S&P Global Ratings gave it a brAAA rating because of the company’s cash and increased operating profit margins
The American credit rating agency S&P Global Ratings announced on Thursday (14.Apr.2022) that it decided to keep the retail chain Magalu with the brAAA grade, the highest for the Brazilian market.
It was positive news for Magazine Luiza because the company had faced difficult times in 2021 due to the downturn in the economy and the drop in retail trade in general in Brazil.
The analysis by S&P Global Ratings (intact – 1.5 Mb) indicates that Magalu has a stability outlook. The brAAA rating was maintained, according to the agency, because the company has a good cash position, improves working capital and expects to increase operating profit margins.
“The ‘3’ recovery rating remains unchanged, indicating our expectation of a significant recovery (65%) in our hypothetical default scenario”wrote analysts at S&P Global Ratings.
“In addition, there was an increase in the amount of prepaid receivables in the year, combined with weaker margins, mainly due to a year of retraction in sales in physical stores due to the challenging macroeconomic environment, with higher interest rates and inflation above the target”says the report.
S&P expects Magalu’s digital business (e-commerce) to recover in 2022. The company has invested in increasing its operations on the marketplace platform (when third parties use its system to sell products) and offers a wide range of items for the consumer.
Among the expectations of the international agency are better working capital management, with a reduction in the level of inventories to suit the post-pandemic business environment.
“We estimate an Ebitda margin of around 7% and an adjusted debt-to-Ebitda ratio of around 4.0x in 2022, with gradual improvement in the following years and maintenance of its comfortable liquidity position”, states the report. The expression Ebitda is the acronym in English for “earnings before interest, taxes, depreciation and amortization”. (“earnings before interest, taxes, depreciation and amortization”). It is one of the main indicators to know the financial health of a company.
The stable outlook reiterated by analysts indicates S&P’s expectation that Magazine Luiza will continue to deliver solid revenue growth.
One of Magalu’s strategies cited as successful by S&P is the use of physical stores (on the company’s website the cited number is 1,481) as “hubs”, local distribution centers for items sold to online shoppers.
The delivery of products sold digitally in Brazil faces enormous logistical and operational challenges. The scenario here is different from what is seen, for example, in the USA – a country where the delivery system by the Post Office or other companies (UPS, FedEx, etc.) is something already established and secure. In Brazil, this type of reality does not exist in many regions.
In its report, S&P positively emphasizes Magalu’s investment in creating its own logistics to serve the domestic market:
“In our view, an important part of Magazine Luiza’s strategy for the coming years is to continue increasing the representation of its online platform, bringing new sellers to its marketplace, with focus on local retailers that currently sell only in physical format, in addition to continue to invest in logistics and technology to ensure fast and on-time delivery, important factors for repeat purchases and consumer satisfaction. In this new context, physical stores now play a broader role, serving as a point for collecting items from their partner sellers (Agência Magalu) and withdrawal of products by its customers (Retira Loja – which already represents 13% of marketplace orders), strengthening the omnichannel and convenience of its operation.”
The expressions “omnichannel” and “omnichannel” (words that come from the English, “omnichannel”, and which are not yet listed in the Orthographic Vocabulary of the Portuguese Language) are market jargon for single-channel communication. Refers to the integration of all available contact forms of a company, used to allow the customer to initiate communication through one channel and then continue through another.
In S&P’s estimate, e-commerce sales in Brazil should grow 20% in 2022. In the following years (2023-2024), the expansion rate will be 10% to 15% every 12 months.
Magalu’s 1,481 physical stores are expected to grow in 2022, when 15 new units are expected. Afterwards, that pace should increase to 50 to 70 new stores per year.
In 2021, Magalu had a total turnover of BRL 56 billion. In the announcement of the results (intact), the company reports that “online sales already represent 71% of total Magalu sales”.
Disclaimer: Magalu’s CEO, Frederico Trajano, is a minority shareholder of the digital newspaper Power 360.
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