Latam Consumer Monthly:Rally in LatAm consumer stocks losing pace (May 2016)

　　Rally in LatAm consumer stocks losing pace.

　　The rally in February and March, which pushed LatAm consumer stocks up16.2%, is apparently fading away. These stocks were up 2.5% in April 2016and flat in the first ten days of May. As in the two previous months, retailstocks benefited from reduced risk aversion, outperforming peers by rising5.0%, followed by the beverage sector, which was up 3.8%, and by thecosmetics and HPC stocks, which were up 3.5%. As in March, the laggard hasbeen the food sector, which had its shares down 2.0%, affected by thenegative impact of BRL appreciation on Brazilian meat exports.

　　Brazilian retailers potentially facing more favourable earnings dynamics.

　　Steep deterioration in the labour market, higher sales taxes, reduced consumerconfidence and accelerated inflation have been threatening retailers’ sales andmargins for some quarters, leading to continued downward revision in Streetestimates. 1Q16 apparently brought a different picture. Most categories facedSSS contraction, but a softer one. Moreover, many retailers highlighted a morefavourable sales trend in coming quarters, due to easier comps. Besides, amuch leaner SG&A will open room for operating leverage, which means thatthe earnings miss will probably lose pace, especially in the case of the hardlyhit hard-line and apparel retailers. The exception to the rule may be the twooutperforming retailers, Renner and LASA, as the challenging environment hasfinally taken a toll on sales and margin dynamics, potentially threatening veryhigh Street expectations.

　　Dividends trending up at Hypermarcas (Hold), but stock price at high altitudeThe stock was up 13% in April, one of the best performances in the sector, asthe underlying business keeps showing great resilience and the boardevaluates a potential increase in dividend pay-out. In our view, uncertaintiesrelated to the economic environment in Brazil should make the board decide.

　　on a more conservative stance, distributing roughly R$500m in 2016(incremental yield of 1.9%). If Hypermarcas is able to sell the diaper business,it would probably be more aggressive, but it is hard to tell how much,potentially 3-4% more. Given its solid cash flow, we expect Hypermarcas toadopt a 30-50% dividend pay-out ratio in the coming years, which yields1.5-2.0%. It is worth noting that price increases and BRL appreciation shouldcontribute to the achievement of 2016 EBITDA guidance, but we reiterate ourHold rating, as the stock fairly prices in its growth opportunities and tradeswell above peers at 21.0x PE’17.

　　B2W (Hold) and Lojas Americanas (LASA; Sell) facing a hard time.

　　B2W and LASA’s share prices have been under pressure, down 4% and 15% inApril, respectively, underperforming their peer group. Rising concern about aflattish or even declining e-commerce market, continued cash burn and a highindebtedness level have been weighing on B2W. In the case of LASA, despitefavourable margin dynamics, lowering SSS and increasing risk to the 2016store openings guidance threaten market estimates. In addition, the potentialneed for an equity raise at B2W would certainly hurt LASA’s ROIC, anotherheadwind for the stock.