The company also mentions aiming for greater accuracy and better inventory management to overcome the challenging macroeconomic situation.
Lojas Renner (LREN3) is adapting to the new reality of Brazilians after a period of high inflation and interest rates that eroded part of the population’s income. In an interview with InfoMoney after the second-quarter results of 2023, the company’s Chief Financial Officer (CFO), Daniel Martins, stated that the fashion retailer intends to focus more on entry-level products, meaning more affordable items.
“The second quarter was important for us to make adjustments in our operations. We changed our value equation, combining fashion, quality, and price, and now we present a more attractive equation. We will have a wider range of entry-level products at a more accessible price,” said the executive.
According to him, another focus is on assertiveness. The high indebtedness of the population, with almost 50% of the economically active group having “bad credit,” creates a more selective consumer behavior, where the company needs to accurately meet customer demands.
“We entered the third quarter with a significant part of the collection being developed during the season, responding to consumer needs,” said Martins, mentioning that the company’s responsiveness has greatly improved since before the pandemic.
The CFO argues that the lower prices should not impact the profit margins significantly. Macroeconomic factors such as deflation and currency exchange rates, combined with the company’s efforts like negotiations with suppliers and better collection management, contribute to defending profitability.
The company expects that the focus on more affordable products will even improve its earnings. The higher sales growth will translate into increased revenue and, consequently, a reduction in expenses.
In the second quarter, Lojas Renner explained that its gross margin declined (from 56.1% last year to 53.9% this year) due to the need for more price adjustments resulting from lower volumes sold.
Besides the economic situation, the milder winter also impacted sales, with people refraining from buying heavy clothing. Another challenge was the strong comparison base from the previous year when people were eager to go out and buy new clothes after two years of pandemic and restrictions on mobility.
Lojas Renner seems to be focusing on versatility and adaptability to meet consumers’ needs more consistently. They aim to increase their inventory in the third quarter, but with a strong emphasis on responsiveness. This means they plan to reserve a portion of their stock for production during the actual season, allowing them to be more agile and respond quickly to changing customer demands. By adopting this approach, they intend to stay in tune with market trends and ensure they can cater to the preferences of their customers in a more dynamic manner.
The executive explains that the improved responsiveness should even free up capital for Lojas Renner. In the second quarter, the company had a free cash flow of R$ 262.9 million, a significantly better figure than the same period in 2022, attributed precisely to a reduced need for working capital in inventory formation – which would be structural.
“As the economy improves and consumers regain their purchasing power, we will also move forward. Customers will be able to return to buying other price options that we offer in our product range,” explained the director.
However, Lojas Renner doesn’t anticipate such rapid improvement in the macroeconomic scenario. It seems they are cautiously optimistic and are not expecting a swift recovery but are rather taking a more measured approach in their planning and expectations.
Despite investors’ expectations of a turnaround in the Brazilian economic cycle, with the Central Bank having recently lowered the Selic rate from 13.75% to 13.25%, Lojas Renner believes that the economic improvement will be slower.
“A decline in interest rates certainly helps, but we still have to see how the default rate will increase. The second quarter was challenging for our financial arm, Realize, as the default rate continued to rise, especially in May,” commented the executive.
In the financial statement, Realize reported a loss of R$ 53.7 million, with credit losses growing by 40.7% year-on-year to R$ 396.1 million.
The government’s debt renegotiation program, Desenrola, has not yet begun. According to Martins, the debt renegotiation for amounts up to R$ 100 is still relatively low, considering that the average debt of the Brazilian population, according to statistics, is R$ 4,000. “It is still early to talk about any improvement from the program,” he pointed out.
In response, Lojas Renner is focusing on operational improvements and becoming more selective in granting credit through its financial arm. They are taking a cautious approach to credit extension to mitigate potential risks associated with rising default rates.
“When we compare our on-time portfolio on a sequential basis, it remains flat (stable), and on an annual basis, there was a 13% growth, reaching R$ 6.17 billion. However, in terms of on-time payments, the growth is 6%. We are being more selective. The new batches show much better behavior than the older ones,” he said.
Regarding the Remessa Conforme program, a Federal Government initiative to regularize imports, Lojas Renner sees some positive developments, but they still find it insufficient.
“We see a positive evolution. We went from a point where the Government might not have had any awareness or action to having a program. It aims to bring formalization and progress. However, the proposed taxation is not sufficient; it provides an advantage for the importer,” he commented. “The government, though, claims it’s just the first phase and that there will be fairness. We hope that will happen.”
In summary, Lojas Renner is being cautious with its financial arm, Realize, and is focusing on operational improvements while closely monitoring default rates. They find the Remessa Conforme program a positive step, but they are looking forward to further developments to ensure fairness for all parties involved.
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