Retail And E-commerce Developments May Mitigate Future Financial Services Risks

Key Takeaways

• Falabella's growth in retail and e-commerce bolsters revenue expectations, while banking improvements enhance earnings through better risk management.
  
• Strategic cost containment and reduced leverage improve financial stability, supporting future earnings growth and operational efficiency.
  
• Challenges in maintaining financial services growth, revenue volatility in Colombia, and reliance on e-commerce highlight potential threats to Falabella's long-term revenue and margin stability.

Catalysts

Engages in the retail sale of clothing, accessories, home products, electronics, and beauty and other products in Chile, Peru, Colombia, Brazil, Mexico, Uruguay, and Argentina.

• Falabella is experiencing sequential revenue growth across its retail operations, with consolidated revenue growth reaching 7%, highlighting improvements in the company's physical and digital ecosystems. This is likely to support revenue growth.
  
• The e-commerce segment, particularly in 1P and 3P channels, has shown significant growth, with e-commerce sales in home improvement rising by 20% and overall growth of 21% among their sellers, contributing to increased revenue expectations.
  
• Falabella's banking operations are seeing improved risk management and credit behavior, resulting in a lower non-performing loan ratio and a decrease in the cost of risk. These improvements are expected to positively impact net margins and earnings in their financial services segment.
  
• The company has implemented SG&A cost containment measures, successfully reducing the SG&A to revenue ratio. This operational efficiency is likely to lead to improved net margins.
  
• Falabella has achieved EBITDA growth and improved its cash position, reducing leverage to its lowest level since Q2 2022, which enhances financial stability and could support future earnings growth through potential reinvestments or debt reduction strategies.

Falabella Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Falabella's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.8% today to 4.9% in 3 years time.
• Analysts expect earnings to reach CLP 663.2 billion (and earnings per share of CLP 284.51) by about December 2027, up from CLP 331.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CLP 741.6 billion in earnings, and the most bearish expecting CLP 448.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.6x on those 2027 earnings, down from 26.6x today. This future PE is lower than the current PE for the CL Multiline Retail industry at 19.5x.
• Analysts expect the number of shares outstanding to decline by 2.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.51%, as per the Simply Wall St company report.

Falabella Future Earnings Per Share Growth

Risks

• The contraction in Falabella's consolidated loan book, despite improved risk levels, indicates potential challenges in maintaining growth in its financial services segment, which could impact future interest income and net margins.
  
• Colombia's revenue was negatively affected by a nonrecurring event, suggesting potential vulnerabilities in revenue stability in that market, which could influence overall revenue growth projections.
  
• The dependency on events like Cyber Day for e-commerce growth highlights potential volatility in online revenue streams, impacting the predictability of both revenue and net margins.
  
• Store closures in Falabella Retail, despite high same-store sales, could indicate underlying issues in capturing market share, potentially impacting long-term revenue growth.
  
• With a significant portion of debt tied to real estate operations, any downturn in this sector could increase leverage pressures and affect earnings, given that these operations contribute to a substantial part of Falabella's debt structure.

Valuation

• The analysts have a consensus price target of CLP 3118.89 for Falabella 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 CLP 4100.0, and the most bearish reporting a price target of just CLP 2300.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CLP 13465.5 billion, earnings will come to CLP 663.2 billion, and it would be trading on a PE ratio of 15.6x, assuming you use a discount rate of 12.5%.
• Given the current share price of CLP 3517.0, the analyst's price target of CLP 3118.89 is 12.8% 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.