Advanced AI And Technology Will Improve Future Performance

Key Takeaways

• Completion of investment cycles and technological advancements enhance profitability and boost revenue through improved fashion execution, trend identification, and inventory management.
  
• Store and digital expansion in underpenetrated areas, along with new distribution centers, drive revenue growth, market share gains, and improved e-commerce performance.
  
• Increasing interest rates, exchange rate fluctuations, and macroeconomic challenges in Brazil threaten Lojas Renner's margins, sales growth, and profitability despite hedging and expansion efforts.

Catalysts

Operates as a fashion and lifestyle company in Brazil, Argentina, and Uruguay.

• Completion of a significant investment cycle has expanded competitive advantages, sped up growth, and improved profitability in a sustainable manner; this is expected to continue enhancing revenue and profitability.
  
• Advanced use of technology, data, and AI to improve fashion execution, trend identification, and inventory management is likely to boost revenue by increasing sales and minimizing markdowns.
  
• New distribution center operations and digital integration are expected to reduce lead times, lower costs, and improve the sales performance of e-commerce, potentially increasing gross margin.
  
• Store and digital expansion in underpenetrated areas, combined with the opening of more stores, especially in new locations, is anticipated to drive revenue growth and market share gains.
  
• Operating leverage and expense control, especially given the expected healthy sales growth above market average, should enhance net margins and inherently improve earnings.

Lojas Renner Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lojas Renner's revenue will grow by 7.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.3% today to 10.0% in 3 years time.
• Analysts expect earnings to reach R$1.8 billion (and earnings per share of R$1.65) 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$2.0 billion in earnings, and the most bearish expecting R$1.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.0x on those 2028 earnings, up from 10.3x today. This future PE is greater than the current PE for the BR Specialty Retail industry at 8.6x.
• 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 20.06%, as per the Simply Wall St company report.

Lojas Renner Future Earnings Per Share Growth

Risks

• The impact of increasing interest rates affected the company's gross margin negatively, which is expected to continue affecting the first half of 2025 due to adjustments in the present value of sales, impacting net margins and earnings.
  
• The exchange rate fluctuations have increased costs, putting pressure on the gross margin; while some hedging is in place, the FX rate adjustments still pose a risk to revenue stability and operating margins.
  
• Challenges in the macroeconomic environment in Brazil, including consumption pressure, could pose risks to the company's sales growth forecast, as the external conditions remain unpredictable, potentially affecting revenue and profitability.
  
• The mention of new central bank regulations impacting Realize might initially bring positive effects but could also introduce uncertainties in revenue from financial operations, affecting overall earnings.
  
• Continued investment in store expansions, particularly into unpenetrated areas, while potentially benefiting long-term growth, could initially impact short-term cash flow and profitability if these new locations do not meet performance expectations promptly.

Valuation

• The analysts have a consensus price target of R$16.678 for Lojas Renner 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$21.0, and the most bearish reporting a price target of just R$13.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$17.9 billion, earnings will come to R$1.8 billion, and it would be trading on a PE ratio of 17.0x, assuming you use a discount rate of 20.1%.
  
• Given the current share price of R$11.7, the analyst price target of R$16.68 is 29.8% 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.