Capital responsibility, perennial growth, in addition to market confidence. A real case is how it could have done better!
THE OBSERVATION OF THE BUSINESS ENVIRONMENT BY INVESTORS AND BANKS: Investors and banks have been closely monitoring the scenario involving Magazine Luiza, a company that until 2020 was cited as an example of a successful business model.
REALIZATION OF THE MODEL BY INVESTORS AND THE 93% MARKET VALUE DROP: From 2021 onwards, investors interpreted that the business model no longer presented components of aggregated results after various acquisitions and implementations of e-commerce technologies, leading them to sell shares. Consequently, there was a steep decline in the market value of Magazine Luiza by 95% in the last two years, from R$ 170 billion to R$ 12 billion.
WHAT THE 93% DROP IN STOCK VALUE REPRESENTS: Investors liquidating shares, causing a 93% drop in asset value, signifies a loss of confidence in the business model and strategic plans presented by the company's management until 2020 and in previous years. Investors sold shares because they doubted that MAGALU would generate results and cash flows consistent with previous investments. With this loss (93%), the company retained a mere 7% of the business. It's a significant devaluation!
Recently, the company disclosed a material fact admitting accounting errors that, when adjusted, will reduce its net worth by R$ 829.5 million. These errors were investigated following an anonymous complaint made in March 2023 and signal serious problems in corporate governance, or even alleged fraudulent management.
THE CEO, THE BOARD OF DIRECTORS: We believe that if it weren't for the family control, the CEO and part of the Board of Directors would have already fallen in 2021 or 2022 due to the poor results and would have been replaced by executives specializing in turnaround.
Despite weak results and significant accounting errors, the management was still retained, possibly due to the influence of the founding family. Investors view this unfavorably!
A 93% DROP IN VALUE RECOVERS WITH A RISE OF ???? To recover from a devastating 93% drop in stock value, the company must consistently present results well above market expectations, promoting the interest of buyers to allocate significant volumes of their investments in stock purchases over an extended period. In total, the shares must rise a staggering 2,000% (yes, a cumulative increase of 2,000% in stock value is needed to recover from a 93% price drop).
We, at Terus Consultoria, believe that the possibility of a 2,000% appreciation in many years to come is remote. Investors who held positions have lost money and will likely never recover.
IF WE WERE ON THE BOARD OF DIRECTORS, WHAT WOULD WE HAVE PROPOSED? In 2019 and 2020, at the peak of the market value, we would have proposed significant restructuring changes in certain business lines and the closure of unviable stores, along with debt reduction and strengthening of working capital. This might have resulted in slower revenue growth but would have protected shareholders' equity.
In 2021 and 2022, we would have suggested the dismissal of the CEO and the election of a turnaround specialist. The same for some other directorates. Closing more unprofitable stores and unsuccessful e-commerce units would be the focus. The goal would be to improve the capital structure, especially working capital, and adopt measures to strengthen margins, even with a reduced product assortment. We believe a healthy company is one of value, not one that grows without financial and asset support.
HEALTHY GROWTH IS: Healthy growth is growth with responsible capital management, perennial growth, market confidence, and above all, confidence in the management's projects. Business model projects should only be implemented if there are compelling reasons to trust their operation, market acceptance, and realistic projections, never enthusiastic projections.
Talk to Terus Consultoria about business modeling for healthy growth, corporate restructuring, high-level corporate governance, and corporate finance.
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Contact Terus right now: contato@terusconsultoria.com.br / +55 011 2503-6747 / Corporate WhatsApp +55 011 91567-0560.
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