Description

Why Liverpool:

El Puerto de Liverpool, along with its subsidiaries, operates a chain of department stores in Mexico, with a focus on catering to a diverse range of consumers, offering several businesses and services such as commercial stores, real estate, and financial services.

Their commercial segment offers more than 1.7 million square meters of sales ground (about half the size of central park), their operation reaches 88 cities all around México, they operate under the brands Liverpool, Suburbia also offers a boutique experience with the exclusive rights to brands like Williams Sonoma, Pottery Barn, West Elm, GAP, among others.

They have recently incorporated E-commerce into their operation in the pursuit of expanding their reach and boosting their sales. In addition to this they have also incorporated a new logistics platform, looking to strengthen their supply chain and fulfill the needs of 70% more clients.

Through their real estate segment Liverpool owns and operates 28 malls along 603,770 square meters of profitable grounds. Counting with more than 1,500 tenants and registering a 90.3% occupancy rate, which attract over 100 million visitors a year.

Regarding their credit segment, Liverpool was the first issuer of non-bank credit cards in México. There are currently more than 6.9 million Liverpool and Suburbia card holders, which represents the most important form of payment for the company, accounting for almost half of their sales.

Liverpool holds approximately 9.90% of the total outstanding shares of Nordstrom. This ownership stake not only diversifies Liverpool's investment portfolio but also positions the company to benefit from Nordstrom's performance in the U.S. retail market, contributing to Liverpool's overall financial strength and global market presence.

Liverpool has a 50% stake in Group Unicomer, which represents a significant asset. This ownership not only grants access to robust Caribbean and Central American markets but also provides valuable insights into regional consumer preferences and market dynamics.

El Puerto de Liverpool’s total sales are distributed by those three segments with the commercial segment being the strongest, representing 88.3% percent of revenues, their real estate segment bringing in 2.4%, and their credit segment 9.3%.

Throughout the years the company has demonstrated continued growth with stable margins showcasing their values and strong fundamentals. For instance, during the last five full years (2017-2022) their revenues and EBIT have grown at a CAGR of 7.6% and 10.9% respectively. Currently, their EBIT amounts to $26,577 million Mexican pesos in the last twelve months.

Liverpool Business:

Liverpool's Digital segment has evolved into a dynamic component of the company's business landscape. Comprising the digital marketplace accessible through digital platforms and the seller's app, the 'Liverpool Pocket App,' this segment has witnessed remarkable growth and transformation. The contribution from the digital business to Liverpool's retail sales has seen substantial expansion over the years. This growth has been underscored by changing consumer preferences and a notable boost during the pandemic, demonstrating the segment's resilience and adaptability.

Liverpool's commitment to customer convenience is evident through the "Click & Collect" feature, which combines online shopping with immediate in-store pickup. Notably, this service has gained popularity. The widespread use of smartphones in Mexico has boosted Liverpool's digital segment, with nearly 80% of orders originating from their mobile application. While Liverpool acknowledges areas for improvement in their app and website, their marketplace demonstrates great potential to compete effectively against industry giants such as Amazon and Mercado Libre.

Looking ahead, the company aims to achieve a 35.8% digital share of commercial revenues by 2027. This forward-looking approach reflects Liverpool's strong commitment to embracing digital transformation and harnessing the potential of digital channels to enhance sales and customer loyalty.

Chart 1. Digital Sales vs Liverpool Retail Sales

Liverpool will have the largest logistics facility in Latin America, known as the Plataforma Logística Arco Norte (PLAN). To comprehend the real scale of this facility, it is 19 times larger than the average industrial warehouse of its kind.

This industrial warehouse, which commenced operations in 2022, serves as the central hub of Liverpool's logistics scheme. It plays a pivotal role in supplying the company's regional warehouses, stores, and also function as distribution centers. Currently, this project is in phase one, focusing on handling large-sized items such as white goods and furniture. The second phase is set to conclude in 2025 and will be dedicated to managing smaller-sized items.

The PLAN is an integral part of Liverpool's initiative to centralize its operations and establish a robust land-based logistics structure. Situated strategically for easy access to the Valle de México and its outskirts, the Valle Puebla-Tlaxcala region, the Bajío, and the Mexico-Querétaro Highway, which connects to routes extending to the Mexico-US border.

The ultimate vision for the PLAN project includes full automation to streamline inventory management. Using data science, Liverpool optimizes its product assortment to meet the changing preferences of consumers across different regions. This strategy is further enhanced through their marketplace, where Liverpool aims to ensure a balanced presence of third-party sellers alongside their own products. The company's reputation and strong customer trust, reinforced by reliable return and guarantee policies, contribute to the success of their marketplace. Liverpool offers in-store returns, and it's been observed that customers tend to make additional purchases during the return process, capitalizing on the convenience of their visit to the store.

In the financial segment, Liverpool has maintained a stable position with consistently low levels of morosity and a past-due portfolio coverage ratio of 4.1x as of 2022, reducing the risk of adverse outcomes. The company is also actively developing new initiatives, one of which is LiverCash, already in progress. LiverCash offers small loans exclusively to its highest-rated credit clients. These initiatives, including LiverCash, have the potential to diversify and enhance the services offered within the financial segment, adding further value to Liverpool's overall business strategy.

For the credit segment, the company saw recent surge in loans, coupled with its consistently low Non-Performing Loan (NPL) ratio, signals a positive financial trajectory and effective risk management. This increase in loans suggests growing demand for the company's lending services, potentially leading to higher interest income and revenue generation. More importantly, the low NPL ratio indicates that a vast majority of borrowers are successfully meeting their repayment obligations, reflecting prudent lending practices and a strong credit assessment process. This combination of expanding loan activity and minimal credit risk showcases the company's ability to capitalize on market opportunities while safeguarding its financial stability. 

The Financial division has reported strong performance in the second quarter of 2023, with a remarkable 26.7% year-over-year increase in sales and a substantial 24.1% year-over-year expansion of the credit portfolio. The division also saw an impressive growth in the number of cardholders, reaching 6.9 million by the close of the quarter, marking a 10.5% year-over-year increase.

Chart 2. Liverpool’s Loan Portfolio

As per data from the central Bank of Mexico (Banxico) “Indicadores Básicos de Tarjetas de Crédito”, and Liverpool’s annual report, it can be observed that the company holds a prominent position as the largest credit card issuer in Mexico, and the fourth-largest credit card loan portfolio in the country.

Liverpool's status as the largest credit card issuer in the country signifies a level of trust and credibility among its customers, enhancing brand loyalty and customer retention. It also provides insights into consumer spending habits and trends, enabling the company to tailor its products and marketing strategies effectively.

Liverpool's status as the fourth-largest credit card loan portfolio holder in Mexico signifies its substantial influence in the financial sector. Managing a significant volume of credit card loans highlights the company's ability to effectively assess credit risk and support consumer spending.

The Liverpool store credit card is designed for convenient shopping within Liverpool department stores and affiliated outlets, providing exclusive discounts, rewards, and special financing options. Additionally, in collaboration with the major payment network Visa, the Liverpool credit card allows for flexible usage not only at Liverpool stores but also at other merchants accepting Visa, all with the aim of rewarding customer loyalty.

Chart 3. Liverpool vs Banks (Credit Cards)

Chart 4. Liverpool vs Banks (Total Loan Portfolio)

Valuation:

Valuation Methodology for Liverpool's Retail Segment

In our valuation of Liverpool's retail segment, we employed a comprehensive approach aimed at deriving its implied value.

Liverpool holds significant equity stake in Grupo Unicomer and Nordstrom. To focus on its core retail and credit businesses, we subtracted Unicomer at Book Value and Nordstrom at its Acquisition Value from its Enterprise Value.

Liverpool possesses a portfolio of real estate properties, which is reported at acquisition cost, including depreciation. Our approach involved inflating the total new acquisitions for each year from 2008 to the present, reflecting the impact of inflation on the properties' value, to estimate their real value. Factoring in the depreciation of these investment properties over the years, we determined the current value of Liverpool's real estate gross investment properties and subtracted it from Liverpool's Enterprise Value.

Table 1. Liverpool’s Retail & Credit Segment Strip down

Chart 5. Liverpool’s Retail & Credit Segment Strip down

The valuation of Liverpool's retail segment and credit business is at a multiple of 3.9x EV/EBIT indicates that this part of the company's business portfolio could be an appealing investment opportunity. This suggests that the market may not fully recognize the retail segment's value within Liverpool, even though it has demonstrated robust financial performance and resilience in the face of challenges such as the pandemic.

In conclusion, Liverpool stands as a resilient and dynamic player in the Mexican retail industry. Its diversified approach, spanning commercial stores, real estate, and financial services, along with its successful integration of e-commerce, positions it for continued growth.

With all the above mentioned, we believe that the company is currently undervalued, opening a huge opportunity for those looking to invest in one of Mexico’s most important and diverse corporations as it is actively pursuing several strategic initiatives to drive growth and efficiency.

Catalyst

4Q results

Marketplace gaining share to Mercado Libre/Amazon

Valuation (GFC lows)