After very challenging results, Magazine Luiza (MGLU3) reported a quarter bringing clearer signs that the steps towards greater profitability are bearing fruit.
The retailer reported on Thursday a net profit of R$27.9 million in the first quarter, reversing a loss of R$391.2 million a year earlier, with lower financial expenses. Furthermore, the adjusted Ebitda margin (Ebitda = earnings before interest, taxes, depreciation and amortization/net revenue) reached 7.4%, the highest in four years, according to the company, and an increase of 2.5 percentage points year on year. per year, in a performance partially helped by the transfer of DIFAL during 2023, a tax related to interstate purchases. The shares even opened with gains, but turned downwards, falling 5.39%, to R$ 1.58, at 11:35 am (Brasília time), also following a worsening of the market in general, but also with analysts questioning whether It’s time to buy the assets.
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Regarding the evolution of the balance sheet itself, around two years ago, Magazine Luiza began a strategy that involved cutting costs and increasing fees for sellers on its marketplace, with the aim of increasing its profitability, instead of focusing on growth in revenue. sales, amid an environment of high interest rates at the time.
“Magazine Luiza released a solid set of 1Q results, with net revenue performance still moderate, but improving profitability in commercial adjustments and greater service penetration”, assesses the XP analysis team.
Total GMV (gross merchandise volume) rose 3% year-on-year, supported by improved physical store performance (same-store sales up 9% year-on-year), likely reflecting the optimization of competitors’ store fleet, and 3P, or marketplace (+6.4%), more than offsetting the weakness of 1P, or own inventory, (-2% on an annual basis) in a still challenging macro. On a consolidated basis, net sales rose slightly (2%), with service revenues (+7.3%) once again outpacing merchandise sales (+1%).
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Genial highlights that, by leading the idea that the company’s growth should not come at any cost (something that was left behind with a Selic of 2.0%/year), the market begins to see the positive effects of this mentality already in profit.
“For the 2nd consecutive quarter, Magalu presented an adjusted Ebitda margin above the level of 7.0% and net profit − it is worth highlighting that the 1st quarter of the year is not usually a period that brings great operational leverage to the sector and, even so, the company has shown its rationality in remaining profitable and its ability to pass on price”, mentions the analysis team.
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Genial also gave a vote of confidence to this thesis of growth in e-commerce and stated that the share, despite trading at 28 times the price over profit expected for 2024 and 15 times the projected profit for 2025 (not a “cheap” valuation) ), can bring a good potential for risk and return to the portfolio (in measured doses). Therefore, it raised the recommendation for purchase, with the twelve-month target price being maintained at R$2.60 − which implies a potential upside of 56.0% in relation to the closing of the last trading session.
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“Although we see an increase in newsflow regarding the fight between the Kabum brothers and Frederico Trajano, current CEO of Magazine Luiza, we believe that the impact for Magazine Luiza is null”, points out Genial, assessing that the dispute should not bring any risk of provisions or cancellation of the acquisition.
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Another point considered to raise Magalu’s recommendation concerns the company’s capital structure. In January, the company had paid off the amount and interest related to the 9th Debenture Issue (R$900 million). Throughout April (without yet entering the results of this 1st quarter), the company actually eliminated all Loans and Financing for the next 12 months, paying R$ 2.1 billion − also including interest due. With the next debt due only at the end of 2025 and a decelerating Selic rate (even if at a slower pace than estimated by the market at the beginning of 2024), Genial sees that this will open up space for greater sighs from the Magazine’s last line Luiza over the next few quarters.
Furthermore, with LuizaCred (joint venture between Magalu and Itaú) producing net profit for the 2nd consecutive quarter, the controllers approved a capital increase in the company’s credit facility, in the amount of R$400 million, through the issuance of new shares. Itaú and Magalu also agreed to deliberate on a 2nd capital increase worth R$600 million. This operation will be concluded after both parties finalize the structuring of a financing instrument and should boost credit origination and, consequently, boost sales throughout the 2nd half of the year.
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For Bradesco BBI, 1Q24 provided a clearer step to reduce the risk of concerns about Magalu’s capital structure. “The capital increase of R$1.25 billion was definitely helpful, but the underlying cash flow profile also improved this time, which is naturally a good sign of support for the thesis. Consistency remains key and all eyes will now be on how quickly Magalu’s GMV/revenue can recover, while the improved Ebitda margin, combined with the decline in net financial expenses, should gradually decompress its Ebt.” , evaluates the bank. However, due to the multiples, the bank still prefers to maintain a target price of R$3.00 and a neutral recommendation for Magalu for valuation reasons.
BTG, in turn, has a purchase for MGLU3 with a target price of R$4, but assesses that the weak revenue trend persisted amid a challenging environment for e-commerce (1P), while the operation of physical stores was positive.
(with Reuters)
