Fintech Rivalry And Inflation Will Hamper Operations Yet Offer Promise

Key Takeaways

• Strategic store expansion and digital initiatives drive growth, but are hindered by cautious openings, supply chain pressures, and competition from fintechs and omnichannel rivals.
  
• Margins and future profitability are challenged by inflation, high interest rates, and rising promotional activity, threatening resilience if consumer demand softens.
  
• Increased digital competition, high interest rates, and reliance on in-store credit threaten revenue growth, margins, and customer loyalty as the company expands within interior Brazil.

Catalysts

Engages in the general retail trade activities in Brazil.

• While Lojas Quero-Quero continues to see strong store expansion in underserved cities and benefits from urbanization and a growing middle class in Brazil, further acceleration is constrained by the company's cautious approach to new openings amid high interest rates, limiting near-term revenue and market share gains.
  
• Although greater adoption of consumer credit and increasing use of Quero-Quero's private-label card have driven growth in the credit portfolio and higher average transaction sizes, rising competition from alternative fintech lenders and neobanks threatens to erode this advantage, potentially reducing future net margin contributions from financial services.
  
• While the company has participated in Brazil's broader transition toward digital retail-evidenced by digital sales making up 26% of revenue-there remains a persistent risk that more nimble or better-capitalized omnichannel competitors could gain share faster, leading to slower long-term revenue growth and pressure on gross profit.
  
• Though the trend of home improvement and DIY culture in Brazil should support category growth, Lojas Quero-Quero is vulnerable to supply chain pressures and inflationary cost increases, particularly in a higher Selic rate environment, risking gross margin compression if costs cannot be passed onto consumers.
  
• Even as internal operating discipline and credit controls have maintained manageable default rates, any long-term weakening of consumer purchasing power-exacerbated by inflation or prolonged high interest rates-could dampen same-store sales and strain earnings resilience, especially as promotional activity reduces margins in weaker quarters.

Lojas Quero-Quero Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Lojas Quero-Quero compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Lojas Quero-Quero's revenue will grow by 10.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -3.1% today to 4.5% in 3 years time.
• The bearish analysts expect earnings to reach R$165.7 million (and earnings per share of R$0.86) by about July 2028, up from R$-84.9 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 8.3x on those 2028 earnings, up from -6.0x today. This future PE is lower than the current PE for the BR Specialty Retail industry at 13.1x.
• Analysts expect the number of shares outstanding to grow by 6.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 26.52%, as per the Simply Wall St company report.

Lojas Quero-Quero Future Earnings Per Share Growth

Risks

• Increasing internet penetration and the ongoing shift toward digital commerce in Brazil pose a threat to Lojas Quero-Quero's store-based model, especially in smaller cities where online competitors may increasingly capture market share, which could limit future revenue growth and pressure operating margins.
  
• The company's strong reliance on in-store credit solutions and its VerdeCard faces a long-term risk from growing adoption of alternative fintech lending and neobank offerings, which may reduce customer loyalty and transaction volume, reducing earnings and undermining a key profitability engine.
  
• Persistent high interest rates and inflation in Brazil, highlighted by management's repeated focus on the Selic rate's impact, elevate the cost of both customer credit and company debt-this dynamic could further suppress consumer discretionary spending and lead to lower average ticket sizes, negatively impacting revenues and net margins.
  
• Lojas Quero-Quero's concentrated focus on geographic expansion within Brazil's interior regions increases exposure to the risk of rising competition from larger, well-capitalized national and global players expanding into these underserved markets, potentially driving down pricing power and reducing gross profits.
  
• The company's hesitation to accelerate expansion outside traditional strongholds, as well as its measured approach to new store openings due to capital constraints, could allow digital-first integrated marketplaces and direct-to-consumer manufacturer channels to gain customer relationships, siphoning both traffic and sales volume and thereby lowering long-term revenue and earnings growth.

Valuation

• The assumed bearish price target for Lojas Quero-Quero is R$2.75, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Lojas Quero-Quero'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$6.2, and the most bearish reporting a price target of just R$2.75.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be R$3.7 billion, earnings will come to R$165.7 million, and it would be trading on a PE ratio of 8.3x, assuming you use a discount rate of 26.5%.
  
• Given the current share price of R$2.48, the bearish analyst price target of R$2.75 is 9.8% 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.