggesting resilient top-line and gross profit expansion.
  
• Industry consolidation and market share gains, evidenced by consistent increases in Pague Menos' market share both nationally and regionally (notably in the Northeast), dilution of expenses, and effective debt reprofiling significantly enhance scale advantages and net margin outlook, which could buoy long-term earnings and shareholder returns.

Valuation

• The assumed bearish price target for Empreendimentos Pague Menos is R$3.4, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Empreendimentos Pague Menos's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$5.1, and the most bearish reporting a price target of just R$3.4.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be R$17.2 billion, earnings will come to R$284.7 million, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 21.5%.
  
• Given the current share price of R$3.82, the bearish analyst price target of R$3.4 is 12.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.