Expansion Into Chile And Peru And Club Unimarc Initiatives May Strengthen Operations, But Margin Pressures May Persist

Key Takeaways

• Expansion in Chile and Peru will drive revenue growth as new stores exceed sales and EBITDA projections.
  
• E-commerce growth and customer loyalty initiatives are set to boost revenue and improve customer retention.
  
• Rising operating expenses, changes in sales mix, and significant debt issuance may pressure SMU's profitability and market share if trends persist.

Catalysts

Operates as a food retailer in Chile and Peru.

• SMU's significant expansion with 58 new stores planned in Chile and Peru between 2023 and 2025 is expected to boost revenue, particularly as new stores have already exceeded sales and EBITDA projections.
  
• The strong growth in e-commerce, with online sales increasing by 28% in the third quarter, is anticipated to enhance overall revenue and improve sales penetration.
  
• Initiatives to enhance customer loyalty, such as the new membership levels in Club Unimarc and expanding private label offerings, are likely to increase average spend and customer retention, positively impacting revenue.
  
• Efficiency improvements, including logistics expansion with a new distribution center in Peru and energy efficiency programs, are expected to reduce operational costs, supporting a recovery in net margins.
  
• The anticipation of gross margin recovery through improved commercial efficiency and promotional strategies, coupled with easing inflationary pressures, is projected to enhance both margins and earnings.

SMU Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SMU's revenue will grow by 6.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 2.4% today to 1.3% in 3 years time.
• Analysts expect earnings to reach CLP 43.9 billion (and earnings per share of CLP 7.6) by about February 2028, down from CLP 69.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 40.2x on those 2028 earnings, up from 14.4x today. This future PE is greater than the current PE for the CL Consumer Retailing industry at 32.0x.
• 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 11.27%, as per the Simply Wall St company report.

SMU Future Earnings Per Share Growth

Risks

• The company is experiencing pressure on its gross margins due to changes in sales mix favoring basic products, which could continue to impact profitability and constrain net margins if the trend persists.
  
• Operating expenses are rising due to higher wages and inflation, which could pressure net margins unless offset by increased revenue or improved efficiency.
  
• The company has issued significant debt to address upcoming maturities, which could affect net income through increased interest expenses, especially if the EBITDA remains low.
  
• Same-store sales have underperformed compared to competitors, which could impact revenue if the trend continues and market share is not regained.
  
• Any delays or underperformance in opening new stores or less successful integrations of new technologies and processes could negatively affect revenue growth and earnings projections.

Valuation

• The analysts have a consensus price target of CLP222.5 for SMU 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 CLP240.0, and the most bearish reporting a price target of just CLP190.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CLP3490.2 billion, earnings will come to CLP43.9 billion, and it would be trading on a PE ratio of 40.2x, assuming you use a discount rate of 11.3%.
  
• Given the current share price of CLP174.5, the analyst price target of CLP222.5 is 21.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.