Omnichannel Expansion And Margin Improvements Are Expected To Drive Long Term Performance

Catalysts

About Almacenes Éxito

Almacenes Éxito operates a multi format retail and services ecosystem focused on food, nonfood, real estate and financial services across Colombia and select Latin American markets.

What are the underlying business or industry changes driving this perspective?

• Acceleration of omnichannel adoption in Colombia and Uruguay, supported by rapid growth in express delivery and digital channels, may expand the revenue base while improving operating leverage as online sales deepen to a higher share of total revenue.
• Ongoing store renovation and banner unification around Exito and Carulla, combined with a 30 percent larger assortment and experiential formats, may consolidate market share in full grocery shopping and support same store sales and gross margin resilience.
• Disciplined cost and efficiency programs in Colombia and Uruguay, including structural expense reductions and logistics optimization, are positioning the group to translate moderate top line growth into EBITDA and net margin expansion.
• Scaling of complementary businesses such as Viva Malls, Tuya financial services and Puntos Colombia loyalty can increase traffic monetization and fee based income, which may diversify earnings streams and smooth overall group profitability through cycles.
• Improved local equity market liquidity, potential future index inclusion and a balance sheet with low net debt to EBITDA may create room for reinvestment in new stores and selective international expansion, supporting medium term earnings and potential valuation re rating.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Almacenes Éxito's revenue will grow by 4.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.4% today to 2.7% in 3 years time.
• Analysts expect earnings to reach COP 668.7 billion (and earnings per share of COP 447.1) by about December 2028, up from COP 529.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting COP813.2 billion in earnings, and the most bearish expecting COP522.0 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 15.9x on those 2028 earnings, up from 11.3x today. This future PE is greater than the current PE for the CO Consumer Retailing industry at 11.3x.
• 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 17.56%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The current acceleration in omnichannel adoption, with online and express channels already representing close to 14 percent of Colombian revenue and growing more than 60 percent in Uruguay, may sustain higher structural growth than expected and drive ongoing market share gains. This would push revenue and earnings above a flat share price scenario.
• Structural margin expansion initiatives, including a reduction of more than 200 basis points in the expense ratio, stable or rising gross margins and recurring EBITDA margins above 8 percent in Colombia and nearly 12 to 13 percent in Uruguay, suggest a multi year profitability re rating that could justify a higher valuation multiple and rising net margins.
• The combination of a stronger balance sheet, with net debt to EBITDA near 0.9 times, growing cash flow and a renewed store expansion plan into under penetrated Colombian municipalities, indicates the business may enter a new investment cycle. This could accelerate long term earnings growth and lead to a sustained increase in the share price.
• Improving equity market liquidity following the delisting of ADRs and BDRs, the free float rising from 2.6 percent to 13.2 percent and the potential for future index inclusion create secular tailwinds for demand for the stock. This may compress the discount rate applied by investors and lift the valuation and earnings multiple over time.
• The scaling of high margin complementary businesses, such as Viva Malls with EBITDA margins near 78 percent, Tuya financial services shifting from losses to positive income and the growth of Puntos Colombia loyalty, may structurally diversify and upgrade the profit mix. This would support higher consolidated EBITDA and net income growth than implied by a flat share price outlook.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of COP5050.0 for Almacenes Éxito 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 COP5750.0, and the most bearish reporting a price target of just COP3900.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be COP24973.6 billion, earnings will come to COP668.7 billion, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 17.6%.
  
• Given the current share price of COP4595.0, the analyst price target of COP5050.0 is 9.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.