Expanding Product Lines And Seasonal Focus Will Improve Future Prospects

Key Takeaways

• Product line expansion and focus on seasonal products are expected to boost sales, margins, and revenue.
  
• Strategic expansions in Jafra US and innovative product launches aim to drive revenue growth and improve earnings.
  
• External factors, such as currency depreciation and rising freight costs, are pressuring Betterware Mexico's margins and financial stability amidst strategic expansion and asset valuation concerns.

Catalysts

Operates as a direct-to-consumer selling company in the United Staes and Mexico.

• The expansion of Betterware's product portfolio from 370 to 420 SKUs, including the introduction of lower-priced SKUs, is expected to drive additional sales and enhance margins, positively impacting future revenue and net margins.
  
• The strategic focus on seasonal products and improved merchandising techniques for holiday events like Dia de Muertos, Christmas, and Black Friday (Buen Fin), is anticipated to increase sales volume and revenue.
  
• The successful launch of new innovative products in Jafra Mexico's fragrance and beauty segment, such as the Gii fragrance and BioLab skincare line, is likely to contribute to sustained revenue growth and improved earnings.
  
• Expansion strategies for Jafra US, including the rollout of the new Shopify Plus platform and focus on the Hispanic market, aim to drive significant revenue growth and become more prominent within the group.
  
• Cost management and strategic adjustments, including hedging interventions and inventory optimizations, are expected to stabilize gross margins between 58% and 59%, enhancing profitability and net margins going forward.

Betterware de MéxicoP.I. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Betterware de MéxicoP.I. de's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.5% today to 14.8% in 3 years time.
• Analysts expect earnings to reach MX$2.5 billion (and earnings per share of MX$65.5) by about January 2028, up from MX$885.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.5x on those 2028 earnings, down from 10.1x today. This future PE is lower than the current PE for the US Specialty Retail industry at 16.3x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.85%, as per the Simply Wall St company report.

Betterware de MéxicoP.I. de Future Earnings Per Share Growth

Risks

• The depreciation of the Mexican peso and significant increases in freight costs have negatively impacted Betterware Mexico's gross margin, which could continue to pressure profitability if these factors persist. [Gross margin]
  
• Strategic investments in international expansion, particularly in the U.S. and Peru, are currently impacting BeFra's year-to-date adjusted EBITDA, indicating potential short-term financial strain as these markets develop. [Adjusted EBITDA]
  
• The property sale in Mexico resulted in a substantial noncash accounting loss, which, while not affecting cash generation, raises concerns about the asset valuation and may affect future profitability perceptions. [Net income]
  
• Fluctuations in freight costs and exchange rates have caused volatility in gross margins, impacting Betterware Mexico's consistent historical margin levels, which might fluctuate further if these external factors do not stabilize. [Gross margin]
  
• The company’s plan to allocate 30%-40% of free cash flow to acquisitions could increase financial leverage and risk, particularly if pursued aggressively in uncertain market conditions. [Net debt and financial leverage]

Valuation

• The analysts have a consensus price target of $20.22 for Betterware de MéxicoP.I. de 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 $22.87, and the most bearish reporting a price target of just $17.57.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MX$16.6 billion, earnings will come to MX$2.5 billion, and it would be trading on a PE ratio of 8.5x, assuming you use a discount rate of 10.9%.
• Given the current share price of $11.68, the analyst's price target of $20.22 is 42.2% 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.