Unified Commerce And Logistics Shift Will Challenge Margins Yet Support Long Term Earnings Stability

Catalysts

About El Puerto de Liverpool. de

El Puerto de Liverpool operates department stores, specialty formats, shopping centers and a large private label credit and financial services platform in Mexico.

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

• Although unified commerce and digital adoption are supporting double digit GMV growth and higher app penetration, the need to rely on heavy promotions to convert increasingly price sensitive consumers may cap pricing power and limit retail revenue growth.
• While the Arco Norte logistics hub and last mile reconfiguration should eventually improve fulfillment efficiency, lingering transition costs and structurally higher logistics expenses could delay a full retail margin recovery until at least 2026, putting pressure on EBITDA margin.
• Despite robust expansion in the credit portfolio and higher card utilization deepening customer engagement, the deliberate move up the risk curve together with rising NPLs and elevated coverage ratios can keep credit loss provisions at the top of the guided range, constraining net income growth.
• Although shopping center expansions such as Galerías Metepec and the recovery of assets such as Galerías Acapulco are driving higher traffic and rental income, a slower macro backdrop and rising operating costs could temper real estate contribution to consolidated earnings.
• While partnerships and category expansions in areas such as athleisure and branded concepts aim to capture long term shifts in consumer preferences, exposure to tariff changes on Asian imports and intense promotional competition may compress category margins and weigh on consolidated profitability.

Assumptions

This narrative explores a more pessimistic perspective on El Puerto de Liverpool. de compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming El Puerto de Liverpool. de's revenue will grow by 4.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.5% today to 9.3% in 3 years time.
• The bearish analysts expect earnings to reach MX$24.0 billion (and earnings per share of MX$17.75) by about December 2028, up from MX$19.2 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as MX$30.6 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.7x on those 2028 earnings, up from 7.0x today. This future PE is greater than the current PE for the MX Multiline Retail industry at 7.0x.
• The bearish 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 18.04%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The ongoing migration to the Arco Norte logistics hub, together with structurally higher logistics and labor costs, could delay margin normalization beyond 2026 and keep EBITDA margin below the revised 15.5 to 16.0 percent range, putting sustained pressure on earnings and valuation multiples.
• Persistent consumer reliance on deep promotions in a cautious macro backdrop may limit Liverpool and Suburbia’s ability to pass through cost inflation and new import tariffs, especially in low priced footwear and apparel, which could cap like for like sales growth and compress retail gross margin and net profit.
• The deliberate move up the credit risk curve, combined with rising nonperforming loans and higher coverage ratios, may require credit loss provisions to remain at the top end of the 30 to 35 percent range for longer than expected, constraining the Financial Services segment’s contribution to consolidated earnings.
• Mexico’s potential tariff increases on Asian sourced merchandise, which directly affects roughly 15 percent of Liverpool’s self imported inventory and indirectly up to half of total inventory through vendors, could structurally raise cost of goods sold if not fully offset by sourcing changes, weighing on gross margin and net income.
• Execution risk around large scale real estate and international investments, such as the Galerías Metepec expansion and the Nordstrom stake, could lead to lower than expected traffic, lease spreads and equity income if consumer conditions weaken in Mexico or the United States, limiting diversified revenue growth and overall earnings resilience.

Valuation

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

• The assumed bearish price target for El Puerto de Liverpool. de is MX$95.0, which represents up to two standard deviations below the consensus price target of MX$119.11. This valuation is based on what can be assumed as the expectations of El Puerto de Liverpool. de's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MX$195.0, and the most bearish reporting a price target of just MX$95.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be MX$258.4 billion, earnings will come to MX$24.0 billion, and it would be trading on a PE ratio of 8.7x, assuming you use a discount rate of 18.0%.
  
• Given the current share price of MX$100.0, the analyst price target of MX$95.0 is 5.3% lower. 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.