Amazon And Alibaba Will Drive Cost Pressures And Erode Margins

Key Takeaways

• Intensifying competition from global e-commerce giants and high digital marketing costs are pressuring Magazine Luiza's market share, margins, and earnings growth.
  
• Ongoing reliance on promotions, rising capital expenditures, and expansion into financial services are stressing profitability, cash flow, and increasing long-term credit risk.
  
• Strong cost discipline, ecosystem diversification, and expanding high-margin services position Magazine Luiza for resilient growth and earnings improvement amid evolving macroeconomic and consumer conditions.

Catalysts

Engages in the retail sale of consumer goods.

• Foreign e-commerce giants such as Amazon and Alibaba are accelerating their push into Brazil, which will significantly increase price competition and compress Magazine Luiza's market share and pricing power over time, leading to prolonged revenue stagnation despite the company's efforts to position itself as a leading multichannel retailer.
  
• The ongoing surge in digital advertising and customer acquisition costs in Brazil means that as more consumers move online, Magazine Luiza will face sharply rising expenditures just to maintain its customer base; this sustained increase in digital marketing costs will erode operating margins and limit future earnings growth, especially as the company remains committed to disciplined margins rather than aggressive expansion.
  
• Despite investments in logistics and technology, Magazine Luiza's continued dependence on high promotions and aggressive discounting to drive revenue growth is likely to further compress gross margins and undermine profitability, particularly as the company resists price wars that could be triggered by an influx of low-cost global competitors.
  
• Expansion into new financial services and the deepening of MagaluPay may exacerbate credit risk, especially in a persistently high-interest-rate environment or if the Brazilian credit cycle turns adverse; any uptick in consumer delinquencies could materially impact net income and threaten the viability of new recurring revenue streams.
  
• Heavy ongoing capital expenditures for logistics, technology, and omnichannel integration could outpace Magazine Luiza's topline growth, causing persistent negative free cash flow and increasing leverage over the long term, with the potential for return on invested capital to deteriorate as sector-wide profitability declines under mounting competitive pressure.

Magazine Luiza Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Magazine Luiza compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Magazine Luiza's revenue will grow by 3.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.0% today to 1.9% in 3 years time.
• The bearish analysts expect earnings to reach R$828.0 million (and earnings per share of R$0.72) by about August 2028, up from R$385.6 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 11.5x on those 2028 earnings, down from 12.7x today. This future PE is greater than the current PE for the BR Multiline Retail industry at 5.2x.
• Analysts expect the number of shares outstanding to grow by 0.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 27.29%, as per the Simply Wall St company report.

Magazine Luiza Future Earnings Per Share Growth

Risks

• Magazine Luiza's disciplined cost control and ability to improve operational margins despite macroeconomic headwinds, such as high inflation and elevated interest rates, point to a strong potential for net margin expansion and resilient earnings over time.
  
• The company's ecosystem strategy-with integrated growth engines across physical stores, first-party (1P), and third-party (3P) online channels-provides diversification and flexibility that can capture revenue growth across market cycles and help offset slowdowns in particular segments.
  
• Expansion of higher-margin revenue streams such as advertising (which is still at a low penetration relative to potential), financial services (including credit, MagaluPay, and consortium products), and logistics services to third parties could significantly improve topline growth and recurring earnings.
  
• Ongoing investment and innovation in logistics (e.g., Magalog's growth into a revenue-generating external client business and omnichannel fulfillment infrastructure) is enhancing Magazine Luiza's delivery speed and customer experience, which drives conversion rates upward and supports revenue as well as market share gains.
  
• The likely future decline of Brazil's Selic interest rate, combined with historically low unemployment and rising consumer benefits, could trigger renewed consumer demand and enable Magazine Luiza to leverage its cost discipline for outsized revenue and earnings growth in a more favorable macroeconomic environment.

Valuation

• The assumed bearish price target for Magazine Luiza is R$6.2, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Magazine Luiza'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$15.0, and the most bearish reporting a price target of just R$6.2.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be R$42.6 billion, earnings will come to R$828.0 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 27.3%.
  
• Given the current share price of R$6.62, the bearish analyst price target of R$6.2 is 6.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.