Bloomberg News

Renner Doubles Down on Credit Bet Fueling Consumer Sales

August 24, 2012

Lojas Renner SA (LREN3), Brazil’s biggest clothing retailer, is joining the ranks of companies relying on credit cards to fuel profit growth as consumer spending surges.

The company’s one-year-old Meu Cartao credit-card division will probably become profitable in 2013, a year earlier than forecast, said Chief Financial Officer Adalberto Santos. Consumers now finance 54 percent of their purchases at Renner’s 174 stores nationwide with Renner credit cards, he said.

Renner is doubling down on its bet that its credit card, which is issued under the Visa and MasterCard brands and can be used anywhere, will fuel sales by shoppers while also allowing it to profit from real interest rates that are the second highest among G-20 nations. The Porto Alegre, Brazil-based retailer expects national delinquency rates, which hit a 30- month high in May, to stabilize or fall in coming quarters, Santos said in an interview at Bloomberg’s Sao Paulo office.

“The worst is over,” he said. “Compared to last year, delinquency numbers should stay stable or get better -- we don’t see them getting worse.”

Delinquency at Renner’s credit business, which Renner manages on its own without any partnerships with banks, rose to 3.9 percent from 3.5 percent a year earlier.

Retail Pickup

“For years, electronic retailers in Brazil have made as much profit from consumer credit as from sales of their products because interest rates in Brazil have always been so high,” Ricardo Correa, an analyst at Ativa Corretora, said in a phone interview from Rio de Janeiro. “It’s only natural that clothing and other retailers will want to follow this trend.”

Lojas Renner declined 2.3 percent to 64.80 reais at 12:02 p.m. in Sao Paulo. A close at that price would be the lowest since Aug. 14. The benchmark Bovespa index was little changed.

Government measures to cut interest rates, reduce taxes and ease reserve requirements are helping to ignite a recovery in Brazil, the world’s largest developing economy after China. Outstanding credit expanded 18 percent in June to 2.2 trillion reais ($1.1 trillion).

Brazilian retail sales unexpectedly rose 1.5 percent in June from the previous month, according to an Aug. 16 government report. An economic activity index calculated by the central bank grew 0.75 percent in June, more than the 0.6 percent increase expected by economists in a Bloomberg survey.

The June data suggest that growth is picking up after the government cut taxes on cars and home appliances and the central bank lowered the benchmark rate to a record low of 8 percent. Brazil is forecast to grow 1.9 percent this year, less than China, Russia and India.

Soured Loans

Itau Unibanco Holding SA (ITUB4) and Banco Bradesco SA (BBDC4), Brazil’s two biggest banks by market value, both boosted provisions for soured loans this year as a pickup in inflation and slower economic growth eroded customers’ ability to make payments on time. In September, Itau Chief Executive Officer Roberto Setubal said that the problem of late payments was “pretty much under control” and would start to improve in 2012.

Renner has gained 37 percent in Sao Paulo trading so far this year, while the MSCI Brazil (MXBR) Consumer Discretionary Index has advanced 1.6 percent. The MSCI Brazil index has declined 5.2 percent. Renner trades at about 26 times annual earnings, compared with 36 for Marisa Lojas SA (AMAR3), 18 for Guararapes Confeccoes SA (GUAR4), which runs Riachuelo stores, and 21 for Cia. Hering (HGTX3), according to Bloomberg data.

‘Risky Business’

Renner shares, which declined 2 percent to 66.31 reais yesterday, are trading at the closest to analysts’ 12-month target price among retailers on the Bovespa index.

While Joao Pedro Brugger, a portfolio manager at Leme Investimentos, which holds Renner shares, sees additional room for Renner to rise, he said continued consumer indebtedness could hurt profit.

“The company is adding a risky business that’s not its main business, which could impact its financial results if defaults increase,” he said in a telephone interview from Florianopolis, Brazil.

Renner had 207 stores in June, including 33 Camicado locations, according to its second-quarter presentation. The company aims to boost that figure to 408 Renner and 125 Camicado stores by 2021, Santos said.

The company is investing 220 million reais from 2011 through 2015 to add a third distribution center in Rio de Janeiro and expand two others in Sao Paulo and Santa Catarina states. The investment will allow Renner to use more space in stores to display products for sale rather than storage and will give the company more flexibility to manage fashion collections depending on weather changes, Santos said.

‘More Efficient’

“We’ll be more efficient inside our stores,” he said in the Aug. 21 interview. “We’ll be able to reduce the amount of merchandise that is left over from season collections or shortages, which are the No. 1 enemy of the retail industry.”

Renner’s second-quarter adjusted profit of 103.5 million reais missed analysts’ estimates of 110.4 million reais in a Bloomberg survey.

Other Brazilian retailers are also counting on growing credit-card sales to fuel profit, including Marisa and Guararapes’s Riachuelo.

“It’s an asset with considerable value,” Caue Pinheiro, an analyst at SLW Corretora, said in a telephone interview from Sao Paulo.

To contact the reporter on this story: Felipe Frisch in Sao Paulo at ffrisch1@bloomberg.net

To contact the editors responsible for this story: Jessica Brice at jbrice1@bloomberg.net; Helder Marinho at hmarinho@bloomberg.net


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