Lojas Renner: Time to Buy Brazil's Largest Clothing Retailer?
B3: LREN3, OTC US: LRENY
In response to requests from readers, today we are going to talk about a well-known company in the Retail sector: Lojas Renner (B3: LREN3, OTC US: LRENY).
Who will I be a partner with?
The company has common shares (LREN3) listed on B3. It's ADR is traded OTC as LRENY.
It is known for being the first Brazilian full corporation, a company without a defined controlling shareholder.
The largest shareholder is BlackRock with 10% of the shares.
The Board of Directors holds 0.40% of the shares and, the Management, 0.05%.
The remaining shares are scattered across the market.
What is Lojas Renner?
Founded in 1965 and listed on the Brazilian Stock Exchange since 1967, it is the largest fashion retailer in Brazil in terms of gross revenue, with more than 600 stores.
Business units:
Renner (92% of net revenue): largest omnichannel fashion retailer in Brazil
Camicado (5% of net revenue): leader in home and decoration in Brazil
Youcom (3% of net revenue): specialized in youth fashion
Ashua (consolidated in Lojas Renner): specialized in curve & plus size
Repassa (consolidated in Lojas Renner): resale platform
Realize CFI: financial institution supporting the retail unit
My Point of View:
Those who are older in the market remember Renner's golden days. Under the leadership of José Galló, Renner went from a small chain of stores almost bankrupt to a retail powerhouse. In the last few years before his departure in 2019, the company operated like a Swiss watch, even going through the times of Dilma II practically unscathed, a miracle.
Galló became the Chairman and left in his place a member of staff, Fabio Faccio, who, since 2019, has been the company's CEO. The current CFO joined in 2022, coming from Unilever.
The retail business is quite complex to operate in Brazil. Even many large investors do not invest in this sector, claiming that companies sooner or later end up going bankrupt.
In 2020, the pandemic came. The world turned upside down. Renner suffered, but withstood the struggle. Did the new Management do as well as Galló in his heyday would have done? We will never know. But I would say that Galló is unsurpassed, he is the creator of an ingenious model that worked very well at the time, but is currently undergoing adaptations due to market changes.
The fact is that Renner is no longer that Swiss watch, but it is making an effort to become so again.
The company is doing its homework by growing a lot online to consolidate the omnichannel model. It is also important to highlight that it is net cash.
But life is not easy.
A certain company called Shein was quickly able to create collections, deliver to customers' homes and all of this for a fraction of the price of Renner's products. How come? Tax-free. To save clothing retailers, the government created the Remessa Conforme Program, somewhat restricting this market gap.
At the same time, with interest rates soaring, the economy is suffering. Guess which sector is highly impacted? Retail.
Renner didn't suffer as much from a drop in sales and margins as the sector in general, but the default of Realize, its finance company, is enough to make anyone's hair stand on end.
The stool created by Galló, which previously boosted Renner's ROE and justified the high multiples of its shares, is now a drain on money due to excessive defaults.
We cannot forget, of course, that most of the shares of businesses focused on the domestic market are abandoned, trading below historical multiples.
This perfect storm caused Renner's shares to plummet, something previously unimaginable. It's that story about the Quality company, loved by funds, with a superstar CEO, traded at a premium. All it takes is one pin for the balloon to pop and the shares melt like a McDonald's ice cream cone in Rio de Janeiro.
LREN3 reached R$51.54 before the pandemic and is now R$12.61. An incredible 75% drop!
Most of Renner's problems should be resolved with the ongoing fall in the Selic rate, but...
Is it time to buy?
Will it return to that pre-pandemic level?
Is it cheap?
After all, is it to buy this stock or not?
What is the price to buy and sell LREN3 (or LRENY) after all?
I'll show you all the rationale, in detail.
Let's go.