BTGP_Specialty vs Department

8/3/2019 BTGP_Specialty vs Department

1/22

ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 19Banco BTG Pactual S.A. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict ofinterest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Equity Research

Fabio Monteiro

Brazil Banco BTG Pactual S.A.

[email protected]

+55 11 3383 2006

Joo Mamede


[email protected]

+55 11 3383 2755

Lucas Suemitsu


[email protected]

+55 11 3383 2257

Long Term Call: We Prefer Specialty Apparel Retailers

Shift from department stores to specialty apparel retailers is a natural move

In this report, we discuss the potential shift in market share over the next 10 years

away from Brazilian department stores and over to specialty apparel retailers. We see

this as a hugely meaningful trend (a structural change, if you will), the reasons for

which are four-fold. The main advantages of specialty apparel retailers over

department stores are: (i) generally higher brand equity; (ii) a superior shopping

experience, characterized by a stores identity; (iii) greater fashion appeal; and (iv)

much smaller stores (easily opened on streets or in shopping malls, and in small-to-mid-size cities).

US market is a good proxy for Brazil

Between 1998 and 2010, US specialty apparel retailers gained market share over

department stores - while apparel stores posted sales CAGR 1998-2010 of 3.7%,

conventional and discount department stores posted -3.4% and -0.5%, respectively.

In Brazil, we could start to see the same movement, fueled by another two local

ingredients: (i) the strong fragmentation of the Brazilian apparel segment, where the

largest specialty retailer accounts for only 1% of apparel sales, and (ii) social mobility

and macro factors (employment + disposable income + credit availability) boosting

consumption.

Fall of department stores - a bit of deja-vu with the hypermarket format

The department store concept reminds us of the hypermarket model, an outdated

grocery format in the US, Europe and Brazil providing a one-stop-shopping

experience. Both formats are large in size, offer a poor shopping experience and lack

store identity - which has meant only one thing for hypermarkets lately...market share

losses. In addition to downsizing, hypermarkets' response has been to launch private

label strategies, in-store services and food service options. However, our take is that

such a response isn't enough, and we think department stores are now starting to

suffer from this same trend.

Hering is the best vehicle; Renner to become a specialty retailer in our view

Hering and Renner both fit our long-term call. We believe Hering is the best vehicle to

play the structural shift, since it has all the markings of a successful specialty retailer,

namely outstanding brand equity, 90% brand recall by all income classes, a pleasant

shopping experience, fashion appeal, and a smaller format. Renners department

store format has limited growth and the company has unsuccessfully tried to climb up

into other social class (via the tentative acquisition of Leader) and into a compact

format. We do, however, think that Renner made a great strategic move by acquiring

Camicado and opening up Blue Steel stores. And regardless of short-term ramp-up

risk, it is becoming more of a specialty retailer, which is something we welcome. In

our models, we estimate that the two new formats could represent over 40% of total

stores and roughly 20% of sales in 5 years, in a conservative scenario.

Latin America

Sector Note

07 November 2011

Brazilian Apparel Retail Sector


2/22


3/22

Brazilian Apparel Retail Sector07 November 2011 page 3

Specialty stores versus department stores

When a favorable macro scenario combines with less informality in a moreconsolidated sector, we think sales at specialty apparel retailers will outperform

department stores. In this report, we discuss the potential shift in market share over

the next 10 years from Brazilian department stores to specialty apparel retailers, a

shift we believe to be an important trend (a structural change, in our view) with

several explanations. A specialty apparel retailers main advantages over a

department store are:

1. Generally higher brand equity

2. A superior shopping experience, characterized by a stores identity

3. Greater fashion appeal

4. Much smaller store size, easily to open in streets and malls, and also in

small-to-mid-size cities

Higher Brand Equity

As they can readily switch between products and names, consumers have

considerable power over apparel and accessories brands. Raising brand awareness

and building brand loyalty, therefore, are the keys to success in the specialty retail

segment. By creating that must-have mindset, a strong brand image typically gives

the retailer more pricing flexibility.

While some segments, such as the popular-price segment, compete fiercely on price,

the D and E income classes are shrinking. The C income class, however, is vast in

Brazil, with 95 million people, and with the macro environment improving, customers

are starting to seek out fashion-related products at affordable prices a situation

favorable to brand equity. The A and B income classes already demonstrate this

behavior, and (mainly due to a smaller base) are growing as fast as class C.

Table 1: A, B and C classes are posting hefty growth rates

Source: BTG Pactual / FGV

2005

Households (M)

2010

Households (M)

% vs. 2005

12.1

5.3

37.4

0.8

7.6

18.2

34.9

1.2

-7%

50%

43%

50%

A

B

C

D/E

A

B

C

D/E

A


4/22


The more aspirational the brand, the more skillfully it avoids commoditization (of the

company), transforming the shopping experience into more sophisticated apparel

consumption. Having a well-known portfolio of iconic brands and executing brandmanagement strategies to create value for the consumer and brand equity for the

apparel company are what distinguish the success stories in the Brazilian specialty

apparel retail space.When companies create apparel brands that provide emotional meaning, purchases

are about more than just pricing. Successful brands create opportunities for brand

extensions and potentially generate superior gross margins. Over the years,

consumers have become brand polygamists, and to compensate for lower levels of

brand loyalty, companies must now recognize the need to incorporate tangible

product features (such as quality and appearance) into intangibles (such as a

personal level of communication and innovation, an emotional connection, or

aspirational values).

Table 2: Aspirational Brands

Source: BTG Pactual

Aware of the growing importance of a strong brand, the large apparel retailers have

been investing in own brands and because creation and development take time and

money, we favor companies that already command nationwide brand recognition,

such as Hering, Le Lis Blanc or Havaianas.Other publicly traded companies such as Guararapes and Renner are also

developing brands. Recently, Lojas Renner inaugurated 3 Blue Steel stores (one of

the companys 18 private label brands, focused on the teen/young adult segment)

and they plan to open more.

Guararapes Pool brand, created to target young customers, gained popularity in the

1980s before entering into the realm of obscurity after a lack of focus and a

consequently low level of investment. Recently, the company inaugurated a re-launch

process, and is recruiting Brazilian celebrities (actors, singers) to advertise the brand.

AspirationalBrands

Premium Pricing

Consumers tend to pay more for theseproducts due to strong intangible aspects

Better Margins

As these products are sold at a premium,retailers can extract better margins

Excellent Mall Locations

Since they attract customers, aspirationalbrands have access to the best shopping mall

locations

Superior Placement at Multi-brand Stores

As these brands attract customers, multi-brand stores place these products in strategicpositions with stronger visibility


5/22


Superior Shopping Experience

Specialization enhances a brands identity. As a company focuses on a specificdemographic, the chance of becoming a customers first choice grows on the ability to

cater to particular needs.

A differentiated shopping experience starts with the store layout. Specialty retailers

have to focus on a design inspired by a lifestyle that suits the brand; and in seeking

distinction, some retailers have innovated unique initiatives: Le Lis Blanc, for

instance, has developed a special fragrance.

Whats more, specialty retailers in Brazil have focused on providing a higher level of

service, with dedicated sales people. While sales representatives in department

stores receive fixed wages, most of their peers at Brazilian specialty retailers work on

a commission basis, an alignment of interest that enhances service levels.

Chart 1: Le Lis Blanc store Chart 2: Riachuelo (Guararapes) store

Source: Company Data / BTG Pactual Source: Company Data / BTG Pactual

A study conducted by the Retail Council of Canada and Verde Group, a retail

research and consulting firm, has shown that brand experience and engagement

including an attractive store layout and consistent availability of quality products are

the strongest drivers of a better shopping experience, making clients feel special.

The more general nature of department stores, with their need to offer a wider range

of products catering to different customer profiles (differing in gender, age, and

income class), prevent the replication of such an experience.

Age in particular plays a key role. Younger customers typically value the shopping

experience more than older shoppers. Clients ranging from 18 to 30 years were most

likely to recall having a great shopping experience, which is probably why retailers

like Renner and Guararapes are cultivating brands (Pool and Blue Steel, respectively)

designed for those customers.


6/22


Greater Fashion appeal

To increase their brand value, retailers need to distinguish their products fromcommon apparel sellers by creating value-priced items with fashion appeal,

generating demand for their products.

Companies like Zara and H&M hired prestigious designers to create experimental

collections for their clients, and they were highly successful: limited collections were

sold out only a few days after their launches. By contrast, such initiatives are timid in

Brazil. Riachuelo (the apparel chain under Guararapes ownership) brought the

famous Brazilian stylist Oskar Metsavant on board to design a collection at the end

of last year.

Some companies also prefer to develop their own collections internally, without the

signature of a famous designer, thereby eliminating the image risk related to a

particular designer. The high-end apparel retailer Le Lis Blanc has demonstrated the

potential success of this strategy.

Companies also develop a differentiated brand image by using celebrities to promote

their products. Hering and C&A have been very successful in Brazil with this strategy.

Much Smaller Store Size

Store size is another important factor in the benefits of specialization. With a product

portfolio more concentrated on a single lifestyle, specialized retailers are usually

smaller, and as a result, they enjoy a decisive advantage in potential store locations.

With available spaces in large centers increasingly hard to come by, location flexibility

is crucial. It also expands the potential number of cities that supports a store, as

smaller-sized stores can be opened in smaller cities.

Lojas Renners compact format launch is a case in point. The company believes that

Brazil can support roughly 180 traditional Renner stores (average of 2.5k square

meters), and since the company expects to reach this number in 5-6 years, it created

the smaller format to penetrate smaller cities. While a traditional Renner store needs

a market of more than 400k inhabitants, the company estimates that the compact

Renner format stores could be opened in a city of 250k.

Table 3: Population overview

Source: IBGE

Population Number of cities % of total population

> 1000k habitants 15 21%

< 1000k and > 500k habitants 23 8%




< 50k habitants 4,957 34%


7/22


Is the US a Good Proxy for This Movement in Brazil?

In the US between 1998 and 2010, specialty apparel retailers gained market shareover both department stores and discount department stores. While specialty stores

posted sales CAGR 98-10 of 3.7%, conventional and discount department stores

posted CAGRs of -3.4% and -0.5%, respectively.

Chart 3: US Apparel Retailers Sales Evolution

Source: S&P / BTG Pactual

0

20

40

60

80

100

120

140

160

180

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Apparel Stores (US$bn) Discount department stores (US$bn)

Con ventional department stores (US$bn)


8/22


9/22


Table 5: American and Brazilian retailers data: Number of stores


Country

2008 2009 2010 2011E 2012E 2008/09 2009/10 2010/11 2011/12

SPECIALTY APPAREL RETAILERS

Hering* Brazil 230 276 425 524 613 20% 54% 23% 17%

Le Lis Blanc* Brazil 33 40 61 107 208 21% 53% 75% 94%

Average Brazil 132 158 243 316 410 21% 53% 49% 56%

Abercrombie & Fitch USA 1,035 1,125 1,096 1,069 1,070 9% -3% -2% 0%

Aeropostale Inc. USA 828 914 952 1022 1070 10% 4% 7% 5%

Amer. Eagle Outfitters USA 987 1,098 1,103 1,089 1,115 11% 0% -1% 2%

AnnTaylor Stores USA 929 935 907 896 950 1% -3% -1% 6%

Bebe Stores* USA 301 308 297 252 260 2% -4% -15% 3%

Buckle USA 368 387 401 420 432 5% 4% 5% 3%

Chicos FAS USA 1,038 1,076 1,080 1,151 1,250 4% 0% 7% 9%

Coach Inc. USA 399 441 471 na. na. 11% 7% na. na.

Coldwater Creek USA 345 348 356 421 420 1% 2% 18% 0%

Gap Inc. USA 3,235 3,270 3,231 3,246 3,125 1% -1% 0% -4%

J Crew Group Inc. USA 260 300 323 na. na. 15% 8% na. na.

Limited Brands USA 2,926 3,511 2,971 3,455 3,426 20% -15% 16% -1%

Pacific Sunwear USA 954 932 896 na. na. -2% -4% na. na.

Urban Outfitters USA 245 294 327 372 422 20% 11% 14% 13%

Average USA 989 1,067 1,029 1,218 1,231 8% 0.5% 4% 3%

DEPARTMENT STORES

Renner Brazil 110 120 134 167 197 9% 12% 25% 18%Marisa Brazil 217 227 278 335 385 5% 22% 21% 15%

Riachuelo Brazil 102 107 123 na. na. 5% 15% na. na.

Average Brazil 143 151 178 251 291 6% 16% 23% 16%

Dillards USA 326 315 309 308 305 -3% -2% 0% -1%

Macy's USA 853 847 850 851 853 -1% 0% 0% 0%

Nordstrom USA 156 169 184 204 224 8% 9% 11% 10%

JCPenney USA 1,067 1,093 1,108 1,106 1,109 2% 1% 0% 0%

Target USA 1,591 1,682 1,740 1,750 1,773 6% 3% 1% 1%

Average USA 799 821 838 844 853 2% 2% 2% 2%

OFF-PRICERETAILERS

Ross Stores USA 890 956 1,007 1,055 1,129 7% 5% 5% 7%

The TJX Cos. USA 2,529 2,652 2,728 2,859 2,913 5% 3% 5% 2%

Number of Stores


10/22


Table 6: American and Brazilian retailers data: Square Footage


Brazil: Fragmentation and Social Mobility may speed upthis process

The above historical data show the shift from department stores to specialty apparel

retailers in the US, and while we dont have precise data for the Brazilian market, we

believe a similar shift has not yet occurred here, as the large department stores

(some of them listed) were more capitalized and more aggressive with their store

opening plans and marketing campaigns. However, the cases of Hering and Le Lis

Blanc are proof that specialty apparel stores with brand equity are more aspirational

Country

2008 2009 2010 2011E 2012E 2008/09 2009/10 2010/11 2011/12

SPECIALTY APPAREL RETAILERS

Hering* Brazil 0.3 0.4 0.5 0.6 0.7 19% 27% 27% 18%

Le Lis Blanc* Brazil 0.1 0.2 0.2 0.3 0.6 10% 28% 52% 84%

Average Brazil 0.2 0.3 0.3 0.5 0.6 14% 27% 40% 51%

Abercrombie & Fitch USA 7.3 8.0 7.8 7.8 7.8 9% -3% 0% 0%

Aeropostale Inc. USA 2.9 3.2 3.6 3.7 3.7 10% 13% 2% 1%

Amer. Eagle Outfitters USA 5.7 6.3 6.4 6.4 6.5 10% 2% -1% 2%

AnnTaylor Stores USA 5.4 5.5 5.3 5.3 5.5 2% -4% -1% 4%

Bebe Stores* USA 1.1 1.3 1.4 1.3 1.3 12% 8% -4% 0%

Buckle USA 1.7 1.8 2.0 2.1 2.2 11% 11% 5% 3%

Chicos FAS USA 2.4 2.4 2.6 2.9 2.9 0% 8% 6% 5%

Coach Inc. USA 1.2 1.4 1.5 na. na. 13% 7% na. na.

Coldwater Creek USA 3.3 3.7 3.7 3.8 3.8 11% 0% 1% 0%

Gap Inc. USA 39.6 39.5 38.8 38.2 37.1 0% -2% -2% -3%

J Crew Group Inc. USA 1.7 1.9 2.0 na. na. 10% 5% na. na.

Limited Brands USA 10.3 10.9 10.9 10.9 10.9 6% 0% 0% 0%

Pacific Sunwear USA 3.7 3.6 3.5 na. na. -2% -3% na. na.

Urban Outfitters USA 2.0 2.3 2.3 2.8 3.1 14% 0% 23% 10%

Average USA 6.3 6.6 6.6 7.7 7.7 8% 3% 3% 2%

DEPARTMENT STORES

Renner Brazil 2.7 2.9 3.8 3.5 4.0 8% 30% -8% 14%Marisa Brazil 2.7 2.8 3.4 3.7 4.1 3% 23% 7% 12%

Riachuelo Brazil 2.9 3.2 3.7 na. na. 11% 13% na. na.

Average Brazil 2.8 3.0 3.6 3.6 4.1 7% 22% 0% 13%

Dillards USA 56.3 54.2 53.4 53.5 53.0 -4% -1% 0% -1%

Macy's USA 155.2 154.3 154.5 154.2 154.3 -1% 0% 0% 0%

Nordstrom USA 20.5 21.9 22.8 23.8 24.9 7% 4% 4% 5%

JCPenney USA 106.6 109.9 111.4 111.6 111.9 3% 1% 0% 0%

Target USA 207.9 222.9 231.9 233.6 236.6 7% 4% 1% 1%

Average USA 109.3 112.6 114.8 115.3 116.1 2% 2% 1% 1%

OFF-PRICERETAILERS

Ross Stores USA 21.1 22.5 23.8 24.8 26.5 7% 6% 4% 7%

The TJX Cos. USA 58.8 61.5 63.5 66.0 69.3 5% 3% 4% 5%

Square Footage (million square feet)


11/22


and, thus, have tended to benefit more from the current Brazilian macro scenario of

low delinquency rates and strong social mobility.

In Brazil, we may start to see similar dynamics to those observed in the last few

decades in the US, with the help of two country-specifics: (i) the strong fragmentation

of the apparel segment in Brazil, where the largest specialty retailer has market share

of only 1.2% of apparel sales, and (ii) social mobility and macro (employment +

disposable income + credit availability) boosting consumption.

Fragmentation of the Apparel Market

The apparel retail segment in Brazil is particularly complex, characterized by low

concentration and high informality (at 42% of total apparel sales, according to our

estimates). Other than the large department store chains and a few national specialty

retailers, the segment is formed by small, local retail companies often lacking the (i)

economies of scale, (ii) broad base of suppliers, and (iii) operational efficiency of

large chains. However, small retail companies are usually able to compete with large

chains by adapting to local preferences with greater flexibility, whilst they commonly

dodge taxes to obtain a competitive edge, offering artificially competitive prices.

Apparel represents some 11% of total retail sales in Brazil according to IBGE,

amounting to R$89bn in 2010 (formal market only). We continue to see the sector as

benefitting from Brazil's improving macroeconomic trends, given its strong leverage to

discretionary spending, consumer credit, and personal income growth.

Chart 4: Brazilian Apparel Market

Source: BTG Pactual

We therefore see considerable room for consolidation in the industry, with well-

established retailers enjoying a clear and significant opportunity to grow share over

the long haul, especially by leveraging their balance sheets to finance consumers and

differentiate via products and payment methods, coupled with the governments

increasing efforts to minimize tax evasion. Furthermore, large apparel chains benefit

Informal

market42%

Others80%

Top 5Companies

18%Hering1.2%Le Lis Blanc

0.6%

Other

58.0%

Formal Market (2010) - R$89bnTotal Apparel Market (2010) - R$149bn


12/22


from increasing services revenues as well as cost reduction and efficiency gains from

outsourcing logistics for the supply of goods and services. Players with strong brand

awareness are set to benefit even more, as highly aspirational brands multiply theeffects of such a consumer trend shift.The latest available data suggest that the 5 largest apparel retailers comprised 18%

of the formal market in 2010, signaling a high level of fragmentation (even compared

to other retail segments) and, therefore, significant potential for greater market

concentration going forward. In fact, we estimate that the same 5 largest chains

accounted for 11.9% of the apparel market in 2004, which indeed implies market

share growth in recent years (the top 7 US players enjoy market share of around

22%). Elsewhere, we note that the Brazilian apparel sector has over 30,000

companies (typically family-owned businesses), of which only 3% are large-sized

(revenues of over R$300mn), while informal players account for nearly 60% of themarket. In our view, the fragmented, informal, non-professionalized businesses that

characterize this market create opportunities for large apparel chains, as small

players should see their profitability slump on the back of harsher restrictions and

more standardized tax regulations.

Social Mobility and Macro (Employment + DisposableIncome + Credit Availability) Boosting Consumption

Due to its discretionary nature, the apparel retailing sector has enjoyed favorable

dynamics in recent years, driven by two powerful pillars: (i) greater credit availability,

with an eye to the broad consumer group; and (ii) rising disposable income across allmajor mass markets. Perhaps more than the vast majority of consumer groups, the

apparel segment has been the beneficiary of Brazils benign macro underpinnings in

recent years, which have driven greater social mobility, wealth distribution, and

stronger demand growth for the overall discretionary groups (including electronics,

apparel, vehicles and housing).

Chart 5: Apparel Retail vs. GDP

Source: IPEADATA / BTG Pactual

0.90

1.10

1.30

1.50

1.70

1.90

2.10

2.30

2003 2004 2005 2006 2007 2008 2009 2010

GDP Apparel Retail


13/22


14/22


Department Store: Equivalent to Hypermarket in Some

Aspects

What the main players representing the department store concept in Brazil (C&A,

Renner, Riachuelo, Marisa, Pernambucanas and Leader) share in common are (i) a

large store size, (ii) a missing brand identity, and (iii) the lack of a take your breath

away shopping experience.

The department store concept reminds us of the hypermarket, a popular grocery

format providing a one-stop-shopping experience - with sales now falling into the red.

In the US and Europe, the hypermarkets decline is correlated with the combination of

an aging population, smaller households, and a rising urban demographic. In Brazil,

socio-demographic changes and new consumer needs are combining to create newtrends, with convenience and neighborhood stores (as well as cash-and-carry

formats, for price-driven consumers) as the big bets to capitalize on growing demand

for convenience. Consumers are increasingly favoring inner city convenience stores

over hypermarkets due to heightened demand for top-up shopping close to shoppers'

homes.

In short, the main factors for Brazilian hypermarkets decline and the rise of

convenience stores are: (i) controlled inflation (no need for wholesale monthly

purchases at hypermarkets); (ii) social mobility motivating customers to seek out a

better shopping experience (offered by a convenience store); (iii) slow traffic in big

cities (convenience stores are usually in the neighborhood of the main districts); and

(iv) greater store identity with smaller store sizes (and the ease of finding what you

want).

In terms of common traits, we note that hypermarkets and department stores share a

large size, a poor shopping experience, and a lack of store identity - all of which result

in market share losses (which is already a reality for hypermarkets). In response to

this movement, hypermarkets (in addition to downsizing) are gearing up private label

strategies, in-store services, and more food-on-the-go and food service options, but in

our view this response is not enough - and we believe the same trend for department

stores is just beginning.


15/22


Chart 6: Food Retailers and Apparel Retailers Main Store Formats

Source: BTG Pactual

Hering Case: Best Vehicle to Play the Structural Shift

In our view, Herings case has all the markings of a successful specialty retailer:

outstanding brand equity, a nice shopping experience, fashion appeal for most

products, and a smaller format. The company is also studying the pilot projects of two

new formats (namely, Hering Kids and Dzarm) to support its growth over the next few

years.

Herings repositioning process started in 2007 when it sought to re-brand itself via a

different pricing approach while increasing the amount of fashion items at its stores

(at the expense of more basic items). At the same time, they created a new store

layout focused on a better shopping experience and brand positioning.

One of the best known apparel brands in Brazil, Hering is recognized by over 90% of

all income classes, according to the company. Hering is able to sell both basic

clothes to high end classes and fashion to the middle income group, which we believe

makes it a unique retail case in Brazil. In fact, Hering has succeeded in improving its

sales mix, selling more items with higher average prices, such as in the woven fabric

and denim wear categories.

Hering stores (ranging from 80 to 400sqm, and averaging 130sqm) have strong

flexibility with respect to size, giving the company a greater presence in smaller cities.

In fact, Hering has been outperforming both its peers and market expectations with a

strong store opening plan, and we expect organic growth to remain a key driver last

year, Hering announced a study featuring a potential 604 Hering stores.

Hypermarkets6-10k sqm

Cash and Carry3-4k sqm

Supermarket/ConvenienceStores

500-1.5k sqm

Department Stores2-4k sqm

Multi-brands andDepartment Stores

500-4k sqm

SpecialtyApparel retailers200-500 sqm


16/22


Chart 7: Growth in number of stores

Source: Company Data

At the end of last year, Hering launched a pilot project to develop own stores of the

Hering Kids and Dzarm brands, and we believe management is looking to announce

the roll-up plan of Hering Kids by year-end, which we believe will feature at least 200

stores. For Dzarm, Hering intends to open new flagship stores to maintain brand

development, as multi-brand retail results continued to impress.

Hering is currently trading at a 2012e P/E of 15.8x, which we consider unfair given

the companys superior growth (3-year EBITDA CAGR of 33% vs. sector average of

19%) and ROIC 2012 (49% vs. sector average of 21%) due to its franchise-based

asset-light model. We have a Buy rating on HGTX3.

Renners Case: Becoming a Specialty Retailer?

In 2002, four years after Renners control was acquired by JC Penney, the company

introduced a lifestyle concept to its collection by creating private label brands that

reflected attitudes, interests, and client profiles.

Given its focus on the B income class and the fact that most stores are located in

shopping malls (due to the large size of the traditional Renner format 2.5k square

meters), management realized that the number of Renner stores that could be

opened was inherently limited to approximately 180.

To get round this limitation, in April 2008 it announced the intention to acquire Leader,

an apparel retail chain with 38 stores focused on the C income class. Though the

valuation to be paid was considered expensive for the market (15.6x EV/EBITDA;

1.5x EV/Sales), the company argued that the deals estimated synergies and its

strategic importance justified the premium paid.

However, as the effects of the economic crises were beginning to be felt, and debate

over the acquisition price raged, management was ultimately unable to persuade their

17%

21%

7%

5%

22%

4%

9%

12%

7%

5%

15%

5%

2009 2010 1H11

Hering Marisa Renner Guararapes


17/22


shareholders (whose approval was needed). As a result, in October 2008, Renner

stepped away from Leader, using the financial crisis as their main excuse.

In the middle of 2010, the company adopted another initiative to fix the old problem of

limited store expansion: the launch of a plan based on a compact format, with the

potential to grow the number of stores by another 80-100 locations. The company

had already operated two or three stores roughly half the size of the traditional ones

(~1.2k sqm vs. ~2.5k sqm of a common store), and a smaller format would allow the

company to open more stores on the streets (where spaces are usually smaller) and

to penetrate in smaller cities unable to support a larger-sized store.

However, neither of these movements the tentative Leader acquisition or the

adoption of a smaller format transforms Renner in a specialty retailer which would

create a differentiated product mix to generate demand.

Renner is now signaling in this direction. On April 4, 2011, it announced the

acquisition of Camicado, a home appliances chain with 27 stores, for R$165mn.

According to Renner, a company with a profile focused on the mid-income classes

had not yet gone national - the famous home items chains in Brazil had all targeted

either the high or low income classes. The entrance into this new niche is the first

step in transforming Renners profile.

Renner also launched its first 2 Blue Steel stores this year and is planning to open 2

more by the end of 2011. The format arises from the Blue Steel brand, a young

lifestyle concept that the company has been developing at its store chain for several

years.

Chart 8: Renner store opening estimates by format

Source: BTG Pactual

The move toward a specialty retailer is a critical strategy to capture the trend we

expect to see in the Brazilian retail market over the next few years. We anticipate that

the two new formats (Blue Steel and Camicado) could represent ~20% of sales in 5years (assuming 54 Blue Steel and 111 Camicado stores by 2016, which is a

conservative expansion plan for Blue Steel).

134165

195225

253 26831

51

71

86

101111

4

9

19

34

44

54

2011E 2012E 2013E 2014E 2015E 2016E

Renner Stores Camicado Blue Steel


18/22


We have a neutral rating on Renner, which is trading at a 2012e P/E of 14.7x,

although we welcome the long-term strategy to reduce exposure to the department

stores segment. The learning curve for the Blue Steel and Camicado stores andexecution risk to deliver store opening plan are the main short-to-mid-term issues we

see for the stock.

Table 9: Apparel retailers valuation

Source: BTG Pactual

Company Country Ticker Market Cap Price ADTV

(US$ m n) (Local FX) 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E (USD m n)

Lojas Renner* BR LREN3.BZ 3,589 51.30 17.9 14.7 12.7 10.2 8.5 7.2 22% 21% 18% 15% 22% 16% 35.4

Marisa* BR AMAR3.BZ 2,181 20.70 16.2 15.1 12.8 9.2 8.0 6.8 21% 15% 18% 14% 7% 18% 1.1

Hering* BR HGTX3.BZ 3,506 37.58 20.9 15.8 13.2 14.7 10.9 9.0 48% 34% 21% 40% 32% 20% 27.7

Le Lis Blanc* BR LLIS3.BZ 876 26.79 25.4 20.3 16.2 14.7 10.7 8.9 46% 39% 20% 45% 25% 25% 1.6

P / E EV / EBITDA EBITDA Growth Net Income Growth


19/22


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 PactualRating

Definition Coverage *1 IB Services *2

Buy Expected otal return 10% above the companys sectoraverage.

55% 58%

Neutral Expected total return between +10% and -10% thecompanys sector average.

44% 57%

Sell Expected total return 10% below the companys sectoraverage.

1% 50%

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 BancoBTG 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 securitiesdiscussed 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 therestrictions 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 PactualS.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.

Statement of Risk

Retail and Consumer Staples companies are subject to local macroeconomic conditions, mainly inflation, FX-rate and GDP growth.

Company Disclosures

Company Name Reuters 12-mo rating Price Price dateHering 18, 19, 20, 21, 22 HGTX3.SA Buy R$37.80 3-11-2011Le Lis Blanc 18, 19, 20, 21, 22 LLIS3.SA Buy R$27.07 3-11-2011Lojas Renner1, 2, 4, 6, 18, 19, 20 LREN3.SA Neutral R$52.01 3-11-2011Marisa 18, 19, 20, 21, 22 AMAR3.SA Buy R$23.06 3-11-2011

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 investmentservices 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 BTG Pactual, 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 the subject company or person, entity or any kind offunds which represents the same interest of subject company.

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 classof 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.


20/22


Hering

Source: BTG Pactual and Economatica. Prices as of 03 November 2011

Le Lis Blanc


Lojas Renner


BuyNeutral

SellNo Rating

0.0

10.0

20.0

30.0

40.0

50.0

60.0

3-Nov-08

3-Feb-09

3-May-09

3-Aug-09

3-Nov-09

3-Feb-10

3-May-10

3-Aug-10

3-Nov-10

3-Feb-11

3-May-11

3-Aug-11

3-Nov-11

St ock P ri ce (R$ ) Pri ce Ta rg et (R$ )

BuyNeutral

SellNo Rating

0.0

10.0

20.0

30.0

3-Nov-08

3-Feb-09

3-May-09

3-Aug-09

3-Nov-09

3-Feb-10

3-May-10

3-Aug-10

3-Nov-10

3-Feb-11

3-May-11

3-Aug-11

3-Nov-11


BuyNeutral

SellNo Rating

0.0

20.0

40.0

60.0

80.0

3-Nov-08

3-Feb-09

3-May-09

3-Aug-09

3-Nov-09

3-Feb-10

3-May-10

3-Aug-10

3-Nov-10

3-Feb-11

3-May-11

3-Aug-11

3-Nov-11



21/22


Marisa


BuyNeutral

SellNo Rating

0.0

10.0

20.0

30.0

40.0

3-Nov-08

3-Feb-09

3-May-09

3-Aug-09

3-Nov-09

3-Feb-10

3-May-10

3-Aug-10

3-Nov-10

3-Feb-11

3-May-11

3-Aug-11

3-Nov-11



22/22


Global Disclaimer

This report has been prepared by Banco BTG Pactual S.A. (BTG Pactual S.A.), a Brazilian regulated bank. BTG Pactual US Capital Corp. (BTG 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 US is an affiliate of BTG Pactual S.A.. BTG 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 asecurity discussed in this report should do so with BTG 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 UK), which is authorised and regulated by theFinancial Services Authority of the United Kingdom. This report may also be distributed in the United Kingdom in the United Kingdom and elsewhere in the EEA by BTG Pactual S.A. and/or BTGUS. BTG 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 US.BTG UK does not distribute summaries of research produced by BTG US.References herein to BTG include BTG Pactual S.A., BTG Pactual US Capital Corp. and BTG UK, 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 is prohibited or restricted by any legislation or regulationin any jurisdiction from making it available to you. You should satisfy yourself before reading it that BTG is permitted to provide research material concerning investments to you under relevantlegislation and regulations.

Nothing in this report constitutes a representation that any investment strategy or recommendation contained herein is suitable or appropriate to a recipients individual circumstances or otherwiseconstitutes 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 orinducement 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 arederived 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) otherpublic sources believed to be reliable; or (iv) BTG's proprietary data or data available to BTG. All other information herein is believed to be reliable as of the date on which this report was issued andhas 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 theinformation 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 thesecurities, 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 ctionin relation to securities or markets that are analyzed in this report.

BTG 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 accepts no fiduciary duties to recipients of this report and in communicating this report is not acting in a fiduciarycapacity. 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 toopinions expressed by other business areas or groups of BTG as a result of using different assumptions and criteria. Because the personal views of analysts may differ from one another, BancoBTG 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 suchopinions, 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 andsubject to change without notice.

Research will initiate, update and cease coverage solely at the discretion of BTG 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 otherconstituencies for the purpose of gathering, synthesizing and interpreting market information. BTG is under no obligation to update or keep current the information contained herein, except whenterminating coverage of the companies discussed in the report. BTG relies on information barriers to control the flow of information contained in one or more areas within BTG, into other areas,units, groups or affiliates of BTG. The compensation of the analyst who prepared this report is determined by research management and senior management (not including investment banking).Analyst compensation is not based on investment banking revenues, however, compensation may relate to the revenues of BTG Investment Bank as a whole, of which investment banking, salesand trading are a part.

The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Options, derivative products and futures are not suitable for all investors, andtrading in these instruments is considered risky. Mortgage and asset-backed securities may involve a high degree of risk and may be highly volatile in response to fluctuations in interest rates andother market conditions. Past performance is not necessarily indicative of future results. If a financial instrument is denominated in a currency other than an investors currency, a change in rates ofexchange 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 theirown 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. Neither BTG nor any of its affiliates, nor any of their respective directors, employees or agents, accepts any liability for any loss or damage arising out of the use of allor any part of this report. Notwithstanding any other statement in this report, BTG UK does not seek to exclude or restrict any duty or liability that it may have to a client under the regulatorysystem in the UK (as such term is defined in the rules of the Financial Services Authority).

Any prices stated in this report are for information purposes only and do not represent valuations for individual securities or other instruments. There is no representation that any transaction can orcould have been effected at those prices and any prices do not necessarily reflect BTG internal books and records or theoretical model-based valuations and may be based on certain assumptions.Different assumptions, by BTG Pactual S.A., BTG US, BTG UK or any other source, may yield substantially different results.

This report may not be reproduced or redistributed to any other person, in whole or in part, for any purpose, without the prior written consent of BTG and BTG accepts no liability whatsoever for theactions of third parties in this respect.

Additional information relating to the financial instruments discussed in this report is available upon request.

BTG and its affiliates have in place arrangements to manage conflicts of interest that may arise between them and their respective clients and among their different clients. BTG and its affiliates areinvolved in a full range of financial and related services including banking, investment banking and the provision of investment services. As such, any of BTG or its affiliates may have a materialinterest or a conflict of interest in any services provided to clients by BTG or such affiliate. Business areas within BTG and among its affiliates operate independently of each other and restrict accessby the particular individual(s) responsible for handling client affairs to certain areas of information where this is necessary in order to manage conflicts of interest or material interests.

Any of BTG and its affiliates may: (a) have disclosed this report to companies that are analyzed herein and subsequently amended this report prior to publication; (b) give investment advice orprovide other services to another person about or concerning any securities that are discussed in this report, which advice may not necessarily be consistent with or similar to the information in thisreport; (c) trade (or have traded) for its own account (or for or on behalf of clients), have either a long or short position in the securities that are discussed in this report (and may buy or sell suchsecurities), with the securities that are discussed in this report; and/or (d) buy and sell units in a collective investment scheme where it is the trustee or operator (or an adviser) to the scheme, whichunits may reference securities that are discussed in this report.

United Kingdom and EEA: Where this report is disseminated in the United Kingdom or elsewhere in the EEA by BTG UK, this report is issued by BTG UK only to, and is directed by BTG UK only

at, persons who are professional clients or eligible counterparties, each as defined in the rules of the Financial Services Authority (together, referred to as relevant persons).

Where this report is disseminated in the UK by BTG, this report is issued only to and directed only at persons who (i) have professional experience in matters relating to investments falling withinArticle 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the "Financial Promotion Order"), (ii) are persons falling within Article 49(2)(a) to (d)("high net worth companies, unincorporated associations etc") of the Financial Promotion Order, (iii) are outside the United Kingdom, or (iv) are persons to whom an invitation or inducement toengage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of any securities may otherwise lawfully becommunicated or caused to be communicated (all such persons together being referred to as "relevant persons"). This report is directed only at relevant persons and must not be acted on or reliedon by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons.

Dubai: This research report does not constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe for or purchase, any securities or investment products in the UAE(including the Dubai International Financial Centre) and accordingly should not be construed as such. Furthermore, this information is being made available on the basis that the recipientacknowledges and understands that the entities and securities to which it may relate have not been approved, licensed by or registered with the UAE Central Bank, Emirates Securities andCommodities Authority or the Dubai Financial Services Authority or any other relevant licensing authority or governmental agency in the UAE. The content of this report has not been approved by orfiled with the UAE Central Bank or Dubai Financial Services Authority.

United Arab Emirates Residents: This research report, and the information contained herein, does not constitute, and is not intended to constitute, a public offer of securities in the United ArabEmirates and accordingly should not be construed as such. The securities are only being offered to a limited number of sophisticated investors in the UAE who (a) are willing and able to conduct anindependent investigation of the risks involved in an investment in such securities, and (b) upon their specific request. The securities have not been approved by or licensed or registered with theUAE Central Bank or any other relevant licensing authorities or governmental agencies in the UAE. This research report is for the use of the named addressee only and should not be given orshown to any other person (other than employees, agents or consultants in connection with the addressee's consideration thereof). No transaction will be concluded in the UAE and any enquiriesregarding the securities should be made with BTG Pactual CTVM S.A. at +55 11 3383-2638, Avenida Brigadeiro Faria Lima, 3729, So Paulo, SP, Brazil, 04538-133.

Date post:	06-Apr-2018
Category:	Documents
Upload:	rafael-shin
View:	219 times
Download:	0 times

BTGP_Specialty vs Department

Documents