Brazilian retailers from Cia. Brasileira Distribuicao Grupo Pao de Acucar to Natura Cosmeticos SA (NATU3) are reporting the most disappointing profits in three years as rising debt and inflation hinder consumer spending.
Fourth-quarter earnings at Pao de Acucar, Natura, Lojas Renner SA and Cia. Hering (HGTX3) trailed analysts’ per-share estimates, according to data compiled by Bloomberg. The last time that many retailers on the benchmark Bovespa index fell short was in the first quarter of 2010.
Shoppers who helped prop up the economy in recent years are starting to pull back, with retail sales surprising analysts by falling in December from a month earlier. Retailers trading at a 46 percent premium to the Bovespa reflect optimism that growth will accelerate and unemployment remain near a record low, said Jorge Simino, chief investment officer at pension fund Funcesp.
“Managing these stocks is like handling uranium without gloves,” Simino said in an interview at Bloomberg’s Sao Paulo office. With the shares “priced to perfection,” any bad news can send them plunging, said Simino, who helps oversee 23.6 billion reais ($11.9 billion) in assets.
That was the case with Blumenau, Brazil-based Hering, which tumbled 12 percent to a five-month low on Jan. 10 after saying same-store sales slid 0.2 percent. Then, last month, the clothing chain known for jeans and T-shirts reported fourth- quarter sales that missed estimates as the country struggles with inflation running at 6.15 percent, the highest in a year.
Hering’s gross margin in 2012 fell almost 3 percentage points to 46 percent, while earnings before interest, taxes, depreciation and amortization slid 2 percentage points to 27 percent, according to data compiled by Bloomberg. Hering’s 18-fold rally since 2009 led its peers and beat the Bovespa’s 50 percent jump. The company’s shares rose 0.8 percent to 38.71 reais at 1:04 p.m. in Sao Paulo.
“To be at this level, the stock should have high profitability, which the company is unable to achieve,” said Renato Prado, an analyst at Fator Corretora who covers retail.
Officials at Hering, Natura, Pao de Acucar and Renner all declined to comment on why earnings are trailing analysts’ estimates. Lojas Americanas SA (LAME4) and B2W Cia. Global do Varejo, the other two retailers in the Bovespa, have yet to release results.
Brazilians are beginning to feel the strain of accelerating inflation, rising debt burdens and a stagnant economy.
Consumer confidence fell in February for a fifth straight month, the longest decline since records began in 2005. The drop in December retail sales from November surprised all 28 economists in a Bloomberg survey, and the 5 percent gain on a year-over-year basis trailed the inflation rate and marked the slowest holiday-season expansion since 2008. Average household debt is up, too, rising to 43.42 percent of annual incomes at the end of 2012 from 32.15 percent at the start of 2009.
Interest-rate futures show traders are betting the central bank will raise borrowing costs by the end of June from a record low of 7.25 percent. Inflation has exceeded the 4.5 percent midpoint of the central bank’s target range for more than two years.
“Brazilian consumers are quite sensitive to interest rates, so an increase in the interest rate will impact consumer spending power and take some of the heat out of inflation,” said Daniel Snowden, an Informa Global Markets economist who covers Brazil, in a phone interview from London. “Consumers are still the key pillar of Brazilian growth.”
Consumer-discretionary stocks rallied last year, posting the best gain among 10 industry groups in 2012’s second half, even as economic expansion slowed to 0.9 percent from 2.7 percent in 2011. Consumer-default rates for payments more than 90 days late reached a record high of 8.2 percent in September, the central bank said.
“Default rates are not falling,” said Funcesp’s Simino, who is based in Sao Paulo. Companies may increase write-offs to reflect delinquencies, while credit may begin to shrink as lenders start seeing more customers failing to make payments, Simino said.
Retailers will have to adjust to consumers’ rising cost consciousness, said Fator’s Prado. Supermarket operator Pao de Acucar is expanding smaller-format stores that are more profitable, while women’s fashion retailer Marisa Lojas SA (AMAR3) reduced its workforce and started selling shoes.
Consumers probably will bounce back in 2013, said Carlos Thadeu de Freitas Gomes, chief economist at the National Commerce Confederation and a former central bank director. The group forecasts 2013 economic growth of 3 percent and a 6 percent expansion in retail sales.
“The consumer sector will still help boost GDP this year, less so than last year because credit is scarce and families are in debt,” Freitas Gomes said in a phone interview from Rio de Janeiro. High employment will be “an anchor” for consumers’ purchases, he said. “There is still room for families to increase spending.”
Average families’ basic needs in the past five years have grown to include amenities such as wireless phones and cable television, Funcesp’s Simino said. That creates “inflexibility” in household budgets and makes hanging onto work all the more important, he said.
“Consumers today are much more in debt than before,” Simino said. “The chances of future job loss become more dangerous.”
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