Digital Expansion And Operational Efficiency Will Strengthen Future Retail Performance

Key Takeaways

• Lojas Renner's strategic investment in infrastructure and improved efficiency efforts are creating a foundation for increased profitability and revenue growth.
  
• Enhanced customer experience and data-driven operations are expected to strengthen customer retention and positively impact revenue and profit margins.
  
• Economic and competitive challenges, including market conditions, currency fluctuations, and emerging rivals, threaten Lojas Renner’s margins, earnings, and long-term growth potential.

Catalysts

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

• Lojas Renner has completed a significant investment cycle in infrastructure, positioning it for growth in profitability and sales, which is expected to drive revenue and enhance operational efficiencies moving forward.
  
• The company has streamlined its operations and increased efficiency with omnichannel capabilities and improved inventory management, which should improve net margins and free cash flow generation.
  
• Enhanced customer experience through digital expansion, the evolution of store checkouts, and a higher Net Promoter Score (NPS) point to stronger customer retention and increased transaction numbers, potentially boosting revenue and earnings.
  
• The integration of SKU systems and data-driven decision-making has improved the supply chain's responsiveness, allowing for quicker fulfillment that aligns supply with consumer demand, expected to positively impact revenue growth and inventory turnover.
  
• The Realize financial operation is becoming a significant loyalty tool, enhancing the precision of credit offerings, reducing delinquency rates, and potentially increasing consumer spending, contributing to higher sales and profit margins.

Lojas Renner Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lojas Renner's revenue will grow by 7.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.8% today to 10.8% in 3 years time.
• Analysts expect earnings to reach R$1.9 billion (and earnings per share of R$2.13) by about February 2028, up from R$1.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.5x on those 2028 earnings, up from 12.3x 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 grow by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.04%, as per the Simply Wall St company report.

Lojas Renner Future Earnings Per Share Growth

Risks

• The company's reliance on achieving operational efficiencies and cost reductions to balance its competitive pricing could face challenges if market conditions change, impacting net margins.
  
• The possibility of currency fluctuations, such as dollar volatility, could pressure profit margins and affect earnings as the company navigates pricing dynamics.
  
• The expansion strategy and opening of new stores will require significant capital allocation; if not executed well, it may affect the return on invested capital and free cash flow.
  
• Economic uncertainties and high consumer debt levels may impact credit expansion strategies through Realize, potentially affecting future revenue from financial services and customer loyalty functionalities.
  
• Though currently experiencing robust growth, future competition, particularly from cross-border and digital-only retailers, poses a threat to revenue and market share, which could limit long-term earnings potential.

Valuation

• The analysts have a consensus price target of R$18.896 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$22.73, and the most bearish reporting a price target of just R$15.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$17.6 billion, earnings will come to R$1.9 billion, and it would be trading on a PE ratio of 19.5x, assuming you use a discount rate of 19.0%.
  
• Given the current share price of R$13.11, the analyst price target of R$18.9 is 30.6% 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.