The stock has seen a turnaround and has gone from a drop of 8% to a rise of 1%; See Balance Sheet Analysis

For another quarter, Lugas Renner (LREN3) released results did not encourage market analysts. Registered Retailer Net income of R$415.8 million in the fourth quarter of 20201 (Q4 21), 17.5% higher than the fourth quarter of 2020.

Revenue trends, which totaled R$3.560 billion between October and December last year, up 22% compared to the same period in 2020, were considered encouraging. However, lower margins overshadowed this positive data, causing homes to reduce expectations for the company’s stake, as in the case of Bradesco BBI, or to put the paper under review, in the case of Itaú BBA.

However, the session is very choppy after the outcome. Shares started the day with a strong decline, with losses of 7.73%, at R$21.13. However, after the more positive market performance, LREN3 shares pared the decline, and at 12:25 pm (Brazilian time), incurred a 1% loss at R$22.67. At 1:40 pm, the asset was up 1.27% to R$23.19.

XP noted that the retailer posted weaker-than-expected results, with continued pressure on margins due to cost pressures and investments in building its ecosystem along with the bonus provision provided in the quarter.

Net sales increased 26% year-on-year as higher average tickets offset the decline in store influx, resulting in same-store (SSS) sales growth of 19% year-on-year, while total market sales (GMV) reached R$514 million. , up 38% year over year and stable against Q3 as a percentage of net revenue, at 12%. The company continues to post a rebound in sales in 2022, with growth accelerating compared to 2019.

Profitability was the downside. Adjusted Ebitda margin (earnings before interest, taxes, depreciation and amortization, or Ebitda on net revenue) was 21.8% for the period, down 3.5 percentage points compared to the margin reported in the fourth quarter of 2020.

XP notes that the margin showed pressure on the company’s investment in building its ecosystem, but provided a surprising bonus upward, at R$148 million, resulting in Ebitda 10% below XP estimates.

“According to the company, this allotment can be considered a one-off given that the annual targets were set at a very uncertain time, with the scenario improving faster than expected during 2021,” stresses XP.

Looking at Realize, revenue growth was solid (up 99% YoY) driven by a rebound in sales combined with Meu Cartão releases, while the level of delinquency increased by 0.8 percentage points in the quarter, although still in line with levels Historic. Net profit was in line with home estimates. XP follows the newspaper’s buy recommendation and a target price of R$42 per share, or a potential increase of 83% over Thursday’s close.

Bradesco BBI analysts note that Renner had a good revenue performance, which was overshadowed by weak margins. Margin pressure was expected, but the contraction from 2019 was larger than expected, even after estimates were revised downward in late January.

The biggest concern is gross margin, which is down 3 percentage points compared to 2019. The company had indicated a tough comparison base in 2019, but Renner Banner posted the lowest gross margin for the fourth quarter in several years, which means cost inflation (raw materials) ) and shipping and exchange) had its effect (reduction has been at historically low levels).

As a result, analysts lowered their gross margin estimate for 2022 – they had previously expected some year-over-year recovery, but are now assuming stability.

BBI maintains an outperform rating (above average performance, equivalent to buying) for Lojas Renner, but lowered its target price from R$40 to R$37, still a 61% upside potential from the previous day’s close.

As we’ve outlined, revenue trends have been strong, while company management notes that strong sales trends have continued and accelerated thus far into 2022 which increases, in BBI’s view, the likelihood of starting to see some easing of the investments made in general and administrative expenses. To support the company’s ecosystem strategy.

However, this does not solve the gross margin problem. Even with the shares trading at an attractive 2022 earnings multiple of 18.5x, we think investors are likely to remain cautious due to pressure on margins.

On the other hand, Itaú BBA has put shares of Lojas Renner under review due to lower profitability. To analysts, Lojas Renner’s fourth-quarter results of 21 were broadly in line with revenue and earnings, but well below Ebitda’s revised expectations in the retail and financial services divisions.

According to the BBA, disappointment in the retail sector was primarily driven by higher general and administrative expenses (in higher digital investments) and profit sharing expenses, while financial services results faltered due to higher provisions.

The fact that margins were below conservative estimates prompted the bank to review LREN3 for the time being.

Recovery on the radar?

On a conference call to present the findings, Daniel Santos, Lojas Renner’s chief financial officer, said that in 2021, there were gains in digital efficiency, but general and administrative expenses were affected, reaching levels higher than those before the pandemic.

As factors explaining this situation, Santos highlighted inflation. Stores whose productivity is still below normal due to the pandemic; digital channel expansion expenses; And investments in a new distribution center.

He stated that the maturity of the distribution center should generate up to 3 percentage points in efficiency, and that digital channels should become more efficient as well. In 2022 and 2023, he says he expects the company to gain efficiencies, in order to approach 2019 levels.

Fabio Vaccio, CEO of Lojas Renner, said sales in January were weaker due to the spread of the Ômicron variant of the coronavirus, but February and March sales came in stronger.

He sees positive moves by state and county governments to suspend measures to restrict movement, which have increased public safety and increased sales. The Executive stated that sales of the new fall-winter collection are positive.

When asked about the expected 3% productivity increase with the new distribution center, Renner’s CFO stated that the improvement is expected on a digital level. He stated that the expectation is that the benefits will be felt from 2023. Santos also mentioned that there are benefits as well for the physical part in efficiency, service time and company network dynamics.

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