Magazine Luiza Restrains Acquisition to Sustain Profits
Magazine Luiza SA (MGLU3) Chief Executive Officer Luiza Helena Trajano is damping her desire to buy companies after the retailer’s last two acquisitions failed to produce the level of profit she sought.
“I don’t even look because I know I will feel like buying,” said Trajano, 61, in an interview at her office in Sao Paulo. “I’m an entrepreneur, but I know that right now the moment isn’t right.”
Magazine Luiza rose 20 percent in the past 30 days in Sao Paulo, the most among Brazilian retail stocks, after reporting its first profit in three quarters. The second-quarter showed Magazine Luiza, which sells consumer electronics and furniture, started generating results from its two acquisitions, Lojas Maia and Bau da Felicidade, in the past two years, said Daniela Bretthauer, a retail analyst at Raymond James in Sao Paulo.
Trajano expects sales growth to pick up in 2013 as a decline in loan delinquencies spurs consumers to buy more durable goods. Economic growth in Brazil, the world’s largest developing economy after China, probably will quicken to 4 percent next year from an estimated 1.6 percent this year, according to a central bank weekly survey of economists.
Magazine Luiza’s same-store sales growth probably will slow to 15 percent this year from 16.5 percent in 2011, she said. The industry will post revenue growth of about 7 percent this year, said Trajano. Her aunt Luiza Trajano and uncle Pelegrino Jose Donato founded the company in 1957, and Luiza Helena took over the retailer’s management in 1991.
Retailers are benefiting from President Dilma Rousseff’s stimulus measures. Last month the government extended tax breaks for goods including furniture, appliances and automobiles in an effort to revive growth. Brazilian retail sales increased 1.4 percent in July, the second-fastest month-on-month pace since January, according to a government report yesterday.
The tax cuts will prevent Magazine Luiza from posting a bigger decline in sales growth this year, Trajano said.
The 20 percent gain for Magazine Luiza in the past month before today compares with a 17 percent increase in B2W Cia Global do Varejo (BTOW3), an online retailer, and a 8.7 percent increase in Marisa Lojas SA (AMAR3), an apparel retail chain. Lojas Renner SA gained 6.7 percent and Lojas Americanas SA (LAME4) rose 2.4 percent.
Magazine Luiza trades at 15 times its estimated future earnings, the lowest among retailers, according to data compiled by Bloomberg. Marisa trades at 17, while Lojas Renner’s ratio is 20 and Lojas Americanas’ is 26.
Second-quarter net income of 21.9 million reais ($10.8 million) beat analysts estimates, according to Bloomberg data, driving gains in the stock. Earning before interest, taxes, depreciation and amortization equaled 4.7 percent of 2011 revenue, the lowest among Brazilian peers, according to Bloomberg data. Cia Hering (HGTX3)’s Ebitda margin was 29 percent, while Marisa’s was 16 percent and Lojas Americanas’ ran at 13.
“We still don’t have what we want in terms of profitability, but we will in terms of revenue,” said Trajano, sporting a black silk blouse. “This year we’re paying the price because when you make acquisitions and invest, you suffer for the first two or three years.”
Magazine Luiza and its shareholders raised 805 million reais last April in an initial public offering. Since then, its shares have fallen 18 percent. This year, the stock is up 38 percent, compared with a 9 percent gain for the benchmark Bovespa stock index.
Five of ten analysts that cover Magazine Luiza have a buy recommendation, while four say hold and one says sell, according to data compiled by Bloomberg.
“They weren’t doing well because of the macroeconomic environment and because of the acquisitions of Maia and Bau,” said Raymond James’s Bretthauer, who rates Magazine Luiza equivalent to buy, in a telephone interview. “It’s a turnaround story for 2013 but we will gradually see improvement this year.”
Magazine Luiza plans to open 15 new stores before the end of the year, bringing its total number to 749, Trajano said. The company won’t make any acquisitions until the middle of 2013, she said.
“This is the year of consolidation,” Trajano said. “We won’t buy anything, sadly for me, but at the same time it was a decision that I helped to make.”