Ongoing Store Expansion In Mato Grosso Do Sul And Paraná Will Broaden Market Presence

Key Takeaways

• Strong same-store sales growth and expansion in key regions indicate potential for revenue and market presence improvement.
  
• Conservative credit strategies enhance financial stability, while tax credits improve cash flow and net margins.
  
• Geographic volatility and external challenges threaten sales growth and profitability, with potential negative impacts on margins without favorable past conditions repeating.

Catalysts

Engages in the general retail trade activities in Brazil.

• The company is seeing a stabilization and growth in same-store sales, with a 14% increase in retail sales, indicating potential for continued revenue growth as market conditions improve across all regions.
  
• The conservative approach to credit and collection has resulted in improved delinquency rates and a 15% growth in the credit portfolio, suggesting future stability in financial health and potential growth in earnings from financial services.
  
• Ongoing store expansion, with the addition of new stores in key regions like Mato Grosso do Sul and Paraná, points to increased market presence and potential for revenue growth as the retail footprint expands.
  
• Improved margins in retail, with a notable increase to 22.9%, combined with controlled operating expenses, indicate potential for better net margins and higher future profitability due to operational leverage.
  
• The use of PIS and COFINS tax credits, expected to turn into cash, presents an opportunity for improved cash flow and financial flexibility, potentially increasing net margins by reducing tax liabilities.

Lojas Quero-Quero Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lojas Quero-Quero's revenue will grow by 12.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.1% today to 2.8% in 3 years time.
• Analysts expect earnings to reach R$104.7 million (and earnings per share of R$0.47) by about February 2028, up from R$54.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.0x on those 2028 earnings, up from 8.1x today. This future PE is greater than the current PE for the BR Specialty Retail industry at 8.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 26.12%, as per the Simply Wall St company report.

Lojas Quero-Quero Future Earnings Per Share Growth

Risks

• The lingering effects of the deflation experienced earlier in the year, combined with a previous slight drop in volumes, may impact the stability and growth of future same-store sales and overall revenue.
  
• Higher dependency on localized factors, such as the recovery from floods in specific regions, may create geographic volatility in sales growth, potentially impacting overall earnings predictability.
  
• A close-to-zero adjusted net profit indicates that external factors or unforeseen expenses could quickly tip the balance into negative earnings territory, undermining profitability.
  
• A 47.1% margin in financial services, although in line with last year, shows deterioration from a previous 54.2% one-time margin, suggesting potential impacts on profit margins if past favorable conditions don't repeat.
  
• Although no immediate pressure from price wars is noted, regional and market-specific challenges, especially in agriculture-dependent areas like Mato Grosso do Sul, could affect inventory turnover and revenue growth negatively.

Valuation

• The analysts have a consensus price target of R$4.27 for Lojas Quero-Quero 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$6.2, and the most bearish reporting a price target of just R$2.75.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$3.7 billion, earnings will come to R$104.7 million, and it would be trading on a PE ratio of 16.0x, assuming you use a discount rate of 26.1%.
  
• Given the current share price of R$2.25, the analyst price target of R$4.27 is 47.3% 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.