Hard Discount Expansion And Logistics Transformation Will Drive Long-Term Retail Strength

Catalysts

About InRetail Perú

InRetail Perú operates an integrated platform of food retail, pharmacies and shopping malls across Peru.

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

• Acceleration of the hard discount Mass format, supported by low formal penetration in food retail in Peru and a robust multi format strategy, is expected to drive traffic gains and higher consolidated revenues as the network surpasses 1,500 stores.
• Productivity focused innovation in Pharma, including expansion of higher ticket personal care and beauty assortments and new Mifarma Beauty concepts, is intended to lift basket size and mix, supporting revenue and stabilizing gross margins.
• Ongoing logistics transformation with new dedicated distribution centers for Mass and a new Pharma distribution center is expected to lower unit operating costs over time and improve net margins as ramp up expenses normalize.
• Measured recovery and expansion in Shopping Malls, with new power centers and enlargements in Primavera, Piura and Lurín, is designed to offset the Trujillo impact and increase rental income density, supporting adjusted EBITDA and earnings.
• A strengthened balance sheet and extended debt maturities at historically low spreads are expected to enhance financial flexibility to keep funding organic expansion, which may contribute to gains in earnings and free cash flow.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming InRetail Perú's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 4.2% today to 4.1% in 3 years time.
• Analysts expect earnings to reach PEN 1.1 billion (and earnings per share of PEN 10.56) by about December 2028, up from PEN 948.6 million today.
• 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 19.1x on those 2028 earnings, up from 9.4x today. This future PE is greater than the current PE for the PE Consumer Retailing industry at 9.4x.
• Analysts expect the number of shares outstanding to decline by 0.69% per year for 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?

• Peru's consumption recovery remains cautious despite low inflation and a strong exchange rate, and if this subdued demand persists into and beyond the pre election period, it could cap same store sales growth across Food Retail and Pharma and slow consolidated revenue growth.
• The strategic shift in the Pharma distribution unit toward cash flow and return on invested capital is structurally reducing top line in Peru, and if this lower scale becomes permanent or spreads to other units, it could constrain segment revenues and limit earnings expansion.
• Hard discount competition is intensifying as rival players rapidly expand store bases into a still highly informal market, and if competitors rely more heavily on promotions and wholesale volumes, it may force InRetail to compress prices in supermarkets and hard discount formats, pressuring gross margins and net margins.
• The Real Plaza Trujillo mall remains closed with reopening timing dependent on local authorities, and if regulatory or safety hurdles delay a full restart or lead to longer lasting discounts and higher maintenance spending, the Shopping Malls segment could face a prolonged drag on rental income and adjusted EBITDA.
• InRetail is pursuing aggressive organic expansion and logistics investments funded alongside higher interest bearing debt. If the new stores and distribution centers ramp more slowly than anticipated while financial expenses continue to rise, the company could see weaker returns on invested capital and lower net income growth.

Valuation

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

• The analysts have a consensus price target of $38.0 for InRetail Perú 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 $45.0, and the most bearish reporting a price target of just $35.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be PEN27.4 billion, earnings will come to PEN1.1 billion, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 17.6%.
  
• Given the current share price of $24.85, the analyst price target of $38.0 is 34.6% higher.
  
• 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.