Partnering With Alibaba Will Increase Online Sales Volume In Future

Key Takeaways

• Magalu's ecosystem consolidation and strategic acquisitions aim to diversify revenue streams, reduce volatility, and positively impact future margins and earnings.
  
• Expansion in multichannel systems and strategic partnerships are expected to improve service efficiency and revenue growth through enhanced customer satisfaction and sales conversions.
  
• Intense competition and macroeconomic risks, including high interest rates and economic dependencies, threaten profitability, market share, and revenue growth amidst operational challenges.

Catalysts

Engages in the retail sale of consumer goods.

• Magalu's strategic shift towards consolidating its ecosystem involves multiple acquisitions in logistics, fintech, technology, and content, which are expected to diversify revenue streams and reduce cyclical volatility, positively impacting future net margins and earnings.
  
• The expansion of Magalu's fulfillment network, integrating multichannel systems and enhancing delivery efficiency, is expected to reduce costs and improve service NPS, potentially increasing revenue and net margins through higher customer satisfaction and sales conversion rates.
  
• The strategic partnership with Alibaba aims to integrate a vast catalog of low-ticket items into Magalu’s digital platform, potentially increasing online sales volume and complementing high-ticket sales, thereby enhancing overall revenue growth.
  
• Magalog, the newly created logistics company, leverages Magalu's cost control and service efficiency to generate new income streams by servicing external clients, which could transform a cost center into a revenue generator, positively impacting earnings over time.
  
• The growth of Magalu Ads as a substantial portion of GMV aims to improve profitability through higher-margin ad revenue, contributing positively to Magalu's overall earnings and reducing earnings volatility by monetizing its significant customer base and ecosystem traffic.

Magazine Luiza Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Magazine Luiza's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.0% today to 1.9% in 3 years time.
• Analysts expect earnings to reach R$850.7 million (and earnings per share of R$1.5) by about February 2028, up from R$366.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.2x on those 2028 earnings, up from 14.8x today. This future PE is greater than the current PE for the BR Multiline Retail industry at 6.0x.
• Analysts expect the number of shares outstanding to grow by 0.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 23.93%, as per the Simply Wall St company report.

Magazine Luiza Future Earnings Per Share Growth

Risks

• The high Selic rate presents a macroeconomic risk, potentially increasing financial expenses and impacting net margins and earnings.
  
• The company's ongoing need to integrate multiple recent acquisitions could strain operational efficiency and delay achieving targeted cost savings, affecting profitability and net income.
  
• Intense competition within both durable goods and lower price e-commerce markets, including players like Alibaba with AliExpress, could pressure Magalu's market share and revenue growth.
  
• Dependence on the macroeconomic environment, like GDP growth and employment levels, suggests vulnerability to economic downturns, which could affect sales and overall revenue.
  
• Expanding financial products into online platforms may introduce credit risks, which can affect future earnings if default rates increase amid economic challenges.

Valuation

• The analysts have a consensus price target of R$10.323 for Magazine Luiza 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$15.0, and the most bearish reporting a price target of just R$6.6.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$45.1 billion, earnings will come to R$850.7 million, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 23.9%.
  
• Given the current share price of R$7.38, the analyst price target of R$10.32 is 28.5% 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.