Investments In Healthcare And AI Will Drive Future Operational Efficiencies And Profitability

Key Takeaways

• Focused investment in organic growth and digital channels aims to expand market share and boost long-term revenue through increased pharmacy footprint and online sales.
  
• Strategic healthcare and AI investments could lead to new revenue streams and efficiencies, while customer loyalty initiatives drive repeat sales and profitability.
  
• Challenges in digital sales growth, mature store base, softening retail performance, margin pressures, and managing expenses could impact future revenue and profitability.

Catalysts

Engages in the retail sale of medicines, perfumery, personal care and beauty products, cosmetics, dermocosmetics, and specialty medicines in Brazil.

• Raia Drogasil's focus on organic growth provides a strong opportunity to increase market share and profitability by expanding their pharmacy footprint in existing and new cities, potentially impacting long-term revenue growth positively.
  
• The company is leveraging its digital channels with a 41.7% rise in digital operations, a strategic move accommodating consumer shifts to online shopping which could bolster revenue, especially given the 75% penetration of digital orders through their proprietary app.
  
• The prioritization of customer experience, through a 20% digital penetration and a high Net Promoter Score (NPS) of 91, suggests a strategy likely designed to maintain customer loyalty and drive repeat sales, impacting future revenue positively.
  
• Raia Drogasil is emphasizing healthcare and AI investments as strategic growth pillars, which could lead to new revenue streams and operational efficiencies, thereby potentially improving net margins.
  
• The company’s strategic plan includes improving selling efficiencies and reducing G&A costs while enhancing profitability, expected to contribute to more robust earnings growth and better financial management.

Raia Drogasil Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Raia Drogasil's revenue will grow by 13.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.1% today to 3.5% in 3 years time.
• Analysts expect earnings to reach R$2.0 billion (and earnings per share of R$1.16) by about March 2028, up from R$1.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting R$2.2 billion in earnings, and the most bearish expecting R$1.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.6x on those 2028 earnings, up from 28.1x today. This future PE is greater than the current PE for the BR Consumer Retailing industry at 12.7x.
• Analysts expect the number of shares outstanding to decline by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.96%, as per the Simply Wall St company report.

Raia Drogasil Future Earnings Per Share Growth

Risks

• The company's strong growth in digital sales channel penetration might not sustain, as overall retail growth in digital for the industry faces challenges post-pandemic, which could impact future revenue growth.
  
• A significant proportion of RD Saude’s growth was driven by new store openings and market share gains, but a mature store base still remains, which might slow future revenue growth if not managed well.
  
• Recent softening of retail performance, particularly in the fourth quarter and in categories like cosmetics due to factors such as weaker Beack Friday sales and poor weather impacting sunscreen sales, poses a risk to consistent revenue and earnings growth.
  
• The company faces ongoing margin pressures, with factors such as changes in PIS/COFINS tax regimens on gross profit, and mix effects from higher medication sales vs. HPC products, which could lead to lower net margins.
  
• There is significant pressure to manage selling and general expenses, with expected adjustments and restructuring needed, potentially impacting future profitability if not appropriately balanced with growth ambitions.

Valuation

• The analysts have a consensus price target of R$25.173 for Raia Drogasil 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$33.0, and the most bearish reporting a price target of just R$17.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$57.0 billion, earnings will come to R$2.0 billion, and it would be trading on a PE ratio of 34.6x, assuming you use a discount rate of 17.0%.
• Given the current share price of R$19.64, the analyst price target of R$25.17 is 22.0% 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.