Rising Cost Pressures And Fierce Global Rivalry Will Erode Margins

Key Takeaways

• Intensifying competition and changing consumer habits threaten Magazine Luiza's pricing power, revenue growth, and long-term profitability.
  
• Economic pressures and risks in financial offerings could constrain investment capacity and increase credit losses, limiting growth and squeezing margins.
  
• Marketplace expansion, fintech integration, and logistics investments position the company for platform-based growth, operational efficiency, and greater resilience amid accelerating Brazilian e-commerce trends.

Catalysts

Engages in the retail sale of consumer goods.

• The rise of global e-commerce competitors and new entrants-such as AliExpress and TikTok Shop-are likely to accelerate pricing pressure, drive higher customer acquisition costs, and erode Magazine Luiza's gross margins and long-term market share, undermining the sustainability of revenue growth.
  
• Persistent high interest rates and an environment of rising funding costs may constrain both consumer spending and Magazine Luiza's ability to finance crucial logistics, technology, and fulfillment investments, which will directly weigh on net margin expansion and capex efficiency.
  
• Growing income inequality and stalled growth of the Brazilian middle class threaten to limit expansion of Magazine Luiza's core addressable market in home goods and electronics, stalling topline growth and disproportionately impacting earnings from mass-market consumers.
  
• The push to expand Magalu's consumer finance offerings significantly increases risk of deteriorating credit portfolio quality and higher default rates-in an economic downturn, this will lead to elevated loan loss provisions and sharply reduce consolidated net profits.
  
• Intensifying price-based competition from digital-first retailers and shifting consumer behavior toward direct-to-consumer channels will make it increasingly difficult for Magazine Luiza's omnichannel model to maintain historical revenue per user, causing margin compression and decelerating long-term EPS growth.

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 3.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.1% today to 2.0% in 3 years time.
• The bearish analysts expect earnings to reach R$853.2 million (and earnings per share of R$1.03) by about July 2028, up from R$433.6 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 10.8x on those 2028 earnings, down from 11.9x today. This future PE is greater than the current PE for the BR Multiline Retail industry at 5.3x.
• 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 26.23%, as per the Simply Wall St company report.

Magazine Luiza Future Earnings Per Share Growth

Risks

• Expanding integration and monetization of financial services such as Luizacred, Magalu Pay, and consortium products, especially through low-penetrated digital channels, could drive a structural increase in service-related revenue and recurring income, supporting long-term growth in both revenue and net margins.
  
• Consistent investment in logistics infrastructure, omnichannel capabilities, and fulfillment operations-including store pickup and multichannel reverse logistics-positions the company to improve delivery times, boost customer loyalty, and gain market share, which can positively impact revenue and operational efficiency over time.
  
• Robust marketplace expansion, strategic partnerships with major players like AliExpress, and a strong pipeline for Magalu Ads suggest a transition toward a higher-margin, platform-based revenue model, which could help diversify income streams and improve gross margins.
  
• Solid financial discipline with demonstrated improvement in working capital, increased net cash position, and successful long-term funding (including IFC financing) provide resilience and enable ongoing investment in technology and strategic initiatives, supporting sustained earnings and reducing risk of liquidity crunches or dilution.
  
• Continued demographic tailwinds, growing smartphone and internet adoption, and formalization of Brazilian retail favor digital transformation and secular e-commerce expansion, which directly enlarge Magazine Luiza's addressable market and potentially sustain increases in both sales and net income over the long term.

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$42.7 billion, earnings will come to R$853.2 million, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 26.2%.
  
• Given the current share price of R$6.98, the bearish analyst price target of R$6.2 is 12.6% 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.