Inflation, weakening demand shrink Brazilian retailers market cap

SAO PAULO, Nov 12 (Reuters) - Three of Brazil’s highest flying retailers during the pandemic were cut down to size this week, revealing that spiking inflation and weaker demand slammed margins, shaving some 25 billion reais ($4.58 billion)off their collective market value.

The worst performers on Friday, after the release of results of most retailers, were Magazine Luiza and cosmetics maker Natura & Co Holding.

Magazine Luiza, whose shares soared in recent years as it became one of Brazil’s best-performing e-commerce companies, suffered with rising pressures on discretionary income, and had a sharp drop in third-quarter profit.

This week’s selloff, which comes against the backdrop of a weaker-than-expected Brazilian economy, was the latest blow to hopes that the country’s improving COVID-19 outlook would lift consumer demand and corporate profits.

Magazine Luiza’s CEO Frederico Trajano said that lower-than-expected third quarter sales boosted its inventories to 100 days, above the company’s ideal benchmark of 70 days.

“We weren’t expecting this drop in store sales,” he said, adding the company may use some promotional sales to reduce inventory.

In a report to clients, Bank of America analysts said the retailer’s consumers are suffering with real wage declines, high debt levels, and employment rates that are struggling to return to pre-pandemic levels.

“Disappointed, but not surprised,” said Credit Suisse analysts Victor Saragiotto and Pedro Pinto in a note to clients. Common shares in Magazine Luiza were down 16% in afternoon trading, at 11.61 reais. The company lost 13.9 billion reais in market capitalization on Friday.

One of its main competitors, Via Varejo, was performing well on Friday after a sharp fall on Thursday after its earnings release that came with a surprise provision for payments in labor disputes. On Thursday, Via Varejo lost 1.4 billion reais ($257.4 million) in market capitalization.

Cosmetics maker Natura’s shares also tanked after the company slashed its outlook and reported weaker earnings, with a 47% drop in EBITDA in the third quarter, affected mainly by weaker profitability in Latin America. The company, which owns London-based Avon Products, pushed from 2023 to 2024 its guidance to hit a 14% to 16% EBITDA margin, citing inflationary pressures and supply chain problems.

In early afternoon trading, shares in Natura were down 16%, at 33.58 reais, despite having announced a share buyback program and the intention to change its main listing venue from Sao Paulo to New York. The company’s market capitalization dropped 9.3 billion reais ($1.7 billion) on Friday.


The only exception to Friday’s bloodbath was retailer Lojas Americanas and sister company Americanas SA , which enjoyed higher growth in online sales than Magazine Luiza and Mercado Libre. With a larger offering of cheaper products, Americanas seems to better weather the drop in disposable income, Bradesco BBI analysts led by Richard Cathcart said in a note to clients.

“The diversification of Americanas’ online mix is likely to be an advantage as we head towards Black Friday this year, given the weakening of demand for larger-ticket, discretionary items”, the report said.

Shares in Americanas SA, formerly known as B2W Digital, were up 7% in mid afternoon trading, at 37.78 reais.

$1 = 5.4392 reais $1 = 5.4639 reais Additional reporting by Alberto Alerigi, writing by Tatiana Bautzer; Editing by Christian Plumb and Chizu Nomiyama