March 26 (Bloomberg) -- Grendene SA, the maker of footwear endorsed by supermodel Gisele Bundchen, is posting the biggest rally among global shoemakers as demand for its $7 flip-flops withstands Brazil’s economic slump.
The company’s shares have more than doubled in the past 12 months to 21.20 reais, compared with an average 23 percent return among 24 shoemakers including Brazilian high-heel maker Arezzo & Co., Skechers U.S.A. Inc and Puma SE. Grendene’s total returns topped those of all Brazilian small cap stocks and the benchmark Bovespa index, which dropped 17 percent during the period.
While the gains have pushed Grendene’s valuation to a five-year high, it still is cheaper than the industry norm, a signal to Hermes Emerging Markets and Banco do Brasil SA that the rally isn’t over. Grendene, based in Sobral, Brazil, trades at 14.9 times earnings, compared with the average ratio of 24.9 for global peers and 20.5 among 81 Brazilian consumer goods makers.
“The shares still offer good upside relative to other consumer names in Brazil,” Samir Patel, who helps oversee about $900 million in assets including Grendene stocks at Hermes Emerging Markets in London, said in an e-mailed response to questions on March 14.
Grendene’s focus on lower-cost shoes helped drive a 27 percent increase in sales to a record 1.88 billion reais ($934 million) in 2012 as growth in Latin America’s biggest economy slowed to 0.9 percent, the weakest in three years, according to Patel. For Grendene bears like Renato Prado, an analyst at Sao Paulo-based brokerage Fator SA, the economic rebound expected for this year won’t boost revenue further because sales held up so well during the slowdown.
“Brazilians buy an average of four pairs of shoes every year, and we have no reason to expect this amount to increase soon,” Prado said in a phone interview. He cut the stock to sell from hold on March 21, saying the share price reflects most of the company’s competitive advantages after the rally.
The 6.3 billion-real company, which gets 78 percent of gross revenue from Brazil, expanded its market share in the country to about 20 percent last year from about 14 percent in 2011, according to company filings. It became Brazil’s biggest shoemaker by market value in January 2012, surpassing Arezzo, whose products are priced on average from 90 reais to 960 reais, and Alpargatas SA, the maker of rubber flip-flops Havaianas, which are sold at prices starting 18 reais at stores in Sao Paulo.
Grendene reduced the average price of its shoes to 13.21 reais in 2012 from 13.85 reais in 2011, helping it boost sales as stagnant economic growth curtailed spending on more expensive consumer goods.
The shoemaker manufactures plastic flip flops and sandals with lines endorsed by Gisele, Colombian singer Shakira and Brazilian former professional tennis player Gustavo Kuerten. The company said in a March presentation that production has grown at a 6.3 percent pace since 2002, above the industry’s 2.5 percent average advance.
“Grendene’s strategy is every consumer product enterprise’s dream: it sells its products to the lower middle class and to high-income clients as well,” Rodolfo Amstalden, an analyst at equity research firm Empiricus, said by phone from Sao Paulo. The firm recommends Grendene as a top pick among Brazilian consumer stocks.
Grendene’s press office did not reply to phone calls and e-mailed requests for comment. A press official at Arezzo declined to comment.
Hiring Gisele in 2001 as its main celebrity endorser was key to reaching higher-income consumers, according to Amstalden. After supporting the company’s main female flip-flop brand, called Ipanema, the Brazilian supermodel, who also endorses products from Oral-B Laboratories whitening strips to cable TV and is married to New England Patriots quarterback Tom Brady, introduced her own line of Grendene plastic sandals.
Grendene, which made 185 million pairs of shoes last year, is spending 60 million reais to build a factory that it plans to open in the second half of 2013 to meet rising demand, according to a Feb. 28 statement accompanying its quarterly earnings.
Amstalden projects 12 percent annual gains in Grendene’s sales until 2015. The reduction in payroll taxes the government announced in April and limited increases in the costs of the materials Grendene uses to make its shoes should also help improve profits, he said.
A stronger real, which has gained 1.7 percent this year and is up 68 percent over the past decade, could hurt Grendene by making its products less competitive against foreign-made shoes, according to Patel.
Footwear exports from Brazil fell 16 percent in dollar terms last year, according to the country’s shoe industry association. Grendene’s share grew to 40 percent of volume, the company said in its fourth quarter earnings release.
The shoemaker is focusing on sales of its higher priced items, such as the Melissa line, in its international expansion, according to Thiago Gramari, an analyst at BB Investimentos, Banco do Brasil’s investment banking unit.
As revenue rose, Grendene boosted its dividends to a record 293.5 million reais last year. The shoemaker said on Feb. 28 that dividends should increase further in 2013 even as it cuts the percentage of profit allocated to payouts.
“That increase should be read as a reflection of the good moment Grendene is living in now and management’s optimistic vision of the near future,” Amstalden said.
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