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Magazine Luiza Surges on Credit Card Profit: Sao Paulo Mover

Magazine Luiza SA, Brazil’s worst-performing retailer this year, rose the most on record as its credit card unit’s profit exceeded the forecasts of Itau BBA.

Shares rallied 29 percent to 6.38 reais at the close of trading in Sao Paulo, the biggest gain since they started trading in May 2011. It was the best performance on the BM&FBovespa Small Cap index, which declined 0.7 percent.

The Franca, Brazil-based retailer reported in a regulatory filing yesterday that adjusted earnings before interest, taxes, depreciation and amortization increased 14 percent to 95 million reais ($41 million) for the quarter ended in June. Ebitda from the LuizaCred credit card unit was 18.4 million reais, compared with Itau’s projection of 7.4 million reais.

“Where the company most significantly surpassed our estimates was at LuizaCred,” Itau analysts Vitor Paschoal and Rachel Rodrigues wrote in a research note to clients.

The shares have plunged 45 percent this year and trade at 11.9 times analysts’ earnings estimates. That compares with a 17 percent decline in the BM&FBovespa Small Cap index, which trades at a multiple of 15.8.

“We see Magazine Luiza as a high-risk, high-return investment story, because we believe that the company could be worth more than what the market is currently willing to pay, but our visibility on its longer-term prospects is limited at this point,” wrote Paschoal and Rodrigues, who have a recommendation equivalent to buy on the stock.

New Stores

Banco do Brasil SA’s price target for the stock is 10.50 reais by Dec. 31. It expects sales to increase faster in the second half of this year.

“It’s a very well managed company that has been able to perform better than its peers in a scenario of slow growth in Brazil,” Thiago Gramari, an analyst at the bank, said in a telephone interview from Sao Paulo.

Complete integration of the stores Magazine Luiza bought in the past two years may help to improve profitability at the retailer, according to Gramari.

Thirty-eight percent of Magazine Luiza’s 733 stores have been open for less than three years, according to yesterday’s filing. The retailer acquired the store chain Bau da Felicidade, which operates in the states of Sao Paulo, Minas Gerais and Parana, in 2011, and the chain Lojas Maia, which operates in the Northeastern part of the country, in 2010.

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