While Americanas (AMER3) suffers from a major crisis resulting from the “billion dollar bomb” in its accounts, leading to a collapse of its shares in the cumulative of the last three sessions, the shares of Magazine Luiza (MGLU3) have rallied in the Brazilian stock exchange in the period, with an increase of 27% in the same period, going from R$ 3.03 to R$ 3.85 between the close of Wednesday (11) and the last Monday (16).
Shares of Via (VIIA3), while up 10.55% last Monday, fell Thursday and Friday and amassed gains of just 0.77% in three sessions, while BDRs (asset of a publicly traded company abroad) of Mercado Livre (MELI34) rose 17.5% in the period.
Against this backdrop, what explains the surge in Magalu’s shares?
Of note, MGLU3 shares fell 11.22% on Thursday after Americanas disclosed R$20 billion in accounting discrepancies, on fears that the discrepancies could spread to other companies. However, Magalu assets finished the session with gains of more than 5%.
First, it’s worth explaining that Americanas’ billion-dollar deficit originates from credit risk withdrawn from accounts payable (liabilities) with suppliers. As Genial Investimentos points out, the company has paid suppliers with bank credit, but has not recognized these transactions as bank/financial debt on the balance sheet.” Most impressively, accounts payable with suppliers were only BRL 5 billion (liabilities) in 3Q22, well below the BRL 20 billion gap. Inventory (asset) account was only BRL 5.77 billion in 3Q22, in line with vendor account. That is, everything indicates that the company has paid suppliers with credit and has canceled suppliers and inventory from the account”, evaluates the analysis house.
On Thursday, Magalu himself tried to clarify in talks with market agents during the session not to resort to bank loans to pay suppliers with an additional term. Via, on the other hand, issued a statement specifying that all of his risk-taking operations are recorded in the company’s financial statements according to international accounting standards. This reassured the market about other companies in the sector after an initial wariness about the impact for them.
Meanwhile, market analysts have ended up highlighting the impact that “weakened” Americans could have on their rivals, in a scenario in recent years in which fierce competition in the sector has undermined the profitability of retailers.
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Cassiano Leme, CEO of Constância Investimentos. points out that the expectation that Magalu will have a weaker competitor, leading to the possibility of better margins, ended up boosting the company’s share, which had a sharp decline of 62.5% in 2022. The company is still subject to great caution from analysts for the macroeconomic scenario, but it is considered one of the favorites of the sector after Mercado Livre and also presented the best results for the third quarter of 2022 among Brazilian companies.
Looking at the dynamics of the sector, Morgan Stanley (which last week put the AMER3 asset recommendation under scrutiny, as did several other houses) noted that, after the accounts scandal, Americanas is likely to have a decline in its share market share (currently 15%) in Brazilian e-commerce. Mercado Livre should lead the conquest of the market left by Americanas, while Magalu and Via are among the potential beneficiaries.
Analysts point out that, in call With investors on Thursday explaining the scenario, Americanas executives cited no impact on ongoing operations. “However, we see potential risks around the ability to manage inventory and also the ability to invest for growth, especially when considering senior management turnover.”
While Goldman Sachs believes it’s too early to assess how American news might impact industry dynamics, Goldman Sachs stresses that any weakening or disruption of the company’s competitive positioning could create market share opportunities for its key competitors.
“We believe that Americanas’ 1P e-commerce business (treasury shares) of approximately R$15 billion competes most directly with Magalu and Via,” Goldman points out, estimating that approximately 70% of the gross merchandise volume (GMV) of Americanas Its inventory is in durable goods/electronics, which implies approximately R$11 billion in GMV in this category.
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“There may also be exposure to the category through its marketplace (3P), but we believe it is significantly lower (we estimate around 35%),” the analysts point out. In Americanas physical stores, analysts estimate exposure to durable goods at around 25% (mainly TVs, smartphones and portable appliances). This would imply approximately BRL 23 billion in durable goods/electronics sales.
Friday’s preliminary decision against the early maturity of debts and news of an impasse with creditor banks ignited judicial recovery fears in Americanas, which led the rest of the sector’s shares to soar the day before.
“In judicial reorganization, companies can continue to operate, but enter a process that ends up resulting in a financial restructuring. (…) We believe that a judicial reorganization could accelerate the pace at which Americanas sells its stake in national e-commerce”, Morgan underlined. The bank reiterated that it believes Mercado Livre is likely to capture the largest market share left by Americanas, while potential beneficiaries also include Magazine Luiza and Via.
To complete the scenario, the day before, the Minister of Finance, Fernando Haddad (PT), said yesterday that the government had decided not to re-establish the Industrialized Products Tax (IPI) rates to signal a commitment to move forward with tax reform agenda.
In drawing up the package of measures to improve this year’s public accounts, Haddad also studied the increase in IPI rates, reversing the 35% cut made by the management of former Economy Minister Paulo Guedes. The tax return would generate an increase of 9 billion reais in the 2023 accounts, but in the end the proposal was rejected and did not enter the set of actions announced last week.
At the time of the IPI cut early last year, XP had identified Magalu, Via and Natura&Co (NTCO3) as the main beneficiaries, with the measure expected to lead to lower costs, which would be passed on to final prices at increase demand or be partially incorporated into margins.
Therefore, Magalu’s shares have come to benefit in the short term from the market reallocation within the more e-commerce focused retail sector. However, it should be noted that the scenario remains cautious for the sector in general, mainly due to the macroeconomic scenario, even if it is believed that the assets may be discounted.
According to a compilation made by Refinitiv with analysis houses, out of 14 houses covering MGLU3, five recommend the purchase and nine recommend maintenance, with an average target price of R$ 5.06, still a potential appreciation of 31% compared to the closing from the day before.
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