Consumer & retail. abc. Consumer & retail team

Transcription

1 team Francisco J Chevez Analyst HSBC Securities (USA) Inc francisco.j.chevez@us.hsbc.com Manisha Chaudhry Analyst HSBC Securities (USA) Inc manisha.a.chaudhry@us.hsbc.com Stewart H Ragar Analyst HSBC Bank Brasil SA stewart.h.ragar@hsbc.com.br 1

2 2 Sector structure Staples retailing Beverages xxxxxxxxxx See sector section for further details Consumer & Retail LATAM xxxxxxxxxxxxxx Food Apparel Retailers xxxxxxxxxx See sector section for further details Home & Personal Care Internet Retailers Latin America Equity Research Wal-mart de Mexico Lojas Renner Hypermarcas MercadoLibre Grupo Pao de Acucar Lojas Marisa Genomma Lab Lojas Americanas Soriana Companhia Hering Natura Cosmeticos B2W Chedraui Comerci Mexicana Exito Guararapes Confeccoes Arezzo Alpargatas Cencosud Le Lis Blanc Liverpool Source: HSBC

3 Sector price history Latin America Equity Research Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Consumer Staples Consumer Discretionary Source: Thomson Reuters Datastream, HSBC 3

4 4 EBIT margin asset turnover chart (2011) 35.0% 30.0% Cia Hering MercadoLibre Inc Latin America Equity Research 25.0% Genomma Lab Internacional 20.0% EBIT margin Arezzo & Co Guararapes Confecµêes 15.0% Lojas Renner S.A Lojas Americanas S.A Marisa Lojas 10.0% Wal-Mart de Mex ico B2W-Cia Global do Varejo 5.0% Chedraui CBD Soriana 0.0% 0.0x 0.2x 0.4x 0.6x 0.8x 1.0x 1.2x 1.4x Asset Turnover Source: Company data

5 Sector description Consumer products and retailing Retailing in emerging markets like Latin America is supported by structural growth, favourable macroeconomic conditions including decreasing unemployment, increased inclusion of women in the workforce, positive consumer sentiment, shopping mall growth, and easier availability of consumer credit. Francisco J Chevez, CFA Analyst HSBC Securities (USA) Inc francisco.j.chevez@us.hsbc.com The retail industry in Latin America s key retail economies, Mexico and Brazil, is driven by a large and growing middle class. Chile is another important emerging player in the industry, with ownership stakes in other countries throughout the region. Ownership structures for Latin American companies in the industry are varied, with a strong representation of family ownership. While many of the retailers in the region are family owned, such as Marisa and Arezzo, with more than 60% ownership, others such are Lojas Renner are 100% public. Other are subsidiaries owned by larger global firms, such as Walmart de Mexico, which is owned by Walmart, and CBD in Brazil is owned by French food retailer, Casino. Industry players as well as new entrants seek to capture market share by targeting this fast-growing consumer base. The IPO market in both Brazil and Mexico countries saw a wave of activity in the early to mid-1990s, when a majority of the Mexican and Brazilian food and apparel retailers went public. Recent IPOs in Brazil have included more premium, fashion focused, apparel brands such as Les Lis Blanc and Arezzo & Co in 2008 and 2010, respectively. This trend responds to rising incomes and female labor force participation, which has been a critical driver to both food and apparel retail in the region. Female labor force participation increased by 75.2% in Brazil and 18.7% in Mexico between Growing access to credit has also been an important driver of consumption in both Mexico and Brazil. In 2011, Brazil had 22% growth in personal credit. In Mexico, consumer credit grew 24% in Mexico s retail sector remains attractive due to its growing middle class, supporting a retail sector that is expected to expand by 12% by Domestic demand has been a strong driving force, reaching record highs since 2008, as the purchasing power outlook also reached record levels in 2012 since Given the relative saturation in food retailing in Mexico, industry growth has shifted toward speciality retailing. A number of US and European retailers are entering through joint ventures and franchises. The retail sector in Brazil has been boosted by shopping mall growth, which accounts for around 20% of retail sales. The acceleration in Brazil s mall development with a recorded 408 malls at 2010-end, is critical to the country s retail growth. HSBC estimates acceleration in mall growth with the addition of 21 malls in 2011 and 43 in Mall developments have been mostly concentrated in the southeast region of Brazil, suggesting opportunity for regional expansion. While Brazil s middle class represents a majority of the population, upward trends into higher income segments has given rise to consumer spending and Brazil s luxury market. Brazil s middle class constituted 54% of the population as of A total of 22% of Brazilians in 2011 were in the highest A and B in income segments, compared to 15% in Rising incomes and women s labor force participation in recent years are favorable trends for Brazil s apparel and accessories market, the secondfastest growing consumption category registering growth of 17% in In terms of competition, Brazil's economy is protected from international competition to some extent due to tariffs on imported goods. Mexico is at the other end of the spectrum, with a very open economy and a 5

6 large external sector. These structures have resulted in relatively high prices for Brazilian consumers and lower prices for their Mexican counterparts. The sector is divided into consumer products and retailing companies. The retail segment is further divided into staples retail, soft-line retail, and e-commerce. The consumer segment is divided into food, beverages and HPC (home & personal care). The food and beverages sectors are described in other parts of this report. Staples retailers Companies in the staples retailing segment are mostly food retailers in the region. Food retailing in emerging markets like Latin America is supported by structural growth, favorable macroeconomic conditions including growing disposable income, declining unemployment, and consumer credit expansion. We believe that presently, c45% and c50% of retail trade in Brazil and Mexico, respectively, is through modern retail format, thus creating a high growth industry in these countries. Food retailing is highly fragmented in Brazil but there are just a few dominant players in Mexico. Thus consolidation opportunities in Brazil represent another industry growth driver. Discretionary spending growth encourages food retailers to diversify their merchandise by offering to other non-food items. The industry in Latin America is under-penetrated and highly fragmented which offers both organic and inorganic growth opportunities to companies, particularly in Brazil. Retailers such as Walmart and Casino have established operations in the region seeking the next wave of growth. Wal-mart de Mexico is one of fastest growing subsidiaries, and through Walmex, the company is expanding into other Central American countries. Walmart also believes that Brazil will be one of the key growth markets in its international operations. Casino is present in Brazil through its stake in CBD and in Colombia through its stake in Exito. Exito further has a majority stake in Disco and Devoto stores in Uruguay. The industry operates different store formats: hypermarkets, supermarkets, discounters, convenience stores, cash and carry, and department stores. Hypermarkets are large stores (above 8,000 square meters per store) that focus on volume and compete on price. They usually sell groceries and general merchandise offering up to 50,000 stockkeeping units (SKUs), a common measure of each unique product or item for sale in the retail industry Supermarkets are medium sized stores (about 2,000 square meters per store) which also focus on groceries but have a limited collection of non-food items as well. These stores primarily compete on price and have around 13,000 SKUs in grocery Convenience stores offer a variety of food and non-food items and are located very near to the target customer population. As the name suggests, these stores provide convenience of location to customers in return for higher prices Discount stores are no frills stores with low prices targeting lower income customers Department stores have many different categories functioning as different business units beneath one roof. They have the largest number of SKUs. 6

7 Soft line retailers Soft-line is a retailing term relating to a product line primarily consisting of merchandise like clothing, foot-wear, jewellery and other linens. The soft-line retailers in Latin America have performed well despite negative economic conditions recently on the back of increasing discretionary spending in the region. E-commerce E-commerce in Latin America is the fastest growing in the world not only due to low penetration rates but also thanks to improving macro economic conditions in the region as well as growing availability of broadband services. The internet penetration in the region is comparatively low at 40%, with Brazil having 39% and Mexico having 37% penetration when compared to US with 78% and Europe with 61% penetration. Brazil experienced a 20% annual growth in broadband subscribers over the last two years. The industry should continue to see faster growth as the supporting distribution network improves. There are a few pure e-commerce companies in Latin America such as B2W and MercadoLibre. In addition, many brick and mortar retailers are building an online presence as well. Key themes and sector drivers Staples retailers Consumer confidence This is measured through regular surveys of consumers who reveal their assessment of the state of the economy and their own personal financial situation. The survey acts as an indicator for the direction of the economy and consumer propensity to spend on products. When consumer confidence grows, consumers trade up as has been the case in recent years. Selling space growth The staples retailing companies experienced close to 10% growth in 2011which should allow increased economies of scale which lead to expanding margins. As penetration rates improve, retailers in Latin America are moving to small-store formats. However, we expect retailers in Latin America will continue to build large format stores as the most effective way to penetrate the market. Same store sales growth As retailers bring new products to stores they tend to generate more sales from the space they already operate. Such growth represents the attractive appeal of the store which can be enhanced using better branding, diversifying merchandise, pricing and loyalty offerings. Soft line retailers Imports Imported merchandise contributes to higher gross margins from a combination of higher prices and lower costs to the retailers. We estimate the mark-up on Latin America-made apparel is 2.5x while it reaches 3.0x for imported items. The price-value proposition of Asian manufacturers is difficult to replicate by the Latin American textile industry, especially when it comes to synthetic fibers. Imported merchandise contributes to higher gross margins from a combination of higher prices and lower costs to the retailers. 7

8 Designer collaborations Designer collaborations with retailers, a concept spearheaded by European retailers such H&M, have been picked up by a range of retailers including Walmart and Target, and recently by apparel retailers in Brazil including Guararapes, Lojas Renner, and Arezzo. While these collections sellout quickly and break-even at best they generate millions of dollars of free advertising and buzz value, which is invaluable for brand image. We emphasize fashion content as an important driver of sales in apparel retailers. Outlet mall Outlet stores are beginning to emerge in Brazil as the retailing industry modernizes and apparel manufacturers and retailers find new ways to distribute and sell their merchandise. Outlet stores typically sell returned, discontinued, or irregular merchandise at heavily reduced prices. This American invention has been spreading around the world and it has now reached Brazil. Initially, manufacturers opened individual outlet stores in different locations, including airports. Now, outlet malls are getting a boost in Brazil with the announced JV formed by Simon Properties and BR Malls. E-commerce E-commerce growth in Latin America should continue to be driven by broadband penetration in the region s competition between cable and telephone companies intensifies, the supply of services is increasing and pricing is becoming more accessible. In addition, technology improvements and wider acceptance of electronic payments is boosting e-commerce growth in Latin America. Valuation The consumer and retail companies trade on traditional earnings metrics, namely forward-looking PE multiples and EV/EBTIDA. The staples retailing companies currently trade on c20x our 2012 earnings estimates. The apparel retailers are around c18x our 2012 earnings estimates, while the internet retailers trade around c28x our earnings estimates. Compared to these valuations three years ago, staples were trading at 18x, apparel at 17x and internet retailers were trading at 31x e Growth Sales 15.9% 15.4% 24.9% 17.0% 15.1% EBITDA 23.7% 20.0% 28.7% 13.1% 22.8% EBIT 27.8% 24.2% 31.3% 11.7% 26.8% Net profits 9.1% 53.9% 23.9% 4.8% 8.7% Margins EBITDA 11.7% 12.4% 13.3% 12.6% 13.5% EBIT 9.5% 10.4% 11.3% 10.5% 11.5% Net profit 5.7% 7.2% 7.4% 6.6% 7.6% Productivity Capex/sales -7.0% -4.6% -5.4% -5.3% -4.8% Asset turnover (x) 0.7x 0.7x 0.8x 0.8x 0.8x Net debt/eq 25.4% 32.1% 21.8% 13.8% 2.2% ROE 18.3% 24.1% 25.6% 20.8% 20.7% Note: based on all HSBC coverage of Consumer & Retail Source: HSBC estimates, company data 8

9 We derive our target PE multiples by applying the following formula: PE = (ROE-g)/(ROE * (k-g)) Where g = long term growth rate of earnings and ROE = HSBC s projection for 2011 for each company Ke = cost of equity Given these two inputs, we calculate different growth rate assumptions to arrive at a fair multiple for each company. We compare the implied growth rate derived from our target multiple against our perception of potential EPS growth. We also compare it against the growth implied by the current market PE. 9

10 Sector snapshot Key sector stats Consumer discretionary 4.39% of MSCI EM Latam Trading data ADTV (5 Year) (USD mn) Free float market cap (USD bn) Performance since 1 Jul 2002* Absolute % Relative to MSCI EM Latam % 3 largest stocks TV.N, FALABELLA, LREN3.SA Correlations (5-year) with MSCI EM Latam 0.88 *Performance includes dividends Source: HSBC, Thomson Reuters Datastream, MSCI, I/B/E/S, At June 30, 2012 Top 10 stocks Stock rank Stocks Index weight Core industry driver: Consumer Confidence Index Jun-02 Jun-04 Jun-06 Jun-08 Jun-10 Jun-12 Brazil Mexico Source: Thomson Reuters Datastream, HSBC 1 TELEVISA CPO 1.47% 2 FALABELLA 0.60% 3 LOJAS RENNER ON 0.46% 4 LOJAS AMERIC PN 0.36% 5 CIA HERING ON 0.36% 6 CYRELA REALT ON 0.30% 7 PDG REALT 0.26% 8 ANHANGUERA ON 0.21% 9 MRV ON 0.21% 10 LIVEPOL 'C-1' 0.20% Source: HSBC, Thomson Reuters Datastream, MSCI, I/B/E/S, At June 30, 2012 PE band chart x 24x 20x 18x 15x 12x Country breakdown Jun- Dec- Jun- Dec- Jun- Dec- Country Weights (%) Mexico 7.51% Chile 6.73% Brazil 3.58% Colombia 0.00% Peru 0.00% Source: HSBC, Thomson Reuters Datastream, MSCI, I/B/E/S, At June 30, 2012 Source: Thomson Reuters Datastream, HSBC, MSCI PB vs. ROE May -11 Jul-11 Sep-11 Nov -11 Jan-12 Mar-12 May -12 Fwd PB (LHS) Fwd ROE % (RHS) Source: Thomson Reuters Datastream, HSBC, MSCI 10