brazil retail and internet - static.poder360.com.br · in the case of zara, its brazilian...

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Equity Research

Fabio Monteiro

Brazil – Banco BTG Pactual S.A.

[email protected]

+55 11 3383 2006

Luiz Guanais

Brazil – Banco BTG Pactual S.A.

[email protected]

+55 11 3383 2755

Zara Index Update: the Brazil cost

Stronger USD makes local markets more competitive. Brazil was an outlier

Since the inception of our “Zara Index” in 2014 (see our April 2014 report “Foreign

Invasion: Why, how and what it means for locals”), Brazil has been one of the most

expensive countries to buy apparel. In this edition, we expand the number of countries

analyzed (from 29 to 44) for a basket of 12 items. Our simple conclusion is that USD

appreciation increased the competitiveness of local markets (only the Swiss Franc,

Japanese Yen and Thai baht appreciated more than the USD in LTM), with Zara US

one of the most expensive operations for the sample of products under analysis. To

our surprise, the only exception was Brazil.

BRL down 14% LTM vs. USD; Zara Brazil is 18% more expensive than in the US

The BRL was one of the currencies to lose most value against the USD (14% YTD),

mostly reflecting political volatility related to the October elections. However, Zara’s

products are now 18% more expensive in Brazil than in the US. That’s a huge change

versus our 2016 Zara Index (Brazil was 22% cheaper than in the US), but followed the

same trend of our first survey, in 2014, when prices in Brazil were the highest in the

world and 21.5% costlier than in the US. The conclusion of the current study was

reached despite Brazil’s tough macro scenario, which took a toll on the amount of

money that Brazilians spent abroad - 16% below 2013 levels (excluding inflation).

A more hostile environment for foreign players than local companies

Brazil is clearly a tough country for players to do business. Regulatory issues, the

complexities of the tax system and logistics bottlenecks made otherwise successful

players overseas (e.g. Amazon and Walmart) struggle to gain traction in the country.

In the case of Zara, its Brazilian subsidiary has a different M.O. than its global strategy,

where distribution is centralized and 57% of factories are concentrated in proximity

countries (Spain, Portugal, Morocco and Turkey). In Brazil, Zara’s FX risk is higher and

lead time is longer, as very little is produced locally compared to ten years ago, when

Zara produced roughly 40% locally. Only 92 factories are located in Brazil or Argentina,

1.3% of Zara’s factories (7,210).

Blue sky for locals…but not for everyone!

We don’t expect the main barriers for foreign retailers to come down much in the coming

years (our 2018 Zara Index showed how difficult it is for foreigners to remain

competitive in the Brazilian market). But it isn’t a blue sky for all local retailers.

Execution discipline and focus on processes and controls remain a key theme. So,

companies like Lojas Renner (LREN3) should outperform. Renner has lots of room to

grow its market share (currently 6%) in a fragmented apparel retail sector. In the

meantime, following the secular growth trend of e-commerce in Brazil, B2W (BTOW3

– Buy) and Magazine Luiza (MGLU3 – Buy) are potential winners in this scenario,

combining a great focus on service levels, solid traffic and broad assortment at their

websites, which offer a barrier for new entrants and foreign players to succeed.

BTG Pactual Affiliate Research

Banco BTG Pactual S.A.

SectorNote

07 January 2019

Brazil Retail and Internet

Brazil Retail and Internet 07 January 2019 page 2

USD appreciation again dictated Zara Index’s main trends; Brazil was an outlier

Our last update of the Zara Index was in February 2016. Since then, the USD

depreciated 4.3% versus BRL (while BRL depreciated 14% LTM). Indeed, comparing

a basket of 44 currencies (the scope of our analysis in this report), only the Suisse

Franc, Japanese Yen and Thai baht appreciated more than the USD in LTM.

Table 1: Currencies’ performance vs. USD (LTM)

Source: Bloomberg and BTG Pactual (01/03/2019)

Our survey this time includes prices of 12 products in 44 countries (vs. 29 previously)

with a very similar basket. We also took into account list prices, ignoring any

markdowns.

The BRL was one of the currencies to lose most value against the USD in 2018 (14%

LTM) – mostly reflecting political volatility, given the elections that took place in

October, but Zara’s products are now 18% more expensive in Brazil than in the US.

4%

2%

1%

0%

0%

-2%

-2%

-3%

-3%

-4%

-6%

-6%

-6%

-6%

-6%

-6%

-6%

-6%

-6%

-6%

-6%

-6%

-6%

-6%

-6%

-6%

-6%

-6%

-6%

-6%

-6%

-7%

-7%

-7%

-8%

-8%

-9%

-9%

-10%

-10%

-11%

-14%

-17%

-31%

Japan

Switzerland

Thailand

US

Hong Kong

Vietnam

Mexico

Singapore

Malaysia

Taiwan

Croatia

Mainland China

Bulgaria

Belgium

Germany

Estonia

Spain

Finland

France

Greece

Ireland

Italy

Luxembourg

Netherlands

Austria

Portugal

Slovakia

slovenia

South Korea

Danmark

Romania

New Zeland

Czech Republic

Norway

UK

Canada

Poland

India

Sweden

Hungary

Australia

Brazil

Russia

Turkey


After Brazil, Zara’s most expensive operations worldwide are in Japan and in the US,

mainly reflecting USD appreciation versus global currencies.

Table 2: “Zara Index” 2018 (raw) – Price gap to Zara US

Table 3: “Zara Index” 2018 (PPP-adjusted) – Price gap to Zara US

Source: Company and BTG Pactual Source: BTG Pactual

That’s a huge change vis-à-vis our 2016 Zara Index (Brazil was 22% cheaper than in

the US), but followed the same trend of our first survey, back in 2014, when prices in

Brazil were the highest in the world and 21.5% costlier than in the US. In 2016, the BRL

was also pressured by the deterioration of Brazil’s fiscal situation and political woes.

As in the previous versions of our Zara Index, Portugal and Spain are among the

cheapest places to buy Zara products, due to the fact that Inditex (owner of Zara) has

manufacturing facilities in Spain and outsources production to factories in Portugal,

Morocco and Turkey (this time we also included the Turkish operation, whose prices

are, on average, 33% cheaper than in the US).

18%

4%

0%

-1%

-1%

-4%

-5%

-5%

-6%

-8%

-11%

-12%

-13%

-15%

-15%

-16%

-17%

-18%

-19%

-21%

-22%

-24%

-25%

-28%

-29%

-29%

-29%

-29%

-29%

-29%

-29%

-29%

-29%

-29%

-30%

-30%

-31%

-32%

-33%

-33%

-36%

-36%

-36%

-36%

Brazil

Japan

US

South Korea

Thailand

Switzerland

Vietnam

Russia

Singapore

Taiwan

Hong Kong

Malaysia

Australia

Danmark

New Zeland

Norway

Canada

Mainland China

Sweden

Czech Republic

India

Mexico

UK

Croatia

Belgium

Germany

Estonia

Finland

France

Ireland

Italy

Luxembourg

Netherlands

Austria

Poland

Bulgaria

Romania

Hungary

Turkey

Greece

Spain

Portugal

Slovakia

Slovenia

191%

171%

159%

144%

144%

140%

114%

86%

67%

59%

59%

52%

48%

40%

32%

30%

27%

25%

14%

9%

8%

7%

0%

-7%

-9%

-11%

-14%

-17%

-17%

-18%

-20%

-20%

-23%

-24%

-24%

-26%

-26%

-26%

-27%

-27%

-27%

-31%

-34%

-34%

India

Vietnam

Russia

Thailand

Malaysia

Turkey

Brazil

Taiwan

Bulgaria

Mexico

Romania

Mainland China

Singapore

Poland

Hungary

Czech Republic

Croatia

South Korea

Hong Kong

Slovakia

Estonia

Japan

US

Greece

Portugal

Slovenia

Canada

New Zeland

Italy

Spain

Australia

UK

Sweden

Germany

Switzerland

France

Belgium

Austria

Danmark

Ireland

Netherlands

Norway

Luxembourg

Finland


Table 4: BZ price gap to US

Table 5: Spain price gap to US

Source: Company and BTG Pactual Source: Company and BTG Pactual

Inditex has a footprint in 96 countries, with 7.4k stores and eight banners (Zara,

Pull&Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterque).

Table 6: Net revenues by banner EURmn – Inditex (2017)

Table 7: # of stores by banner – Inditex (2017)

Source: Company and BTG Pactual Source: Company and BTG Pactual

As of 2017, Inditex operated with ~1.8k suppliers (and 7.2k factories). 57% of factories

are in countries near Zara’s headquarters, such as Spain, Portugal, Morocco and

Turkey, which explains why these countries have lower average prices than most of

Zara’s operations worldwide.

18%

-23%

-4%

21%

2018

2016

2015

2014

-36%

-39%

-36%

-34%

2018

2016

2015

2014

16,620 1,747

1,765

2,227

1,480

570

830

97

Zara Pull&Bear Massimo Dutti Bershka Stradivarius Oysha Zara Home Uterque

2118

979

780

1098

1017

670

590

90

Zara Pull&Bear Massimo Dutti Bershka Stradivarius Oysha Zara Home Uterque


Table 8: Inditex total suppliers and manufacturers by geographic area

Source: Company and BTG Pactual

In Brazil, Zara started its operations in 1999 and, in almost 20 years, opened 56 stores

in the country (vs. an initial plan to open 50 stores in three years), plus 15 Zara Home

stores. Logistics challenges coupled with Brazilian tax system complexities made

Zara’s life in Brazil much tougher.


Table 9: Tax system in Brazil

Source: BTG Pactual

Zara’s Brazilian subsidiary has a different M.O. than its global strategy, in which all

distribution is centralized and 57% of production is maintained in Portugal, Spain and

Morocco axis (which borders Spain).

Almost all clothes manufactured for Zara in the world, including Asia, are shipped to

three major distribution centers in Spain. From there, they go by truck or plane to 96

countries in which the company has stores.

Maintaining production in Europe is more expensive than manufacturing everything in

China, as competitors do. But one of Zara’s differential is its state-of-the-art inventory

management (which also helps its fast fashion model).

In Brazil, Zara’s FX risk is higher and lead time is longer, as very little is produced

locally compared to ten years ago, when Zara produced roughly 40% locally. Only 92

factories are located in Brazil or Argentina, 1.3% of Zara’s factories (7,210).


Table 10: Zara’s timeline

Source: Company and BTG Pactual

1975 – First store in La Coruña

1977 – Headquarters in Arteixo (Spain)

1984 – Opens logistics Center

(Arteixo)

1985 – Creation of Inditex (Holding

company)

1988 – Opens first store in Portugal

1989 - Opens first store in the US

1990 – Opens first store in France

1992 – Zara opens first store in Mexico

1993 – Opens first store in Greece

1994 – Opens first stores in Belgium and

Sweden

1999 – Zara starts operation in Brazil

2003 – Opens distribution center in

Zaragoza

2006 – Opens distribution center in

Léon

2009 – Zara deepens coverage in China with Stradivarius,

Bershka and Pull&Bear

2012 – Opens logistics Center in

Tordera

2017 – Reaches 7,475 stores with 8

banners (2,118 under Zara banner)


Our previous Zara Index editions

Chart 1: “Zara Index” 2014 (raw) – Price gap to Zara US



Source: BTG Pactual Source: BTG Pactual Source: BTG Pactual

21.5%

14.2%

12.9%

6.2%

4.8%

2.6%

-3.4%

-5.4%

-6.5%

-11.1%

-12.1%

-12.1%

-12.1%

-12.1%

-12.1%

-12.1%

-12.1%

-12.1%

-17.3%

-29.1%

-29.1%

Brazil

Switzerland

Norway

Sweden

Denmark

Japan

China

Poland

United Kingdom

Canada

Italy

Belgium

Germany

France

Ireland

Luxembourg

Monaco

Netherlands

Greece

Spain

Portugal -41.4%

-40.9%

-40.1%

-33.3%

-28.8%

-24.2%

-23.5%

-23.1%

-22.6%

-22.2%

-22.2%

-21.3%

-21.3%

-21.3%

-21.3%

-21.3%

-20.9%

-20.3%

-19.4%

-13.5%

-10.8%

-10.5%

-8.4%

-7.1%

-0.1%

5.4%

16.3%

17.8%

Portugal

Spain

Russia

Greece

Colombia

Romania

Poland

Chile

Canada

France

Ireland

Belgium

Germany

Italy

Luxembourg

Netherlands

Austria

Monaco

Mexico

Sweden

Denmark

United Kingdom

Norway

Japan

Brazil

China

South Korea

Switzerland 4.8%

-2.2%

-3.5%

-4.7%

-6.8%

-10.0%

-10.1%

-11.3%

-13.1%

-15.1%

-22.5%

-23.0%

-24.8%

-25.9%

-26.0%

-26.0%

-26.0%

-26.0%

-26.0%

-26.0%

-26.0%

-26.0%

-26.0%

-27.5%

-28.3%

-28.8%

-33.4%

-39.5%

-39.5%

Macau

South Korea

China

Japan

Hong Kong

Denmark

Switzerland

Sweden

Norway

United Kingdom

Brazil

Russia

Taiwan

Canada

Austria

Belgium

Germany

France

Ireland

Italy

Luxembourg

Monaco

Netherlands

Greece

Mexico

Romania

Poland

Spain

Portugal


Chart 4: “Zara Index” 2014 (PPP-adjusted) – Price gap to Zara US



Source: BTG Pactual Source: BTG Pactual Source: BTG Pactual

54.2%

49.4%

42.1%

-0.8%

-11.8%

-14.1%

-17.0%

-18.2%

-19.1%

-19.3%

-21.2%

-22.2%

-22.4%

-23.2%

-25.0%

-25.4%

-25.4%

-25.8%

-26.6%

-27.4%

-29.9%

Poland

Brazil

China

Japan

Greece

United Kingdom

Portugal

Italy

Canada

Germany

Sweden

Ireland

Norway

Netherlands

Belgium

Monaco

Spain

France

Denmark

Switzerland

Luxembourg -24.3%

-24.1%

-23.1%

-21.8%

-21.7%

-20.9%

-19.0%

-18.0%

-18.0%

-18.0%

-16.6%

-16.1%

-16.1%

-15.5%

-14.9%

-10.7%

-8.3%

-7.7%

5.8%

35.6%

40.6%

41.6%

48.8%

51.8%

60.4%

79.0%

84.2%

116.8%

Luxembourg

Denmark

Spain

Switzerland

Canada

Norway

France

Belgium

Monaco

Sweden

Austria

Ireland

Netherlands

United Kingdom

Portugal

Germany

Italy

Greece

Japan

Chile

Mexico

Colombia

South Korea

Poland

Brazil

Romania

China

Russia 184.3%

82.9%

76.9%

71.9%

52.3%

52.2%

51.8%

43.5%

34.2%

27.8%

10.6%

5.5%

-6.0%

-10.7%

-14.1%

-15.7%

-18.2%

-18.2%

-18.2%

-18.4%

-18.9%

-19.0%

-19.2%

-19.2%

-19.5%

-20.2%

-21.1%

-24.6%

-33.7%

Russia

Brazil

China

Romania

Macau

Taiwan

Mexico

Poland

South Korea

Hong Kong

Japan

Greece

Portugal

Italy

Germany

Sweden

Austria

France

Netherlands

Spain

Denmark

Canada

Belgium

Ireland

Norway

United Kingdom

Monaco

Luxembourg

Switzerland


Brazil is still one of the most expensive countries to buy imported products

As we mentioned in 2016 in our Zara Index report, Brazilians take it for granted that

apparel is much cheaper abroad, mainly due to hefty taxation on imported products.

In 2014, when we compiled the prices of a basket of luxury apparel goods, prices in

Brazil were, on average, 33% costlier than in the US (including VAT and IOF tax on

Brazilian credit cards when shopping abroad).

In our 2016 price survey, a similar basket in Brazil costs only 7% more than if bought

in the US.

Now, a basket of luxury products in Brazil costs 4.5% more than in the US.

However, in our current survey, some products of international brands sustained

cheaper prices in Brazil (as in 2016). Even luxury goods by brands such as Christian

Louboutin, Louis Vuitton and Cartier have similar or slightly cheaper prices compared

to the US.

By buying locally, Brazilian clients can pay for products in installments and without

incurring any FX risk.

Table 11: Luxury product price survey 2014 – Brazil vs. US

Source: BTG Pactual (*6.38% IOF financial transactions tax charge on credit card purchases abroad). Prices as of March 27th 2014.


Source: BTG Pactual (*6.38% IOF financial transactions tax charge on credit card purchases abroad). Prices as of January 30th 2015.



Source: BTG Pactual (*6.38% IOF financial transactions tax charge on credit card purchases abroad). Prices as of December 22nd 2015.


Source: BTG Pactual (*6.38% IOF financial transactions tax charge on credit card purchases abroad). Prices as of November 29th 2018.

Looking at cosmetics banners in Brazil (Sephora and L’Occitane), our 2016 survey

identified that prices in Brazil were 11% cheaper than in the US, on average.

In 2018, the trend changed in the cosmetics segment (same conclusion from our

Zara Index). Products in our sample were, on average, 6% more expensive.

Table 15: Sephora cosmetics survey – Brazil vs. US

Source: BTG Pactual (*6.38% IOF tax charge on credit card purchases abroad)


Table 16: L’Occitane cosmetics survey – Brazil vs. US

Source: BTG Pactual (*6.38% IOF tax charge on credit card purchases abroad)

In the case of electronics, we took a sample of 20 countries which sell directly (through

the Apple Store) iPhones (Xs, 5.8 inches and 64GB) and iPads (64GB). For US, we

have adjusted prices to include the sales tax rate (we used an average tax rate of 8%).

The conclusions are the same as those in our 2018 Zara Index. In the case of iPhones,

products are, on average, 20% more expensive than in the US for the group of

countries analyzed. For iPads, products are, on average, 13% more expensive.

Brazil is the most expensive country, with prices 77% and 101% higher than in the US

for iPhones and iPads, respectively.

Table 17: Apple survey (prices vs. US) - iPhone

Table 18: Apple survey (prices vs. US) - iPad

Source: Company and BTG Pactual (as of 03/01/2019) Source: Company and BTG Pactual (as of 03/01/2019)

The volatile economic/political outlook took a toll on the amount of money that

Brazilians spend abroad, which is also a consequence of the less favorable FX rate.

After a peak in 2H17, Brazilians’ expenditures abroad remained flattish y/y in 10M18 in

USD terms, but still 16% below the levels of 2013 (without adjusting for inflation

effects).

Iphone Xs (5.8 inch) -

64GBFX

Currency

ticker

Price (local

currency) Price (USD)

Price vs.

US

China 6.87 CNY CNY curncy 8,699 1,267 17%

Hong Kong 7.83 HKD HKD curncy 8,599 1,098 1%

Singapore 1.36 SGD SGD curncy 1,649 1,211 11%

Australia 0.70 AUD AUD curncy 1,629 1,147 6%

Japan 108.01 JPY JPY curncy 112,800 1,044 -4%

Belgium 1.14 EUR EUR curncy 1,159 1,322 22%

Germany 1.14 EUR EUR curncy 1,149 1,311 21%

Spain 1.14 EUR EUR curncy 1,159 1,322 22%

France 1.14 EUR EUR curncy 1,155 1,318 21%

Italy 1.14 EUR EUR curncy 1,189 1,357 25%

Austria 1.14 EUR EUR curncy 1,149 1,311 21%

Switzerland 0.99 CHF CHF curncy 1,199 1,216 12%

Turkey 5.41 TRY TRY curncy 9,899 1,831 68%

Sweden 8.99 SEK SEK curncy 12,795 1,423 31%

Netherlands 1.14 EUR EUR curncy 1,159 1,322 22%

UK 1.27 GBP GBP curncy 999 1,266 16%

Mexico 20.25 MXV MXV curncy 24,499 1,210 11%

Canada 1.34 CAD CAD curncy 1,379 1,026 -6%

US 1.00 USD USD curncy 1,087 1,087 0%

Brazil 3.80 BRL BRL curncy 7,299 1,921 77%

iPad Pro (64GB) FXCurrency

ticker

Price (local

currency) Price (USD)

Price vs.

US

China 6.87 CNY CNY curncy 5,143 749 6%

Hong Kong 7.83 HKD HKD curncy 4,988 637 -10%

Singapore 1.36 SGD SGD curncy 968 711 1%

Australia 0.70 AUD AUD curncy 979 689 -2%

Japan 108.01 JPY JPY curncy 69,800 646 -8%

Belgium 1.14 EUR EUR curncy 739 843 19%

Germany 1.14 EUR EUR curncy 729 832 18%

Spain 1.14 EUR EUR curncy 729 832 18%

France 1.14 EUR EUR curncy 738 842 19%

Italy 1.14 EUR EUR curncy 739 843 19%

Austria 1.14 EUR EUR curncy 729 832 18%

Switzerland 0.99 CHF CHF curncy 719 729 3%

Turkey 5.41 TRY TRY curncy 4,799 888 26%

Sweden 8.99 SEK SEK curncy 7,495 834 18%

Netherlands 1.14 EUR EUR curncy 738 842 19%

UK 1.27 GBP GBP curncy 619 784 11%

Mexico 20.25 MXV MXV curncy 15,499 765 8%

Canada 1.34 CAD CAD curncy 799 595 -16%

US 1.00 USD USD curncy 706 706 0%

Brazil 3.80 BRL BRL curncy 5,399 1,421 101%


Chart 7: Brazilian spending abroad in USD (12-month moving average) – base 100 (2013)

Chart 8: Brazilian spending abroad in USD (12-month moving average) – y/y growth

Source: Brazilian Central Bank / BTG Pactual Source: Brazilian Central Bank / BTG Pactual

Local players definitely benefit from Brazilians spending less abroad and from the

increasing competitiveness of local retail versus international markets, given the more

favorable FX. We also remind investors that the decline in consumption abroad is also

a function of the more volatile political outlook in the country, which in turn means a

softer recovery for the overall retail sector (including the local market).

According to BTG’s macro team, in a baseline scenario, the 10-year CDS spread ends

2019 at 225bps, and the 10-year US Treasury rate increases to 3.50%. This scenario

is compatible with the approval of a moderate social security reform next year in Brazil

and additional measures that keep the spending cap rule achievable. In this context,

the currency ends 2019 at BRL3.90/USD, the same level of YE18. Higher US Treasury

rates would be offset by the decline in country risk.

In the benign alternative scenario, spreads recede to 150bps at YE19 and 10-year US

Treasury rates remain stable at the current level of ~3.0% up to YE19. Here, a bold

social security reform is approved, and further fiscal consolidation measures advance

in Congress as well as pro-productivity reforms. In this context, the currency

appreciates to BRL3.40/USD.

In the adverse alternative scenario, Brazil’s 10-year risk spread reaches 400bps and

10-year US Treasury rates rise to 4.00% at YE19. This scenario is compatible with

approval of a highly watered-down version of the social security reform proposal, such

as a reform focused exclusively on civil servants, and where the incoming

administration faces a political gridlock in relation to other necessary fiscal adjustment

measures. This scenario would be compatible with the depreciation of the domestic

currency to BRL5.00/USD.

It is worth mentioning that the new Brazilian government should lead an agenda in the

next months to simplify the Brazilian tax system and eventually reduce import taxes,

which could mean a more benign outlook for foreign players to operate in Brazil.

However, Brazil remains a tough environment for foreign players. Assuming the base

case scenario for FX rates, as well as the still challenging (and structural) outlook for

foreign players to operate in Brazil (high import tax burden, tax system complexities

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

-

0.20

0.40

0.60

0.80

1.00

1.20

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

Jan

-14

Ap

r-1

4

Jul-

14

Oct

-14

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Jan

-18

Ap

r-1

8

Jul-

18

Oct

-18

Expenditures w/ international credit cards Brazilian expenditures abroad

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Jan

-14

Ma

r-1

4

Ma

y-1

4

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Ma

r-1

5

Ma

y-1

5

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Ma

r-1

6

Ma

y-1

6

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Ma

r-1

7

Ma

y-1

7

Jul-

17

Sep

-17

No

v-1

7

Jan

-18

Ma

r-1

8

Ma

y-1

8

Jul-

18

Sep

-18

Expenditures w/ international credit cards Brazilians expenditures abroad


and logistics bottlenecks), the advantage of local players should persist in the coming

years.

But as in previous years, it isn’t a blue sky for all retailers. Execution discipline and

focus on processes and controls remain a key theme. Thus, companies such as Lojas

Renner (LREN3) should outperform (also leveraging, in the case of LREN, on its still

low market share in Brazilian apparel retail, at ~6%). In the meantime, following the

secular growth trend of e-commerce in Brazil, B2W (BTOW3 – Buy) and Magazine

Luiza (MGLU3 – Buy) are potential winners in this scenario, combining a great focus

on service levels, solid traffic and broad assortment at their websites, which offer a

barrier for new entrants and foreign players to succeed.

Table 19: Summary – Zara Index 2018 (prices in USD)

Source: BTG Pactual


Table 20: Summary – Zara Index 2018 (Prices in USD)

Source: BTG Pactual


Table 21: Summary – Zara Index 2018 (Prices in USD)

Source: BTG Pactual


Required Disclosures

This report has been prepared by Banco BTG Pactual S.A.

The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results.

BTG Pactual Rating

Definition Coverage *1 IB Services *2

Buy Expected total return 10% above the company’s sector average.

60% 44%

Neutral Expected total return between +10% and -10% the company’s sector average.

37% 31%

Sell Expected total return 10% below the company’s sector average.

3% 33%

1: Percentage of companies under coverage globally within the 12-month rating category.

2: Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months.

Absolute return requirements

Besides the abovementioned relative return requirements, the listed absolute return requirements must be followed:

a) a Buy rated stock must have an expected total return above 15%

b) a Neutral rated stock can not have an expected total return below -5%

c) a stock with expected total return above 50% must be rated Buy

Analyst Certification

Each research analyst primarily responsible for the content of this investment research report, in whole or in part, certifies that:

(i) all of the views expressed accurately reflect his or her personal views about those securities or issuers, and such recommendations were elaborated independently, including in relation to Banco BTG Pactual S.A. and/or its affiliates, as the case may be;

(ii) no part of his or her compensation was, is, or will be, directly or indirectly, related to any specific recommendations or views contained herein or linked to the price of any of the securities discussed herein.

Research analysts contributing to this report who are employed by a non-US Broker dealer are not registered/qualified as research analysts with FINRA and therefore are not subject to the restrictions contained in the FINRA rules on communications with a subject company, public appearances, and trading securities held by a research analyst account.

Part of the analyst compensation comes from the profits of Banco BTG Pactual S.A. as a whole and/or its affiliates and, consequently, revenues arisen from transactions held by Banco BTG Pactual S.A. and/or its affiliates.

Where applicable, the analyst responsible for this report and certified pursuant to Brazilian regulations will be identified in bold on the first page of this report and will be the first name on the signature list.

Statement of Risk

B2W Companhia Global do Varejo [BRSUBA] - B2W is subject to local macroeconomic conditions, mainly inflation, FX-rate, GDP growth, consumer spending and credit availability. Company specific risks include growth dynamics of the ecommerce sector, competition and deterioration of working capital terms.

Lojas Renner S.A. [BRLRE] - Renner is subject to local macroeconomic conditions, mainly GDP and inflation. On top of that, increase in raw material prices and/or deterioration of delinquency ratios could have an adverse impact on the results. Company specific risks include the learning of financial products and their expansion to new regions.

Magazine Luiza S.A. [BRMGLU] - We believe the main risks are 1) macro conditions changes, 2) competition, and 3) execution.

Valuation Methodology

B2W Companhia Global do Varejo [BRSUBA] - Our 12-month forward target price is DCF based (cost of equity of 11.0% and g of 6.5%, in nominal USD).

Lojas Renner S.A. [BRLRE] - Our 12-month forward target price is DCF based (cost of equity of 9.6% and g of 3.5%, in nominal USD).

Magazine Luiza S.A. [BRMGLU] - Our 12-month forward target price is DCF based (cost of equity of 10% and g of 6.5%, in nominal USD).

Company Disclosures

Company Name Reuters 12-mo rating Price Price date B2W Digital 1, 2, 4, 6, 18, 19, 20 BTOW3.SA Buy R$42.00 4-1-2019 Lojas Renner 1, 2, 4, 6, 18, 19, 20, 22 LREN3.SA Buy R$41.35 4-1-2019 Magazine Luiza 18, 19, 20, 21, 22 MGLU3.SA Buy R$178.40 4-1-2019

1. Within the past 12 months, Banco BTG Pactual S.A., its affiliates or subsidiaries has received compensation for investment banking services from this company/entity.

2. Banco BTG Pactual S.A, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services and/or products and services other than investment services from this company/entity within the next three months.

4. This company/entity is, or within the past 12 months has been, a client of Banco BTG Pactual S.A., and investment banking services are being, or have been, provided.

6. Banco BTG Pactual S.A. and/or its affiliates receive compensation for any services rendered or presents any commercial relationships with this company, entity or person, entities or funds which represents the same interest of this company/entity.

18. As of the end of the month immediately preceding the date of publication of this report, neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries beneficially own 1% or more of any class of common equity securities

19. Neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries have managed or co-managed a public offering of securities for the company within the past 12 months.

20. Neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries engaged in market making activities in the subject company's securities at the time this research report was published.


21. Banco BTG Pactual S.A. or its affiliates or subsidiaries have not received compensation for investment banking services from the companies in the past 12 months

22. Banco BTG Pactual S.A. or its affiliates or subsidiaries do not expect to receive or intends to seek compensation for investment banking services from the companies within the next 3 months.

B2W Digital

Source: BTG Pactual and Economatica. Prices as of 04 January 2019

Lojas Renner


Magazine Luiza


BuyNeutral

SellNo Rating

0.0

10.0

20.0

30.0

40.0

50.0

7-Ja

n-16

7-A

pr-1

6

7-Ju

l-16

7-O

ct-1

6

7-Ja

n-17

7-A

pr-1

7

7-Ju

l-17

7-O

ct-1

7

7-Ja

n-18

7-A

pr-1

8

7-Ju

l-18

7-O

ct-1

8

7-Ja

n-19

Stock Price (R$) Price Target (R$)

BuyNeutral

SellNo Rating

0.0

10.0

20.0

30.0

40.0

50.0

7-Ja

n-16

7-A

pr-1

6

7-Ju

l-16

7-O

ct-1

6

7-Ja

n-17

7-A

pr-1

7

7-Ju

l-17

7-O

ct-1

7

7-Ja

n-18

7-A

pr-1

8

7-Ju

l-18

7-O

ct-1

8

7-Ja

n-19


BuyNeutral

SellNo Rating

0.0

40.0

80.0

120.0

160.0

200.0

7-Ja

n-16

7-A

pr-1

6

7-Ju

l-16

7-O

ct-1

6

7-Ja

n-17

7-A

pr-1

7

7-Ju

l-17

7-O

ct-1

7

7-Ja

n-18

7-A

pr-1

8

7-Ju

l-18

7-O

ct-1

8

7-Ja

n-19



Global Disclaimer

This report has been prepared by Banco BTG Pactual S.A. (“BTG Pactual S.A.”), a Brazilian regulated bank. BTG Pactual S.A. is the responsible for the distribution of this report in Brazil. BTG Pactual US Capital LLC (“BTG Pactual US”), a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation is distributing this report in the United States. BTG Pactual US is an affiliate of BTG Pactual S.A. BTG Pactual US assumes responsibility for this research for purposes of U.S. law. Any U.S. person receiving this report and wishing to effect any transaction in a security discussed in this report should do so with BTG Pactual US at 212-293-4600, 601 Lexington Ave. 57th Floor, New York, NY 10022.

This report is being distributed in the United Kingdom and elsewhere in the European Economic Area (“EEA”) by BTG Pactual Europe LLP (“BTG Pactual UK”), which is authorized and regulated by the Financial Conduct Authority of the United Kingdom. This report may also be distributed in the United Kingdom and elsewhere in the EEA by BTG Pactual S.A. and/or BTG Pactual US. BTG Pactual UK has not: (i) produced this report, (ii) substantially altered its contents, (iii) changed the direction of the recommendation, or (iv) disseminated this report prior to its issue by BTG Pactual US. BTG Pactual UK does not distribute summaries of research produced by BTG Pactual US.

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BTG Pactual Argentina is a broker dealer (Agente de Liquidación y Compensación y Agente de Negociación Integral ) organized and regulated by Argentinean law, registered with the Exchange Commission of Argentina (Comisión Nacional de Valores) under license Nro. 720 and responsible for the distribution of this report in Argentina. Additionally, the Brazilian Central Bank approved the indirect controlling participation of Banco BTG Pactual S.A. in BTG Pactual Argentina on September 1st, 2017.

References herein to BTG Pactual include BTG Pactual S.A., BTG Pactual US Capital LLC, BTG Pactual Europe LLP, BTG Pactual Chile and BTG Pactual Peru and BTG Pactual Colombia and BTG Pactual Argentina as applicable. This report is for distribution only under such circumstances as may be permitted by applicable law. This report is not directed at you if BTG Pactual is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that BTG Pactual is permitted to provide research material concerning investments to you under relevant legislation and regulations. Nothing in this report constitutes a representation that any investment strategy or recommendation contained herein is suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal recommendation. It is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation, offer, invitation or inducement to buy or sell any securities or related financial instruments in any jurisdiction. Prices in this report are believed to be reliable as of the date on which this report was issued and are derived from one or more of the following: (i) sources as expressly specified alongside the relevant data; (ii) the quoted price on the main regulated market for the security in question; (iii) other public sources believed to be reliable; or (iv) BTG Pactual's proprietary data or data available to BTG Pactual. All other information herein is believed to be reliable as of the date on which this report was issued and has been obtained from public sources believed to be reliable. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, except with respect to information concerning Banco BTG Pactual S.A., its subsidiaries and affiliates, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the report. In all cases, investors should conduct their own investigation and analysis of such information before taking or omitting to take any action in relation to securities or markets that are analyzed in this report. BTG Pactual does not undertake that investors will obtain profits, nor will it share with investors any investment profits nor accept any liability for any investment losses. Investments involve risks and investors should exercise prudence in making their investment decisions. BTG Pactual accepts no fiduciary duties to recipients of this report and in communicating this report is not acting in a fiduciary capacity. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Opinions, estimates, and projections expressed herein constitute the current judgment of the analyst responsible for the substance of this report as of the date on which the report was issued and are therefore subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of BTG Pactual as a result of using different assumptions and criteria. Because the personal views of analysts may differ from one another, Banco BTG Pactual S.A., its subsidiaries and affiliates may have issued or may issue reports that are inconsistent with, and/or reach different conclusions from, the information presented herein. Any such opinions, estimates, and projections must not be construed as a representation that the matters referred to therein will occur. Prices and availability of financial instruments are indicative only and subject to change without notice. Research will initiate, update and cease coverage solely at the discretion of BTG Pactual Investment Bank Research Management. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, synthesizing and interpreting market information. BTG Pactual is under no obligation to update or keep current the information contained herein, except when terminating coverage of the companies discussed in the report. 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Past performance is not necessarily indicative of future results. If a financial instrument is denominated in a currency other than an investor’s currency, a change in rates of exchange may adversely affect the value or price of or the income derived from any security or related instrument mentioned in this report, and the reader of this report assumes any currency risk. This report does not take into account the investment objectives, financial situation or particular needs of any particular investor. Investors should obtain independent financial advice based on their own particular circumstances before making an investment decision on the basis of the information contained herein. For investment advice, trade execution or other enquiries, clients should contact their local sales representative. 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