Upcoming Investments May Erode Margins And Affect Profitability

Key Takeaways

• Expansion and investment in new stores may increase operating costs and pressure net margins if revenue growth is insufficient.
  
• Efforts to enhance efficiency and reduce energy costs involve significant upfront investments, potentially impacting short-term earnings and profit margins.
  
• Soriana's energy transition, AI implementation, brand sales growth, store expansion, and Falabella partnership enhance efficiency, margins, and revenue potential.

Catalysts

Operates various formats of stores in Mexico.

• The company's expansion plan and investment in 18 new stores may lead to increased operating costs and pressures on net margins if they do not yield proportionate revenue growth.
  
• Elevated personnel costs due to wage increases and staff additions could compress net margins, potentially affecting earnings growth negatively.
  
• Investment in technology, such as AI and warehouse management systems, while potentially increasing efficiency in the long run, requires significant upfront costs, possibly impacting short-term earnings.
  
• Transition efforts, such as switching from LP gas to natural gas, aim to reduce energy expenses but may initially require substantial capital investment, potentially affecting profit margins.
  
• The ongoing focus on in-house brand development projects to increase margins might not immediately offset broader economic consumption challenges, potentially impacting revenue growth.

Organización Soriana S. A. B. de C. V Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Organización Soriana S. A. B. de C. V's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 2.2% today to 1.9% in 3 years time.
• Analysts expect earnings to reach MX$3.8 billion (and earnings per share of MX$2.12) by about March 2028, down from MX$3.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting MX$4.5 billion in earnings, and the most bearish expecting MX$3.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.5x on those 2028 earnings, up from 13.0x today. This future PE is greater than the current PE for the MX Consumer Retailing industry at 16.1x.
• 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 14.48%, as per the Simply Wall St company report.

Organización Soriana S. A. B. de C. V Future Earnings Per Share Growth

Risks

• Soriana's transition to natural gas in stores has reduced energy expenses by 50% and CO2 emissions, showcasing cost management that could help improve profit margins.
  
• The company has implemented AI technology to maintain products on shelves and enhance distribution, potentially driving operational efficiency and lowering inventory costs, positively impacting net margins.
  
• Soriana's in-house brand sales have increased by 14.7%, accounting for 14.8% of total sales, which may improve margins since these products have a margin differential between 4 and 6 points.
  
• The expansion plan included opening 18 new stores and remodeling 39 locations, indicating potential revenue growth through increased market presence and customer reach.
  
• The joint business with Falabella, including the Sodimac brand with 15 stores, has seen strong client acceptance and content sales growth, both online and in-store, which could boost revenue and earnings.

Valuation

• The analysts have a consensus price target of MX$23.357 for Organización Soriana S. A. B. de C. V 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 MX$33.0, and the most bearish reporting a price target of just MX$19.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MX$200.6 billion, earnings will come to MX$3.8 billion, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 14.5%.
• Given the current share price of MX$27.96, the analyst price target of MX$23.36 is 19.7% lower.
• 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.