Grupo Mateus - LATAM Stocks Investment Analysis #15
Grupo Mateus is the 4th largest retail company in Brazil and the largest in the Northeast region.
Dear LATAM Stocks Readers,
This edition of the newsletter will cover Grupo Mateus, one of the largest retail companies in Brazil. Grupo Matheus is interesting for a few reasons.
First, they are exclusively focused on the Northeast region of Brazil. This region is underserved and under invested. There are very few large public companies focused exclusively on this region of the world, so Grupo Mateus stock is unique from that perspective.
Second, they are effectively growing their wholesale retail brands in Brazil in a financially disciplined manner. Wholesale (Atacado in Portuguese) has been a mixed bag in Brazil. Walmart recently divested from their Brazilian operations, selling their assets to Carrefour. The Sam’s club model never really caught on in Brazil the way many expected it would when they opened their first store in 1995.
Another Grupo Mateus competitor, Assai Atacadista (NYSE: ASAI), has certainty seen expressive growth throughout Brazil. However they have done so by heavily leveraging their balance sheet, with a debt to equity ratio over 10. Furthermore Assai’s largest shareholder, Casino group, divested from the company in Q1 2023, so not exactly a vote of confidence.
Meanwhile Grupo Mateus is healthy financially, unleveraged, with plenty of liquidity. Margins are OK and the company continues its focused expansion in an underserved region that it understands better than its competitors.
The wholesale model still has a lot to prove in Brazil. In 5 years investors may look back and realize that it never caught on culturally and e-commerce competition from Amazon and Mercado Libre ate away at the addressable market. But for investors that want to take the other side of that bet, those that believe wholesalers will continue to grow and expand market share in Brazil, I think Grupo Mateus stock is the best way to express that view in the long term.
As always, these investment overviews are meant to be educational. So I hope you learn something about the company, market, and region by reading.
Feel free to leave a comment below with any doubts, questions, or criticisms!
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Common Stock: Grupo Mateus (GMAT3)
Industry: Retailer – Wholesale, Food, Home Appliances
Current Market Price: R$ 5.51; $1.10 USD
Market Capitalization: R$ 12.2 Billion; $2.4 Billion USD
*All values are expressed in Brazilian Reais (BRL) unless otherwise noted
**This analysis is based on the company’s 2022 audited annual report, as well as other supplemental information. You can find the annual report here.
***A complete Disclaimer about LATAM Stocks Investment Overviews can be found by following this link.
Summary of the Company
Grupo Mateus is a diversified Brazilian retail company focused entirely on the Northeast region of Brazil, where they are the largest retail company. The group operates in the following segments:
The company operates the following brands:
Mix Mateus – Wholesale. 58 stores.
Mix Mateus is the groups wholesale retailer, similar to BJ’s or Sam’s Club in The United States. The average store is 5,000 square meters. This is the groups largest brand in terms of SKU’s, offering over 14,000 products, as well as in terms of revenue, accounting for 48% of the group’s revenue.
Mateus Supermercados – Supermarket. 36 stores.
Mateus is the company’s main supermarket brand. Stores average 2,200 square meters and stock 11,000 SKU’s. This brand accounts for 21% of the group’s revenue.
Camiño – Supermarket. 34 stores.
This is another of the groups supermarket brands, focused more on smaller, lower income cities. The average store size is 1,100 square meters, stocking 8,000 SKU’s. Camiño accounts for 8% of the groups revenue.
Eletro Mateus – Home Appliances. 104 stores.
Eletro Mateus is the company’s home appliance brand. Stores are smaller, averaging 900 square meters, stocking 1,500 SKU’s. The Eletro Mateus brand accounts for 6% of the groups revenue.
Armazem Mateus – Logistics and Distribution.
This is the company’s distribution business. This brand operates 14 distribution centers and serves over 34,000 clients. They have exclusive distribution agreements with companies such as Unilever and Johnson & Johnson. Armazem Mateus accounts for 17% of the groups revenue.
Grupo Mateus also operates an e-commerce platform and a discounts app that have over 700,000 users.
Grupo Mateus was founded in 1986 with a 50 square meter store and has grown to be the 4th largest food retailer in Brazil today. The companies 45,000 employees serve over 400,000 clients per day.
As of March 2023 the company has a total of 232 stores, 31 of which were opened in 2022. These stores are located in 93 cities throughout the following states:
Management’s strategy has 2 core focuses:
1. Continue to establish regional dominance through continued expansion. Grupo Mateus remains entirely focused on the Northeast region of Brazil, where they are the largest retailer. This region remains underserved, with a large population, so there is plenty of growth potential. In 2022 the company expanded its wholesale brand into 5 new states.
2. Financial Discipline. This sounds trite, I have never heard of management focusing on being undisciplined financially. However Grupo Mateus has made cash and inventory management their specific focus. This focus appears to have started paying off in Q4 2022, with significant improvements to the company’s inventory and cash conversion cycles.
About the Northeast
The Northeast region (Nordeste in Portuguese) is one of the five official and political regions of the Brazil according to the Brazilian Institute of Geography and Statistics. Of Brazil's twenty-six states, it comprises nine: Maranhão, Piauí, Ceará, Rio Grande do Norte, Paraíba, Pernambuco, Alagoas, Sergipe and Bahia.
The region accounts for 18% of the Brazilian territory and 28% of the country’s population, with over 57 million people living in these nine states.
The Nordeste is one of the most underdeveloped regions in Brazil, accounting for only ~14% of the country’s GDP. In 2020 GDP in the region was roughly R$ 1.1 trillion or $220 million USD at today’s exchange rate.
The Wholesale Industry in Brazil - Major Divestitures
The wholesale retail industry in Brazil has undergone major changes recently.
In June 2022 Carrefour completed the acquisition of Grupo Big from Advent International and Walmart for R$ 7 billion. This was the largest retail acquisition in Brazil’s history. This included wholesale brands Sam’s Club and Maxxi Atacado, as well as supermarket brands.
In March 2023 the French multinational retailer, Casino Group, sold 18.8% of Assai Atacadista, the largest wholesale retailer in Brazil, for R$ 4.06 billion. Casino retains an ~11% ownership position, but no longer controls the company.
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Revenue and Cost Analysis
Grupo Mateus had revenue of R$ 21.8 billion in 2022, a significant increase from R$ 15.9 billion in 2021.
Gross profit was R$ 4.8 billion in 2022, representing a gross margin of 22%, similar to their 23% gross margin in 2021.
EBIT was R$ 1.37 billion in 2022, a significant increase compared to R$ 916 million in 2021.
Grupo Mateus is consistently profitable. In 2022 the company had net income of R$ 1.1 billion, representing a profit margin of 5%.
Balance Sheet Analysis
The company has a sound balance sheet. Their liquidity position is strong, evidenced by a current ratio over 3.
They are not leveraged, with a debt to equity ratio around 0.8.
I don’t see any red flags related to the company’s cash and inventory management. In fact, it appears the company has made significant improvements to their inventory management.
As of year-end 2022 Grupo Mateus has R$ 1.8 billion in total debt outstanding. R$ 193 million of which is current.
In September 2022 Fitch ratings elevated the company’s debt rating to AA+, with a stable outlook.
Price to Book – 1.6x
Price to Sales – 0.56x
Price to EBIT – 8.9x
Price to Net Income – 11x
Share Dynamics and Capital Structure
The company has 2.2 billion common shares outstanding. The founder and his family own a combined 79% of the company. One institutional investors, Squadra Investments, owns 5%. The remaining 16% is owned by smaller, retail shareholders.
Grupo Mateus does not pay a dividend and has not announced plans to initiate one.
Technical Analysis Notes
Price formed a clear V bottom in June 2022 around R$ 3.20. Over the next 4 months price more than doubled, reaching a local high around R$ 7.70.
Since the local top in October 2022, price has been consolidating, potentially forming a descending triangle pattern, with 2 touches of the diagonal boundary and 2 touches of horizontal support at R$ 5.05.
Price is currently below the 50 and 200 daily moving average, as well as the 50 week moving average, so the current trend is down.
Summary and Conclusion
Regionally dominant player.
Revenue well diversified across business models and brands
Clean balance sheet.
Same store sales over 10% for both supermarket and wholesale brands
Reasonable valuation at 11x earnings.
Home appliance brand is the largest brand in terms of stores, but only accounts for 6% of revenue. Same store sales have been declining. This brand may be more trouble than it’s worth.
The wholesale model remains unproven in Brazil, so the expansion of the groups leading brand could be limited.
I am unsure about the wholesale business model in Brazil. Intuitively I would expect it to work, and it has found success in certain locations. But there have also been plenty of failures in others, evidenced by two major divestitures over the past two years.
That being said, Grupo Mateus has clearly found a fit for the model in the Northeast. The company is sound financially and growing in a responsible manner. I see no reason why they can’t continue to expand and consolidate their leadership position regionally.
For that reason I think Grupo Mateus stock is the best option for investors that want to bet on the wholesale business model in Brazil. The stock offers unique regional exposure and is well positioned to capture whatever gains the Brazilian wholesale retail market makes over the coming years.
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*A complete Disclaimer about LATAM Stocks Investment Overviews can be found by following this link.