Brazil’s Retail Profits Threatened by Consumer Pullback

Brazilian consumers are scaling back purchases of furniture and appliances for the first time in almost four years, endangering profits at retailers from Magazine Luiza SA to Cia. Brasileira de Distribuicao Grupo Pao de Acucar.

February retail sales fell 0.2 percent from a year earlier, a government report showed yesterday, surprising all 27 analysts in a Bloomberg survey. Their estimates ranged from gains of 1.2 percent to 6.5 percent. Food and beverages posted the steepest slide, followed by durable goods, clothing and shoes.

Shoppers are deferring costlier items as inflation saps spending power while stagnant growth and the specter of rising interest rates erode consumer confidence. That imperils an industry that has bolstered Brazil’s economy, with consumer-discretionary stocks producing the Bovespa index’s top returns in 2012’s second half even as the economy slowed.

“This very much caught everyone on the hop,” Daniel Snowden, an emerging-markets analyst at Informa Global Markets in London, said in a telephone interview. “Consumer demand has been so strong over the last year and a half, the stop in spending is a surprise.”

Consumers are being squeezed by rising prices, especially on food and beverages. The government’s benchmark consumer price index rose at a 6.59 percent annual rate in March, exceeding the

6.5 percent upper limit of the central bank’s target range for the first time since November 2011.

Durable Goods

Durable-goods purchases fell 1 percent from a year earlier in February, the first drop since June 2009, data compiled by Bloomberg show. Supermarket sales slid 2.1 percent and clothing and shoe purchases decreased 1 percent.

“This could be signaling that economic activity could be at a level much lower than previously believed,” said Paulo de Sa Pereira, who helps manage more than 23 billion reais ($11.7 billion) at Fundacao Cesp including stock in Pao de Acucar, appliance retailer Magazine Luiza and Lojas Americanas SA.

“If this lasts for more than a month, it could result in a lowering of expectations, and it could affect some retail companies,” Pereira said by telephone from Sao Paulo.

The MSCI index of Brazilian consumer-discretionary stocks, which include Lojas Americanas, Lojas Renner SA and Cia. Hering, slid 2.3 percent this year through yesterday. That compares with a 25 percent surge in the last six months of 2012.

Retailer’s Valuation

Pao de Acucar, Brazil’s biggest retailer, traded yesterday at 23 times its estimated 2013 earnings, compared with an average of 16 for all companies on the Bovespa, after rallying 25 percent in the past year, data compiled by Bloomberg show.

Lojas Americanas, which sells household goods, appliances and electronics, had a ratio of 31, making it the most-expensive consumer stock on the gauge.

The company was little changed at 17.24 reais at 4:41 p.m. in Sao Paulo trading. Pao de Acucar declined 1.4 percent to

105.99 reais.

Pao de Acucar’s durable-goods unit, which includes Ponto Frio electronics and appliance stores and Casas Bahia furniture outlets, was the Sao Paulo-based company’s best performer last year, more than quadrupling profit. That compares with a 24 percent increase for the retail segment.

Spokesmen for Pao de Acucar and Rio de Janeiro-based Lojas Americanas declined to comment on decreasing durable-goods sales as Brazilians become more indebted and possible interest-rate increases loom. Magazine Luiza, based in Franca, Brazil, didn’t return an e-mail request for comment.

‘Atypical’ Drop

Retail sales should rebound in March and April after February’s “atypical” decline, said Roberio Costa, chief economist at Banco Rabobank International Brasil in Sao Paulo.

“In supermarket sales, there’s no explanation, especially considering the increase in salaries in January,” said Costa, referring to annual wage adjustments negotiated between the companies and unions. “It was weak and it doesn’t reflect a change in trends. Spending should continue to grow.”

Still, faster inflation could prompt policy makers to raise borrowing costs, further hindering appliance and furniture purchases. Consumers may be hesitant to take on more loans after the average household spent 21.65 percent of its income to pay off debt in January, according to the central bank.

“That’s close to developed-world countries, but with higher rates,” Luiz Cesta, an analyst at Votorantim Corretora, said in an interview in Sao Paulo.

Brazil’s interest-rate futures contracts climbed to a one-week high yesterday, adding to speculation that policy makers will raise borrowing costs as soon as next week from the record low 7.25 percent.

Economists in the latest central bank survey published April 5 forecast growth of 3 percent in 2013. That’s down from a median estimate of 4 percent in October. Last year’s economic expansion was 0.9 percent.

“If consumers are going to stop spending along 2013, are we even going to get to 3 percent?” said Snowden at Informa Global Markets. Shoppers “are keeping their wallets in their pockets.”