La Polar - Nueva Polar

Transcription

Equity Research
Chile
Retailers, Apparel
Company Note
20 May 2013
La Polar
Rising from the ashes: the new (& improved) La Polar
Rating
We are staying on the sidelines for now, initiating coverage with a neutral
12m Price Target
CLP218.00/US$0.45
We are initiating coverage on Chilean department store operator La Polar with a PT
Price
CLP184.00/US$0.38
of CLP218, which represents 19% upside to current levels. While La Polar is firmly
RIC: LAPOLAR.SA, BBG: NUEVAPOL CI
out of crisis mode, the retailer faces tough competition (Falabella, Paris, Ripley) and
an adverse regulatory environment. So, though we believe in the new management
Neutral
Trading Data and Return Forecasts
agreement with the consumer protection agency to end its class action lawsuit.
52-wk range
CLP416.15-165.04/US$0.82-0.35
Market cap.
CLP184bn/US$382m
Shares o/s (m)
998.6
Free float
100%
Avg. daily volume('000 Shares)
1,953
Avg. daily value (CLP m)
369.5
Forecast price appreciation
+18.5%
Forecast dividend yield
0.0%
Forecast stock return
+18.5%
Overhaul of proprietary brands should drive 15% SSS growth in 2013
Stock Performance (CLP)
team and the turnaround plan, execution risk is keeping us on the side lines, for now.
Out of bankruptcy and fully funded for growth
After a high profile credit card & accounting scandal nearly drove the company out of
business in mid-2011, La Polar’s new leadership i) raised US$280mn in equity to fund
its business plan; ii) restructured its debt (to less than half, in PV); and iii) reached an
La Polar’s new apparel & design team wasted no time in giving the retailer’s
proprietary brands a major (and much needed) face lift. Store renovations (US$40mn
in capex over two years) should also help get more customers through the door. As a
result, we expect 15% SSS growth in 2013.
4,000.0
150
3,500.0
120
3,000.0
2,500.0
90
2,000.0
60
1,500.0
rd
apparel, more proprietary brands (50% margins) and less 3 party brands (30%). La
Stock Price (CLP)
20-Feb-13
0
Rel. IPSA
Polar has also made mayor changes to its sourcing process, which has already
reduced direct costs for proprietary apparel brands by roughly 20%.
Quarterly results this year could be a catalyst for the stock
We value La Polar using a blended PT based on a DCF and multiples analysis.
Looking at the comps (Hites & Ripley), La Polar does not look cheap, but in our view
a 10 yr DCF better captures the full impact of the turnaround story. Execution will be
key, so hitting targets in quarterly results this year could be a catalyst for the stock.
Valuation
RoIC (EBIT) %
EV/EBITDA
P/E
Net dividend yield %
12/2011
NM
NM
NM
NM
12/2012
(10.6)
(7.8)
1.1
0.0
12/2013E
(4.2)
(95.0)
(11.5)
0.0
12/2014E
6.8
14.1
17.5
0.0
12/2015E
11.8
8.8
12.7
2.6
Financials (CLPmn)
Revenues
EBITDA
Net Income
EPS (CLP)
Net DPS (CLP)
Net (debt) / cash
12/2011
NM
NM
NM
NM
NM
NM
12/2012
381,910
(51,391)
187,528
187.79
0.00
(193,460)
12/2013E
439,914
(3,952)
(15,967)
(15.99)
0.00
(191,844)
12/2014E
554,894
26,946
10,520
10.54
0.00
(196,782)
12/2015E
636,887
44,234
14,442
14.46
4.82
(206,267)
Isabel Darrigrandi
Chile - BTG Pactual
[email protected]
+562 2490 5093
Alonso Aramburu
New York – BTG Pactual US Capital LLC
[email protected]
+1 646 924 2471
Fabio Monteiro
Brazil – Banco BTG Pactual S.A.
[email protected]
+55 11 3383 2006
Source: Company reports, Bovespa, BTG Pactual S.A. estimates. / Valuations: based on the last share price
of the year; (E) based on a share price of CLP184.00, on 17 May 2013.
ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 42
Banco BTG Pactual S.A. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of
interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
20-May-13
20-Nov-12
20-Aug-12
20-Feb-12
20-May-12
20-Nov-11
20-Aug-11
20-Feb-11
Price Target (CLP)
20-May-11
20-Nov-10
margins: i.e. more apparel (30%-50% margins), and less electronics (15%). Within
0.0
20-Aug-10
Management plans to improve the product mix to favor those with higher gross retail
30
500.0
20-May-10
New product mix & improved sourcing to boost retail gross margins by 300 bps
1,000.0
La Polar
20 May 2013
Table of contents
Investment highlights
3
Retail sector valuation multiples
7
Investment thesis – pros
9
Investment thesis – cons
20
Valuation
23
Ownership structure
25
Company overview
26
Brief history
26
Appendix
35
The new board of directors
35
The new management team
36
Lawsuits
37
New brands
38
Example of a re-launched brand – Zibel
40
page 2
La Polar
20 May 2013
Investment highlights
La Polar, in our view, is well out of crisis mode and firmly positioned to continue
executing on its turnaround strategy. We estimate that in 2013, La Polar’s Chile
operation will once again be in positive Ebitda territory as we expect i) improvements
to the product offering and stores layouts to drive 15% SSS growth; ii) changes in the
sourcing process to increase retail gross margins by 300 bps; and iii) a gross loan
book which we expect will increase by over 25%, as the last restrictions to the credit
operation finally were lifted in late 2012. On a consolidated basis, including Colombia,
La Polar should be able to reach a 5% Ebitda margin by 2014.
When the company first went into bankruptcy in mid-2011, urgent steps needed to be
taken if La Polar was going to remain a going concern. One by one, these “to do’s”
have been checked off the list:
i)
The board of directors was replaced and new management was hired;
ii)
A viable business plan was developed;
iii)
An agreement with creditors was reached to restructure the debt,
including a grace period to delay amortizations;
iv)
Roughly US$280mn was raised in cash through a new equity offering to
finance the capex and working capital requirements in the turnaround
strategy;
v)
An agreement with the Chilean consumer protection agency was
reached which capped the company’s legal liabilities, with regards to
the consumer class action lawsuit, at US$40mn.
Once the immediate crisis was addressed, La Polar was able to focus on reviving its
core business: retail sales. One of the first steps was to completely revamp the
apparel department. A professional, 25 person design team was hired, higher margin
proprietary brands were updated and reenergized, purchasing budgets were
reoriented to favor a better product mix. The sourcing process was also brought into
st
the 21 century, with industry standard best practices like using spec sheets, which
allows the company to not only receive comparable quotes from a larger number of
manufacturers, but also to hold the manufacturer accountable for the product
delivered.
The summer season (which just ended in March) was the first to fully capture all of
these, and other, changes. As a result, we expect La Polar to easily deliver double
digit same store sales growth in 1Q13.
Looking forward, La Polar still has a lot of low hanging fruit that it can easily pick, in
our view. Most of the company’s department stores were neglected for years under
the previous administration, so the investment plan includes roughly US$40mn to
renovate over 60% of the stores in Chile in the next two years. We think the
renovations will make a major difference in luring customers through the door. Also,
the company is no longer hamstrung by the loan caps and other restrictions the
page 3
La Polar
20 May 2013
page 4
regulators had placed on its credit card operation in Chile, so La Polar should be able
to take advantage of pent up demand from existing customers. La Polar also now has
sufficient cash, in our view, to grow its credit card customer base and loan book back
to the point where it is closer in line with the rest of the industry.
Given that La Polar is a turnaround story, the stock faces significant execution risk.
Chile has a crowded retail market with several large, world-class department store
players –including Falabella, Cencosud (Paris and Johnson) and Ripley– each with a
proven retail track record and an established credit card operation. Then there are
smaller players, such as Hites, that primarily target consumers in the lower to middle
income segments, not to mention competition from various specialty store chains, like
Forus. In the past, La Polar focused almost exclusively on low to mid income
customers. If La Polar is going to achieve the goals set forth in the “Aconcagua Plan”
(management’s target for 2014), the company needs to take at least some market
share away from these incumbent players.
Table 1: La Polar’s Chile operation – BTG Pactual forecast compared to the Aconcagua Plan
Retail revenue (CLP$bn)
Sales (UF)/sqm/month
BTG Pactual
BTG Pactual
Aconcagua
2012A
2013E
2014E
2014E
294
338
400
6.7
7.5
8.6
437
10.0
Sales (USD$)/sqm/month
320
358
412
480
Retail gross margin
22%
25%
27%
30.0%
Financial revenues/retail revenues
20%
19%
19%
30.0%
(Retail + Credit SG&A)/retail revenue
40%
34%
31%
30%
Provision/gross loans
12%
12%
12%
12%
-13.7%
1.7%
8.5%
10.0%
(Retail + Credit Ebitda) /retail revenue
Source: La Polar. BTG Pactual.
An even bigger challenge, in our view, will be growing the credit card operation, given
the current adverse regulatory environment and the increasing competition from
banks. Most other department stores in Chile are seeing the percentage of retail
sales realized with their proprietary credit cards, contract. We do think that La Polar
has pent up demand that should fuel growth, at least initially. La Polar has the same
number of active credit cards as Hites, for example, even though La Polar has 40
stores compared to 14 for Hites.
While we do expect La Polar to grow its loan portfolio, we do not think it will likely
grow as fast as management’s plan. In fact, the biggest difference between our
forecast and the Aconcagua Plan is the credit card operation. We keep financial
revenue to roughly 20% of retail revenue while the Aconcagua Plan has financial
revenue ramping up to 30% of retail revenue by 2014. According to our estimates,
this would require more working capital (to increase credit card receivables) than
what La Polar could currently fund, unless it went back to the capital markets. If
management were to surprise to the upside on its retail operating metrics (sales
growth per square meter, retail gross margins), then the company may generate
La Polar
20 May 2013
page 5
more cash than what we are forecasting, which it could then be used to grow its loan
book more aggressively.
Valuing La Polar is tricky because it truly is a moving target: while it the company is
just coming out of bankruptcy and is still in the red in terms of its income statement
and cash flows, the company is fully-funded and equipped, in our view, to execute an
ambitious turnaround plan. Our 10-year DCF, which we believe captures the longterm picture, suggests that La Polar is undervalued by 25%. However, from a
multiples perspective, the stock looks much less compelling.
Table 2: Blended price target
Upside
Current price
184
Blended price target
218
18.5%
DCF
230
25.0%
2015E P/E multiple
208
12.9%
2015E EV/Ebitda multiple
216
17.1%
Source: BTG Pactual.
Table 3: WACC sensitivity
230
2.0%
12.6%
125
12.1%
142
11.6%
161
11.1%
182
10.6%
205
10.1%
231
9.6%
261
9.1%
294
8.6%
333
Using both methodologies, we arrive at a blended price target of CLP218, which
implies 18.5% upside. However, given the significant execution risks and the tough
comps, we prefer to remain neutral.
Table 4: Comparable companies
Company
Share
P/E
EV / EBITDA
price 2013E 2014E 2015E 2013E 2014E
2015E
Chile
Ripley
18.7x 19.9x 14.4x
Hites
11.6x 10.4x
NA
6.7x
6.1x
NA
Avg, ex La Polar
15.2x 15.1x 14.4x
9.9x
8.9x
9.4x
NM 14.1x
8.8x
NM 20.7x 15.0x
NM 14.7x
9.4x
15.2x 15.9x 13.5x
9.9x 10.7x
9.1x
La Polar - current price
184
La Polar - price target
218
Avg, w/La Polar's current price
NM 17.5x 12.7x
13.0x 11.8x
9.4x
Source: Bloomberg, BTG Pactual.
The upside risk to our recommendation is that as management begins delivering on
its operating targets, investor sentiment should improve. We expect that the
company’s 1Q13 results, which are due to be published later this week, will show that
management is executing the plan and delivering tangible results, particularly in its
Chilean operation.
Another possible catalyst for the stock is a possible prepayment of part of the junior
bond. La Polar’s new bonds, from its debt restructuring, are expected to begin trading
over the next few weeks. We think it is likely that La Polar will use the excess cash
(almost CLP$13bn) from its equity offering to acquire, at a significant haircut, much of
2.5%
131
149
169
192
217
245
277
314
357
3.0%
138
157
179
203
230
260
296
337
385
3.5%
146
166
189
215
244
278
317
364
419
4.0%
155
176
201
229
261
299
343
396
460
La Polar
20 May 2013
its junior bond, reducing future financial (non-cash) expenses, improving the bottom
line and making the company more attractive from a P/E perspective, as well. Taking
out the junior bond would also make La Polar more attractive as a possible
acquisition target, given that any acquirer would have to value that debt at a much
lower discount rate.
Another possible catalyst for the stock is Colombia. Under La Polar current plan, the
Colombia operation –with only five stores— will not likely be cash flow positive for
another couple of years. A JV or partnership with a larger player could provide La
Polar with the means of reaching that goal much sooner (and free up cash for its
Chilean operation). We understand that La Polar is undergoing a search at this time.
page 6
La Polar
20 May 2013
page 7
Retail sector valuation multiples
Table 5: BTG Pactual Retail Comps – P/E
Company
Ticker
Market Cap
P/E
Net Income Growth
Dividend yield
(Local FX - mn)
2012E
2013E
2014E
2012E
2013E
2014E
2012E
2013E
2014E
9,513
25.7x
21.5x
16.7x
9%
20%
28%
3%
3%
3%
Brazil
Lojas Renner
LREN3.BZ
Marisa
AMAR3.BZ
5,571
26.7x
18.5x
14.3x
17%
45%
29%
1%
1%
1%
Hering
HGTX3.BZ
6,856
21.3x
18.9x
16.4x
7%
12%
16%
4%
2%
4%
LLIS3.BZ
1,572
31.5x
21.9x
17.3x
-20%
44%
27%
1%
0%
1%
Le Lis Blanc
Arezzo
ARZZ3.BZ
3,676
37.5x
31.0x
25.6x
7%
21%
21%
1%
1%
1%
Lojas Americanas
LAME4.BZ
16,714
44.2x
32.2x
23.8x
14%
38%
35%
0%
1%
1%
Natura
NATU3.BZ
21,674
23.9x
21.2x
18.5x
9%
13%
14%
5%
3%
4%
Hypermarcas
HYPE3.BZ
10,572
33.6x
21.4x
17.1x
>100%
57%
25%
0%
0%
1%
B2W
BTOW3.BZ
1,698
NA
NA
NA
NA
NA
NA
0%
0%
0%
Pao de Acucar
PCAR4.BZ
28,947
29.1x
22.0x
18.3x
20%
27%
20%
1%
1%
1%
Magazine Luiza
MGLU3.BZ
1,492
32.3x
11.4x
7.8x
-7%
NA
45%
0%
0%
0%
Raia Drogasil
RADL3.BZ
7,368
47.9x
33.7x
25.0x
2%
42%
35%
0%
0%
1%
Brazil Pharma
BPHA3.BZ
3,278
37.8x
22.3x
17.6x
3%
69%
27%
1%
1%
1%
IMC
IMCH3.BZ
2,104
71.8x
25.8x
16.8x
NA
NA
54%
0%
0%
0%
Unicasa
UCAS3.BZ
621
13.6x
13.9x
12.3x
-26%
5%
13%
0%
2%
2%
Technos
TECN3.BZ
1,782
24.0x
20.5x
16.6x
5%
17%
24%
2%
1%
1%
33.4x
22.4x
17.6x
3%
32%
28%
1%
1%
2%
Brazilian Companies Average (ex-B2W)
Mexico
Walmex
WALMEXV.MM
644,593
27.7x
24.0x
21.0x
-1%
25%
14%
0%
0%
0%
Soriana
SORIANA.MM
90,504
25.1x
24.6x
25.8x
1%
11%
-5%
1%
0%
0%
CHDRAUIB.MM
45,179
30.1x
21.9x
19.1x
-9%
49%
15%
NM
0%
0%
CENCOSUD.CI
7,351,831
24.3x
21.2x
17.1x
-6%
32%
24%
1%
1%
1%
FALAB.CI
12,970,568
33.0x
24.6x
19.6x
-7%
34%
25%
1%
1%
1%
FORUS.CI
865,871
27.8x
24.6x
21.8x
10%
13%
13%
1%
1%
2%
EXITO.CB
12,640,372
29.7x
26.0x
23.0x
12%
12%
13%
-1%
-1%
-2%
INRETC1.PE
2,365
39.8x
33.0x
25.4x
30%
22%
30%
0%
0%
0%
LatAm (ex-Brazil) Companies Average
29.7x
25.0x
21.6x
4%
25%
16%
NM
0%
0%
BTG Pactual Coverage Average
33.1x
23.4x
19.1x
3%
29%
24%
NM
1%
1%
Chedraui
Chile
Cencosud
Falabella
Forus
Colombia
Almacenes Exito
Peru
InRetail
La Polar
20 May 2013
Table 6: BTG Pactual Retail Comps – EV/Ebitda
Company
Target
Upside
(Local FX)
EV / EBITDA
page 8
EBITDA Growth
FCF Yield
2012E
2013E
2014E
2012E
2013E
2014E
2012E
2013E
2014E
12.2x
9.8x
18%
21%
26%
-1%
0%
3%
Brazil
Lojas Renner
87.00
14%
14.3x
Marisa
37.00
23%
12.7x
9.6x
7.6x
19%
31%
23%
-5%
1%
5%
Hering
53.00
27%
15.8x
13.6x
11.3x
7%
14%
16%
3%
4%
7%
Le Lis Blanc
12.00
31%
17.8x
10.7x
8.7x
9%
68%
22%
7%
-1%
3%
Arezzo
44.00
6%
26.8x
20.4x
15.7x
12%
30%
27%
1%
2%
3%
Lojas Americanas
22.00
27%
13.4x
11.1x
9.1x
13%
22%
24%
5%
2%
2%
Natura
59.00
17%
14.3x
12.5x
11.0x
16%
14%
13%
8%
4%
5%
Hypermarcas
19.00
13%
14.9x
12.6x
10.7x
58%
19%
16%
-1%
1%
3%
-28%
18.00
66%
12.4x
10.1x
7.5x
-14%
40%
47%
12%
44%
Pao de Acucar
112.00
2%
11.5x
9.6x
8.3x
0%
15%
16%
2%
4%
4%
Magazine Luiza
16.00
100%
9.5x
5.5x
4.9x
-8%
55%
24%
37%
4%
7%
Raia Drogasil
23.00
3%
22.7x
17.1x
13.9x
20%
34%
23%
0%
0%
3%
Brazil Pharma
18.00
41%
19.1x
14.2x
10.7x
25%
52%
30%
-9%
0%
9%
IMC
31.00
24%
15.5x
10.7x
8.0x
5%
47%
34%
-2%
-1%
0%
Unicasa
15.00
60%
9.1x
8.8x
7.3x
-24%
7%
12%
4%
6%
10%
Technos
31.00
34%
21.9x
17.7x
13.4x
1%
22%
28%
0%
2%
5%
16.0x
12.4x
10.0x
11%
30%
22%
3%
2%
5%
B2W
Brazilian Companies Average (ex-B2W)
Mexico
Walmex
43.00
18%
15.1x
13.3x
11.8x
3%
23%
13%
5%
5%
6%
Soriana
53.00
5%
12.4x
11.6x
10.4x
-3%
15%
10%
7%
7%
8%
Chedraui
50.00
7%
11.9x
9.9x
8.9x
3%
28%
10%
3%
9%
10%
Cencosud
3,200.00
22%
14.7x
11.2x
9.8x
6%
19%
13%
-2%
4%
5%
Falabella
6,350.00
18%
18.8x
15.2x
12.5x
1%
24%
21%
1%
2%
3%
Forus
3,445.00
3%
20.5x
17.7x
15.7x
13%
16%
12%
2%
3%
3%
36,000.00
28%
12.6x
11.0x
9.5x
22%
9%
12%
4%
4%
5%
24.00
4%
16.5x
14.2x
11.2x
23%
31%
34%
NA
NA
NA
Chile
Colombia
Almacenes Exito
Peru
InRetail
LatAm (ex-Brazil) Companies Average
15.3x
13.0x
11.2x
9%
21%
16%
NA
NA
NA
BTG Pactual Coverage Average
15.8x
12.6x
10.4x
10%
27%
20%
NA
NA
NA
La Polar
20 May 2013
Investment thesis – pros
Corporate governance firmly in place
One of the first orders of business for La Polar’s new board of directors was to ensure
that a corporate governance structure was put into place to prevent a repeat of the
fraud that nearly brought down the company in 2011. The position of controller was
created with this goal in mind. The controller reports directly to the board, oversees
the transparency of internal reporting practices, and conducts the internal audit.
In the 2011 scandal, various board members claimed to not have known what was
going on with regards to the unilateral debt restructurings. La Polar’s new board
created various committees (retail, finance, audit, risk, Colombia and fraud
prevention) to make sure that in the future there would be no excuse for not being
informed. Each committee is composed of up to three board members and meets
with management on a regularly scheduled basis.
New, transparent provisioning methodology
La Polar’s new management introduced a new provisioning methodology for its loan
book based on widely accepted industry standards. The new methodology
establishes tranches, starting with non-delinquent loans, and then bases the groups
on length of delinquency (using 30-day intervals). As a loan passes from one tranche
to the next, provisions are increased accordingly. At 91 days, roughly 90% of the loan
has been provisioned. At 180 days, the entire loan and provision are written off as
bad debt.
Another important change is the greater transparency with regards to La Polar’s
receivables and provisioning practices. In its quarterly report, the company now
provides a clear and detailed breakdown of its loans and provisions by tranche so
that investors can monitor, quarter by quarter, the health of the loan book.
Healthy balance sheet should provide breathing room for turnaround
La Polar, which was insolvent just a few months ago, today has a healthy balance
sheet that in our view should give the company sufficient breathing room to execute
its turnaround strategy and return to positive cash flows. La Polar recently raised
CLP132.7bn (US$280mn) in cash in new equity and erased almost two thirds of its
debt (CLP296bn), when measured in present value, thanks to a major debt
restructuring. As a result, the company’s net debt to equity was 0.5x in 4Q12 with
CLP91bn in positive equity (US$190mn).
In our view, cash from the new equity should be sufficient to cover its working capital
and capex needs, as well as the client reimbursements agreed to in the class action
suit settlement. The new credit agreement provides a lenient amortization schedule
and low, nominal interest rate expenses in the first few years. A more detailed
account of the debt restructuring and the class action lawsuit settlement can be found
on pg. 31.
page 9
La Polar
20 May 2013
page 10
New, experienced management team and committed BOD
Given the extent and pervasiveness of the fraud and/or mismanagement, La Polar’s
board of directors decided early on to fire the entire top tier of executives at the
company. The new management team is comprised of experienced professionals,
primarily from the retail and finance industries. See appendix for details.
As already stated, La Polar’s board of directors meets with management on a regular
basis to monitor the company’s progress and to ensure that management follows the
regulations and policies established to protect the interests of shareholders and
clients. The BOD is made up of well-known business leaders and investors in Chile.
Back to the company’s roots: focus on the retail business
A central part of La Polar’s turnaround strategy is to make the retail business the
company’s core business once again. Under the previous management, La Polar’s
financial services division at one point came to represent roughly half of total
revenue. In 2012, revenue from credit cards represented 19% of retail revenue (16%
of total revenue). Management has stated that, going forward, financial services
revenue should reach, but not exceed, 30% of retail revenue (or 23% of total
revenue).
According to La Polar’s management, customers with the La Polar store credit card
purchase, on average, roughly four times more than customers without the card.
Management therefore views the credit card as important for customer loyalty. Today,
roughly 50% of La Polar’s retail sales are realized using the La Polar credit card.
Spotlight on “soft goods” should help gross retail margins
Like most department stores, La Polar’s products can be placed into two general
categories: i) “soft goods”, which at La Polar primarily include apparel, footwear,
accessories, cosmetics and toys; and ii) “hard goods”, which include home
appliances & décor, electronics and computing.
In Chile, retailers tend to sell home appliances and electronics (the bulk of the “hard
goods” category) at low prices and with thin gross retail margins (in the teens or lower
La Polar’s retail gross margins in Chile expected
to improve, partly due to higher % of soft goods
twenties, in the best cases). The retailers make up for the thin margins with the credit
card revenue that they generate by providing financing for those large-ticket items.
While a consumer may buy a flat screen TV in 12 installments, he or she is less likely
to do the same with the purchase of a T-shirt or a dress, so soft goods sales cannot
rely as much on credit card income. As a result, Chilean department store retailers do
not generally discount soft goods as deeply. Apparel, footwear and accessories,
therefore, generally have a gross retail margin in the range of 30% to 50%,
depending on whether or not the product is a non-exclusive, third-party brand or
proprietary brand.
In 2010, La Polar’s sales mix of soft and hard goods was approximately 51% and
49%. La Polar’s new management has already increased the share of soft goods
revenue to 55%, which has already improved the company’s overall gross margin
2012A 2013E 2014E
Retail gross margin
22%
25%
27%
La Polar
20 May 2013
(and reduced its reliance on the riskier hard goods + financing business model).
Maintaining this mix should contribute to better margins in the future.
Chart 1: 2010 revenue mix
49%
soft goods
Chart 2: 2012 revenue mix
45%
51%
hard goods
Source: La Polar, BTG Pactual.
soft goods
55%
hard goods
Expect stronger growth and better margins from proprietary brands
As already mentioned, most department stores in Chile have a mix of i) proprietary
brands; ii) exclusively licensed brands; and ii) non-exclusive, third-party brands.
Within apparel/footwear/accessories, when we talk about “non-exclusive, third-party
brands” we refer to international staples, such as Nike or Levi’s, which are available
at most large department store chains. These brands are usually sourced locally,
either through a licensee, or directly through the local or regional branch of the
multinational brand. From the perspective of the department store chains, these
international brands generally provide the lowest direct gross retail margins.
Proprietary brands and exclusively licensed brands (depending on the terms of the
license) generally provide better retail gross margins.
In 2010, La Polar’s apparel revenue mix was roughly 43% proprietary/exclusive
brands and 57% non-exclusive, third-party brands. As already mentioned, for the
Chilean department store industry as a whole, proprietary brands have, on average,
higher retail gross margins (roughly 50%) than third-party brands (+/-30%). Retail
gross margins for La Polar’s proprietary brands in 2010 were roughly 40%, lower than
the industry standard.
La Polar’s strategy with its proprietary brands, therefore, has two components: i)
reverse the revenue mix so that proprietary brands represent 55% and non-exclusive
third-party brands, 45%, of apparel sales; and ii) increase its proprietary brands’
gross retail margins from 40% to 50%.
page 11
La Polar
20 May 2013
Chart 3: 2010 apparel revenue mix
57%
proprietary
43%
third party
page 12
Chart 4: Aconcagua plan - apparel revenue mix
45%
proprietary
55%
third party
In order to improve sales for its proprietary brands, La Polar completely overhauled Old design team: 3 people
its apparel department. To start with, La Polar’s in-house design team, under the prior
New design team: 25 people
management, was made up of three people. Andres Molina, who was hired by
Lecaros as Apparel Manager in late 2011, beefed up the design team, hiring 25
experienced apparel designers poached from other Chilean retailers, and organized
them into four different groups: women’s, men, kids and home.
The next step was to take stock of the company’s brands. The first assessment was
that the company had too many brands and was prioritizing none of them. By
eliminating some lower-margin, underperforming brands, La Polar would be able to
focus its purchasing budget on fewer brands, better exhibit those brands on the retail
floor, and set up strategic advertising/marketing alliances with its top third-party brand
Old Polar: too many brands, prioritizing none of
them
New Polar: focus purchasing budget on fewer
brands, better exhibit those brands in the store,
set up strategic alliances
partners, all of which should improve sales.
Apart from the proprietary brands that La Polar had developed in-house over the
years, La Polar also had exclusive licenses with international brand owners. In some
cases, as with Soviet and Fiorucci, these licenses gave La Polar authority to use the
brand on products that La Polar designed and sourced directly, in exchange for a
Eliminate international brands with highest
royalties and worst sales track record
Eliminate numerous in-house brands with little or
no traction
royalty payment. Given the nature of these agreements, these brands had the
potential to deliver gross retail margins similar to those of proprietary brands (+/50%). The first brands that La Polar eliminated, therefore, were the international
brands that had the highest royalties, lowest margins and worst sales track record.
The company also eliminated several in-house brands that had little or no traction.
In parallel to this, La Polar’s new apparel department determined that many of the
company’s brands lacked a well-defined identity. As a result, the sourcing team had
been free to make interpretations, resulting in an inconsistent product offering. La
Polar’s new apparel team, therefore, put together a map of Chile’s three largest
department stores’ primary proprietary/exclusive brands, based on the gender, style,
budget and age group of each brand’s target customer. The brands were also
evaluated on a spectrum, with “fashion/trendy” at one end and “basics/perennial” at
the other.
Map out La Polar’s & competitors’ key brands
-
Strategically define and re-launch
existing brands
-
Identify unattended segments and
create brands to address those
opportunities
La Polar
20 May 2013
The map helped La Polar determine i) how to best strategically position and re-launch
its top proprietary/licensed brands and ii) that the company needed to create a couple
of new brands to compete effectively with the country’s leading department stores.
With a clear view of the competitive landscape, La Polar’s design team went back
and precisely redefined each of the company’s key proprietary/licensed brands,
drawing up a manual for each one, with its identity, customer focus and strategy. The
brands were then grouped as either: i) low-to-mid-priced brands with more emphasis
on basics (Icono, Extralindas, Unanyme, Lisa, M&M, Chess and Ozono) or ii) mid-tohigh-priced brands with basics and fashion (Portman Club, Beverly Hills Polo Club,
Soviet, Fiorucci, Zibel, Lotto, Body Glove, Carven).
The company also launched two new brands. Alma was created to go head-to-head
with Tatienne, Umbrale and University Club, locally. Alma’s international “mirror”
brands include Free People, Rapsodia and Anthropologie. La Polar also created Mila
Jeans, a new brand inspired by international names such as Lucky Brand,
Abercrombie & Fitch, and American Eagle, on the international front, and was created
to compete against Lois and Robert Lewis, locally. See appendix for more on these
two brands.
The design cycle for each collection was also completely redefined, following industry
best practices that included sample trips to the U.S. and Europe, to make sure that
each of La Polar’s collections anticipates international trends that are relevant to the
brand. The commercial department, which is kept in the loop from the beginning of
the process, provides feedback to the design team for each collection.
page 13
La Polar
20 May 2013
page 14
XL
Contemporary
Table 7: La Polar’s brand map – women’s wear
Women's Wear
Falabella
Paris
Ripley
La Polar
Basics & Fashion
Basement
Alaniz
Marquis
Zibel
Prices: Low/Medium
Ziben Woman
Fashion
Mango
Prices: High
Warehouse
Full figured women
Stefano Cocci
Viaressa
Stefano Cocci Woman
VSS Woman
Newport
Rainforest
Basics
Zibel Woman
Prices: Low
Sportswear
Lifestyle
Greenfield
Third-party, exclusivde brands
Esprit
Laura Ashley
Prices: High
Elle
Prices: Medium/High
Extra Lindas
Aziz
Unanyme
Tatienne
Alma
Umbrale
Wados
Prices: Medium/High
Dimensión Azul
Calvin Klein
Benetton
Basics & Fashion
Donna Erre
Regatta
University Club
Third-party, non-exclusive brands
Brigitte Naux
Guess
Wados Fashion
Wados
Saville Row
Sybilla
Opposite
Index
Icono
Jeans
Sybilla
Foster
Barbados
Icono
Semi-basics & Fashion
Americanino
Prices: Low/Medium
Fiorucci
Teens / Young Women
Prices: Medium/High
Jeans
Lee
Lee
Lee
Lee
Third party, non-exclusive brands
Ellus
Ellus
Ellus
Ellus
Efesis
Efesis
Efesis
Efesis
Wados
Wados
Wados
Wados
Wrangler
Wrangler
Wrangler
Wrangler
Levis
Levis
Levis
Levis
Lifestyle - Fashion
Soviet
Mossimo
Prices: Medium/High
Lifestyle
Lois
Robert Lewis
Mila
Semi-basics & Fashion
Prices: Medium/High
International, exclusivde brands
Desigual
Fashion
Top Shop
Pepe Jeans
Free People
Prices: High
Surf
Doo Australia
Aussie
Body Glove
Billabong
Rip Curl
O'Neill
O'Neill
Maui Girl
Roxy
Maui Girl
Source: La Polar, BTG Pactual. This brand map is not a comprehensive list of all of each store’s brands.
La Polar
20 May 2013
page 15
More basics in the mix should also improve retail sales and margins
The new apparel team also determined that La Polar’s apparel offering was too
heavily weighted towards fashion/trend products and too light on basics. The mix was
roughly 29% basics and 71% fashion, compared to 45% basics and 55% fashion for
the rest of the industry, according to their estimates.
The problem with this mix was twofold, according to La Polar’s new apparel manager,
Andres Molina. The fashion/trend product is generally a higher-cost item than a
“basic”. The apparel mix, therefore, contributed to La Polar’s higher-than-average
costs. The previous management tried to make up for this with higher initial price
points, which contributed to La Polar’s brands being less competitive compared to its
peers. Ultimately, La Polar’s apparel margins would suffer anyway when inventory
had to be liquidated at end-of-season sales.
The other problem was that La Polar’s basics did not offer enough “depth”, or number
UNIQLO: example of “basics” with “depth”
of units per product, in a sufficient variety of sizes and colors. As a result, popular
basic items would sell out early, and the opportunity to realize additional sales was
lost.
In our view, La Polar’s apparel sales and margins should improve as the company
improves the mix with a deeper, more extensive offering of basics.
Better sourcing should boost gross retail margins
In the past, La Polar committed several errors when it came to its sourcing practices.
The company used to source at least part of its proprietary brands locally, using a
third-party trader who then outsourced the manufacturing to Asia. Also in the past,
the sourcing team did not put together comprehensive “spec sheets” for its designs,
which made it difficult to i) obtain quotes from more than a handful of manufacturers
and ii) compare the quotes once received. Spec sheets include the technical details
of the product (i.e. fabric weight, etc.). Even minor variations can have a significant
impact on the quality and cost of the product.
Today, La Polar sources 100% of its proprietary brands abroad, primarily in Asia. The
The new sourcing strategy has already reduced
sourcing process now uses spec sheets, which allow the company to not only receive
La Polar’s direct costs by 20% for proprietary
comparable quotes from a larger number of manufacturers, but also to hold the
apparel brands.
manufacturer accountable. La Polar can now more easily track whether specifications
are met during the production process before the final products are shipped. The
current management also introduced two primary seasons with three to four
collection purchasing windows per season, in order to more efficiently manage
inventories. The new sourcing strategy has already reduced La Polar’s direct costs by
20% for proprietary apparel brands.
Established network of 40 stores, located throughout Chile
La Polar has 40 department stores, totaling roughly 161,000 square meters of selling
space, located throughout Chile. Of the total stores, 12 are located in shopping malls
and another eight are in power centers, next to a supermarket. The rest are mostly
located in or near the centers of the cities and towns, on high-traffic streets. La Polar
La Polar
20 May 2013
page 16
has 15 stores in the Santiago Metropolitan area, mostly in middle- and lower-income
neighborhoods.
Figure 1: Store locations - Chile
Figure 2: Store locations - Santiago
.
Iquique
Copiapó
Coquimbo
La Serena
Valparaíso
Viña del Mar
El Belloto
San Antonio
Rancagua
San Fernando
Los Ángeles
Concepción
Bío Bío
Chillán
Puerto Montt
Valdivia
Antofagasta
Calama
Colina
Plaza Norte
Ovalle
Panamericana
Los Andes
Puente
Ahumada
Estación
Central
Santiago
Curicó
Talca
Linares
La Reina
Las Rejas
La Florida
Gran Avenida
Maipú
El Bosque
Osorno
San Bernardo
Puente Alto
Mall Plaza
Sur
Punta
Arenas
.
Store remodeling in Chile should help draw in new customers
La Polar aims to invest roughly US$40mn in 2013-14 to renovate 17 stores in Chile
(100,000 square meters of selling space). In our view, the initiative to update the
stores should help draw in more customers. The clean, contemporary layout, with
distinct brand “corners”, aims to replicate best practices already used by Falabella,
Paris and Ripley.
Table 8: La Polar store renovations
Remodeling schedule
# stores
March - July
2
June - October
1
July - November
6
Total renovations completed by 2013 YE
9
1H14
8
Total renovations completed by 2014 YE
17
La Polar
20 May 2013
Figure 3: Estacion Central store before remodeling
Figure 4: Estacion Central store after remodeling
Operating leverage from leases should help margins as sales increase
La Polar leases all of its stores. Shopping mall operators in Chile generally charge
their tenants the higher of i) a fixed fee in UF (the inflation adjusted currency linked to
the CLP) or ii) a variable fee based on a percentage of the store’s revenue. La Polar’s
stores currently pay a fixed lease in UF in all of the company’s shopping mall stores.
Given that this fixed amount was negotiated, for all of the stores, before the 2011
crisis, when La Polar had significantly higher sales per square meter, the delta with
regards to the variable lease should leave ample room for operating leverage as the
company increases its sales over the coming years.
Colombia, the new frontier
La Polar currently has five department stores in Colombia, with fully-funded plans to
open another nine by the end of 2015. La Polar is also evaluating another nine mall
development projects in Colombia that may present further growth opportunities.
When La Polar’s new management took over in mid-2011, the company had a
relatively clean slate in Colombia, given its short history and relatively few stores (four
at the time). The new administration, therefore, decided to directly target high-to-midincome customers going forward. La Polar hired Francisco Martinez, formerly
commercial director of Falabella Chile, to move to Colombia and lead the operation.
The first store that the new management opened was located in a posh neighborhood
in the city of Bucaramanga, in the Cacique mall. The Bucaramanga store was
designed with management’s new, more upscale and contemporary format.
page 17
La Polar
20 May 2013
Table 9: La Polar’s stores in Colombia
Store
City
Date
Bogota
Oct-10
Medellin
Aug-11
Centro Mayor
Carabobo
Medellin
Los Molinos
Bogota
Floresta
Cacique
Table 10: Colombia store launch schedule
Bucaramanga
Oct-11
Nov-11
Nov-12
City
Date
Yopal
4Q13
Palmira
4Q13
Cali
1Q14
Barranquilla
2Q14
Bogota
4Q14
Cali
4Q14
To be determined
2Q15
To be determined
4Q15
To be determined
4Q15
page 18
Colombia – locations of current and future stores
Barranquilla
Bucaramanga
Bogotá
Medellín
Yopal
Cali
La Polar’s current 3-year capex budget for Colombia is currently US$100mn, to
launch nine new stores and remodel the four stores that new management inherited
from the previous administration. Management estimates that the Colombia
subsidiary will breakeven with nine or ten stores in operation.
It is our understanding that La Polar has begun looking for a partner with financial
muscle, retail expertise, and local knowledge to accelerate its growth plans in
Colombia. We understand that an investment bank has been hired to facilitate the
search and evaluation process. Given that La Polar’s senior bond, to be issued in the
next few weeks, will be secured with shares of the Colombia subsidiary, La Polar
would likely have to initiate a capital increase at the subsidiary level for a new partner
to come in.
Figure 5: The Cacique mall
Figure 6: La Polar’s first store in Colombia designed by new management
La Polar may repurchase part of its debt at a significant haircut
La Polar is evaluating the option of using up to CLP12.7bn from its equity increase to
repurchase part of the junior bond from its debt restructuring. In the equity offering
prospectus, La Polar stated that any cash raised in excess of CLP120bn could be
used for debt prepayment. The junior bond is expected to begin trading in the next
few weeks. The junior bond will be structured as a no-interest, inflation-adjusted bullet
La Polar
20 May 2013
page 19
due in 2032 with a face value of CLP249bn. The present value of this bond is
estimated at roughly CLP18bn. Given IFRS accounting rules, La Polar must
recognize a financial expense for the junior bond that will increase each year as the
due date slowly approaches, even though there is no immediate cash outlay. Buying
back the bond would reduce La Polar’s financial expenses. In addition, the junior
bond, if left intact, would act as a poison pill for any would-be suitors, given that its
present value would likely increase if La Polar were acquired by a company with a
lower cost of capital. By eliminating the junior bond, La Polar is a more likely
acquisition target than if it is left in place, in our view. See page 31 for more details on
the debt restructuring.
Positive outlook for consumer should support retail sales
Our macroeconomics team has a generally positive midterm outlook for both Chile
and Colombia. Short-term, our macro team expects to see stronger GDP and private
consumption growth in Chile than in Colombia due to lower unemployment, higher
wage growth and consumer credit availability. Consumer confidence surveys in Chile
continue to score on the “optimistic” side of the scale.
Table 11: Real GDP growth, YoY
Table 12: Inflation (eop), YoY
2010
2011
2012
2013
2014
Chile
6.1%
6.0%
5.6%
5.4%
4.8%
Colombia
4.0%
6.6%
4.0%
3.9%
4.6%
2010
2011
2012
2013
2014
Chile
3.0%
4.4%
1.5%
2.4%
3.2%
Colombia
3.2%
3.7%
2.4%
2.4%
2.8%
Private consumption in Colombia, on the other hand, is showing signs of a slowdown
in 2013, though our team expects growth to accelerate in 2014.
Table 13: Unemployment, %
Chile
Colombia
Table 14: Private consumption growth, YoY
2010
2011
2012
2013
2014
8.2%
7.1%
6.4%
6.5%
6.8%
11.8%
10.9%
10.2%
10.3%
10.1%
Chile
Colombia
2010
2011
2012
2013
2014
10.8%
8.9%
6.1%
6.4%
5.0%
5.0%
5.9%
4.3%
3.7%
5.2%
La Polar
20 May 2013
page 20
Investment thesis – cons
La Polar faces tough competition from entrenched local players
La Polar’s business plan seeks to rebuild a company in what is an already crowded
and very competitive department store market (m2 per capita penetration in Chile is
the highest in Latam). La Polar is also targeting a higher-income customer (versus
the mid-to-low-income customer it targeted in the past) that is already served by
Falabella, Ripley and Paris (Cencosud), as well as local and international specialty
store retailers such as H&M, which opened its first store in Chile (at the Costanera
Center) this year.
While we believe that La Polar has ample space to improve its operating performance
in the initial stages of its turnaround strategy – driven by improved purchasing and
merchandising functions, a better product mix and store renovations – the longerterm plan to achieve a strong competitive position and take market share away from
incumbent players involves significant execution risks, in our view. One of La Polar’s
main competitive strengths is the strategic location of its 40 stores in Chile. However,
many of those stores are also next to, or near, a Falabella, Paris or Ripley, even in
the mid-to-lower-income neighborhoods.
All three of these department store chains have proven business models that have
produced mostly consistent good results in recent years. These competitors are also
larger than La Polar, which translates into i) better economies of scale and ii) stronger
balance sheets. The cost of capital advantage can be particularly relevant in the
funding of the financial retail operation.
In addition, on the mid-to-lower-end of the spectrum, La Polar continues to face
competition from Hites and Johnson’s (Johnson’s was recently acquired by
Cencosud).
Chart 5: Department stores Chile – number of stores (2012)
90
Chart 6: Department stores Chile – square meters of selling space (2012)
377,190
400,000
78
75
300,000
60
45
40
38
40
253,595
252,042
200,000
161,000
30
14
15
0
86,994
100,000
0
Falabella
Paris +
Johnson
Ripley
La Polar
Hites
Falabella
Paris +
Johnson
Ripley
La Polar
Hites
La Polar
20 May 2013
Chart 7: Department stores Chile – sqm/store (2012)
7,500
6,674
6,000
Chart 8: Department stores Chile – UF/sqm/month (2012)
18.0
6,301
6,214
4,836
16.1
15.0
12.0
4,025
4,500
page 21
8.7
9.0
3,000
9.9
6.7
7.0
La Polar
Hites
6.0
1,500
3.0
0
0.0
Falabella
Paris +
Johnson
Ripley
La Polar
Hites
Falabella
Paris +
Johnson
Ripley
Chart 9: Department stores Chile – Retail revenue, CLPmn (2012)
Chart 10: Department stores Chile – Retail gross margin (2012)
1,200,000
1,107,247
1,000,000
45%
886,075
800,000
30%
673,876
29.0%
27.2%
26.4%
600,000
400,000
26.4%
22.1%
15%
293,754
165,406
200,000
0%
0
Falabella
Paris +
Johnson
Ripley
La Polar
Hites
Falabella
Paris +
Johnson
Ripley
La Polar
Hites
Chart 11: Department stores Chile – Active credit cards, millions (2012)
Chart 12: Department stores Chile – provisions/gross loans (2012)
2.5
15%
2.2
2.0
1.6
1.5
12.0%
11.6%
Ripley
La Polar
12.5%
10%
6.9%
1.1
1.0
0.5
0.5
0.5
La Polar
Hites
0.0
5%
4.6%
0%
Falabella
Paris +
Johnson
Ripley
Falabella
Paris +
Johnson
Hites
La Polar
20 May 2013
Challenging environment to grow retail credit card business
La Polar’s turnaround strategy aims to grow its credit card business by i) increasing
credit to existing customers with good credit histories and ii) issuing cards to new,
higher-income customers. As part of the fallout from the 2011 crisis, regulators
placed numerous restrictions on La Polar’s credit card operation. La Polar was
prohibited from issuing credit cards to new customers, and regulators set caps on
loans for existing customers, for example. The final restrictions were only lifted in late
2012, so we expect to see growth from pent-up demand in 2013. Additionally, La
Polar aims to launch a Visa or Mastercard branded card in 2013, which should help
reach more customers, especially within the mid-to-higher-income segments.
However, La Polar faces several challenges. The department store credit card market
is already crowded with large players: Falabella has 2.2mn active credit card
customers; Cencosud (Paris & Johnson) has 1.6mn; Ripley, 1.1mn. The retail credit
industry as a whole is also facing increasing competition from banks. In fact, usage of
store credit cards in department stores has been declining in recent years: from 62%
to 57% for Falabella and 55% to 51% for Paris between 2009 and 2012.
The regulatory environment has also become more difficult for retail credit card
operators, in large part due to the 2011 La Polar scandal. After news broke that La
Polar had unilaterally renegotiated loans, authorities passed the Ley Dicom, a “clean
slate” law that erased, on a one-time basis, the credit history of all the consumers in
Chile that had defaults of up to CLP2.5mn (roughly US$5,000). This perdonazo, or
“forgiveness” (which did not erase the debt, just the default credit history), was meant
to give consumers an opportunity to start afresh, since the Dicom credit bureau data
base can be accessed by anyone, including employers. However, the measure also
increased the credit risk for banks and retailers with credit businesses. As a result,
retailers were forced to tighten lending criteria.
Another challenge is the debate surrounding a new cap on interest rates. In Chile, the
government imposes a maximum rate that loan providers may charge. This maximum
interest rate depends on several factors, including the currency denomination, the
duration, and the size of the loan. Most of the consumer credit provided by the retail
industry is currently subject to a maximum interest rate of roughly 50% per year. The
government has stated that it intends to reduce this maximum rate to 35%, phased in
over time. The legislation regarding the interest rate caps has been modified a couple
of times already and may not go into effect until 2014. However, since retailers
charge, on average, higher interest rates than banks in Chile, it is highly likely, in our
view, that the retail sector will be more negatively impacted by the new legislation.
More recently, regulators have argued that it is illegal for department stores to
increase credit card fees without prior approval from the customer. Other regulatory
changes may be implemented in the coming months, such as a consolidated credit
database.
page 22
La Polar
20 May 2013
page 23
FX fluctuations could hurt margins
Given that virtually all of La Polar’s merchandise is imported in U.S. dollar
denominated purchases, a strong Chilean peso generally translates into better gross
margins. A weakening of the Chilean peso against the U.S. dollar, therefore, would
likely dampen gross margins.
Financial risk from credit card operation
While we think it is highly unlikely that La Polar will repeat the mistakes of its prior
management with regards to its loan book, external factors (such as a downturn in
the economy and a significant increase in unemployment) could result in higher
delinquency rates for the retail credit card industry overall. In such a scenario,
retailers with a higher percentage of lower income customers, like La Polar, may be
more exposed than department store operators with a greater share of high income
customers.
Valuation
We value La Polar with a blended price target based on our DCF and our multiplebased analysis.
Table 15: Price target calculation
230
33%
77
2015E
P/E
14.4x
209
33%
70
2015E
EV/Ebitda
9.4x
216
33%
72
2014E-23E
DCF
218 Blended price target
183
Share price
19%
Upside
Source: Bloomberg, La Polar, BTG Pactual.
In our view, Ripley and Hites are the closest comparable companies to La Polar.
Average daily trading volume
Falabella and Cencosud are multi-format retail operations (supermarket, home
improvement, as well as department store), with a very different revenue mix. Also,
both deserve a significant liquidity premium to La Polar, in our view.
Hites’s business model is retail + retail credit, with a similar customer base as La
Polar (at least historically). But Hites has a much smaller footprint in terms of number
of stores (14 compared to La Polar’s 40). Also, in April the Chilean consumer
protection agency Sernac presented Hites with a class action lawsuit (for allegedly
charging illegal fees to its credit card customers) and its stock is down over 20%
since. La Polar has already resolved its lawsuit with Sernac and we have no reason
to expect a new dispute. Ripley and La Polar both have 40 stores and La Polar’s
business plan aims to target a similar client base as Ripley’s, so we view Ripley as a
better comp.
Cencosud
Falabella
Ripley
La Polar
Hites
USD$mn
21.2
10.7
2.6
1.7
1.0
La Polar
20 May 2013
page 24
Table 16: Comparable retail company multiples
Company
Share
P/E
EV / EBITDA
price 2013E 2014E 2015E 2013E 2014E 2015E
Chile
Ripley
18.7x 19.9x 14.4x
13.0x 11.8x
9.4x
Hites
11.6x 10.4x
NA
6.7x
6.1x
NA
Avg, ex La Polar
15.2x 15.1x 14.4x
9.9x
8.9x
9.4x
La Polar - current price
184
NM 17.5x 12.7x
NM 14.1x
8.8x
La Polar - price target
218
NM 20.7x 15.0x
NM 14.7x
9.4x
15.2x 15.9x 13.5x
9.9x 10.7x
9.1x
Avg, w/La Polar's current price
Our DCF is based on our forecast for the company’s consolidated operations in CLP.
We estimate a 10.6% WACC in CLP. Our pre tax cost of debt is based on the
weighted average discount rates used to value La Polar’s restructured debt.
Table 17: Free cash flow (CLPmn)
EBIT
(-) taxes
Table 18: WACC
2012
2013
(58,516)
(11,682)
-
-
2014
2015
18,796
34,511
-
(6,902)
(+) depreciation
9,865
7,730
8,150
9,723
(-) capex
(8,333)
(23,348)
(33,987)
(16,667)
(+/-) change in WC
26,591
(60,497)
(40,861)
(25,316)
(30,393)
(87,797)
(47,901)
(4,651)
FCFF
Risk free rate
Expected return on the market
Beta
Cost of capital
Pretax cost of debt
Tax rate
Cost of debt
MV Equity
MV Debt
WACC per operation
2014-23 contribution
WACC - consolidated
Chile
5.1%
5.0%
1.0
Colombia
5.5%
5.0%
1.0
10.3%
13.8%
20.0%
11.0%
48.8%
51.2%
10.7%
91.0%
10.7%
13.8%
30.0%
9.7%
48.8%
51.2%
10.2%
9.0%
10.6%
If La Polar successfully executes on its business plan, its WACC should decrease, in
our view, unlocking additional equity value.
Table 19: DCF valuation
DCF - Perpetuity Based
NPV of cash flow 2014-2023
Perpetuity growth
Perpetuity
EV @ 10.63%
Net Debt 2013E
Equity Value
Share Value (ChP/share)
Upside
142,138
3.0%
211,315
353,453
124,243
229,210
230
25.4%
Table 20: WACC sensitivity
230
2.0%
12.6%
125
12.1%
142
11.6%
161
11.1%
182
10.6%
205
10.1%
231
9.6%
261
9.1%
294
8.6%
333
2.5%
131
149
169
192
217
245
277
314
357
3.0%
138
157
179
203
230
260
296
337
385
3.5%
146
166
189
215
244
278
317
364
419
4.0%
155
176
201
229
261
299
343
396
460
La Polar
20 May 2013
Ownership structure
La Polar does not have a controlling shareholder. In the 2012 equity raise, foreign
institutional investors acquired a roughly 25% stake in the company.
Chart 13: La Polar ownership structure, as of March 2013
25%
50%
10%
7%
3% 5%
Foreign institutional investors Alvaro Saieh *
AFP Habitat
Moneda Asset Management
Sociedad de Rentas Massu
Individual minority investors
Source: Superintendencia de Valores y Seguros (SVS), BTG Pactual. * Owned through CorpSeguros and CorpVida
insurance companies.
page 25
La Polar
20 May 2013
Company overview
La Polar is the fourth largest department store operator in Chile, with 40 locations
totaling roughly 161,000 square meters of selling space. In addition, the company has
five department stores in Colombia. In both Chile and Colombia, La Polar provides
credit to customers through its credit card operation. In terms of department store
sales, the company has about a 9% market share in Chile.
Brief history
La Polar´s origins can be traced back to a tailor shop that opened for business circa
1920 near Santiago’s main railroad station. By the 1950’s, the company had evolved
into a general merchandise store, and by the 1980’s, the company began to adopt a
department store format and open new locations in Santiago. La Polar first began to
offer financing to customers, through a proprietary store credit card, in 1989. By
1990, the company had a dozen stores in Chile and 350,000 credit card holders.
In 1997, the company’s finances began to deteriorate. Chile suffered an economic
crisis, and La Polar, unable to navigate the turbulence, saw sales drop, credit card
default rates rise, and cash flow dry up. Unable to pay suppliers, the company’s
inventory levels plummeted, and by the end of 1998, sales were down by roughly
80% YoY, virtually paralyzing the operation.
In January 1999, with La Polar in bankruptcy court, the private equity firm Southern
Cross Group acquired 100% of the company’s fixed assets and brands, restructured
the debt, and re-launched the company as Comercial Siglo XXI S.A., while
maintaining the La Polar store brand. At the same time, Southern Cross replaced the
top management and recapitalized the company. Julian Moreno was the only top
executive from the prior administration that stayed on, reportedly due to his expertise
in consumer credit. Pablo Alcalde, who had worked in both the finance and retail
industries in Chile, was named CEO. By the end of August 1999, La Polar was back
up and running.
Between 2000 and 2003, La Polar’s sales, Ebitda, and net income grew at a CAGR
of 20%, 30% and 58%, respectively. In that period, the company opened 10 new
stores, more than doubling the square meters of selling space, for a total of 22 stores
(twelve in the Santiago Metropolitan area) with an average selling space of between
5,000 and 6,000 square meters each. La Polar doubled its share of Chile’s retail
market by year-end 2003, consolidating its position as the fourth largest department
store retail chain in Chile.
page 26
La Polar
20 May 2013
Table 21: Financial highlights (2000-03)
page 27
Table 22: Operating highlights (2000-03)
2000-03
2000-03
(CLPmn)
Revenue
2000
78,456
2001
2002
93,828
118,703
2003
137,066
53%
20%
27%
15%
7,320
9,575
13,809
16,145
74%
31%
44%
17%
Ebitda mgn
9%
10%
12%
12%
Net income
2,139
3,586
5,238
8,407
YoY
347%
68%
46%
61%
3%
4%
4%
6%
YoY
Ebitda
YoY
Net mgn
2000
CAGR
20%
2001
2002
2003
SQM
34,300
40,000
47,000
55,000
YoY
31%
17%
18%
17%
CAGR
17%
30%
Credit cards
485,000 660,000 1,014,000 1,273,000
71%
YoY
58%
36%
54%
38%
26%
During those first years under Southern Cross’ ownership, La Polar also expanded its
financial business. In late 2001, La Polar launched its first insurance products. The
next year, La Polar began to sign agreements with third-party shops and service
providers to extend the reach of its credit card. By the end of 2003, the company had
nearly 1.3mn credit card customers. The company launched its e-commerce website
in 2002.
In September 2003, La Polar went public, issuing 41,329,093 shares (20% of the
company’s equity) for CLP520 each on the Santiago Stock Exchange. The equity
offering raised a total of US32mn, which was to be used to expand operations in the
north of Chile, with the goal of reaching a total of 30 stores by 2006. The capital raise,
together with the company’s first (of many) securitized bond offering the year before,
significantly reduced leverage. By end-2003, Southern Cross’ stake in La Polar was
53.9%.
In the years that followed the IPO, La Polar continued to open stores, issue credit
cards to new clients, grow its financial and insurance businesses, and introduce new
brands. The company also continued to securitize a portion of its accounts
receivables through new bond offerings.
Table 23: Operating highlights (2004-10)
2004-10
2004
2005
2006
2007
2008
2009
2010
CAGR
Stores
24
26
33
35
40
40
43
10%
YoY
9%
8%
27%
6%
14%
0%
8%
SQM
70,000
81,000
110,750
130,000
153,000
153,000
154,100
YoY
27%
16%
37%
17%
18%
0%
1%
1.7
1.9
2.2
2.5
2.7
2.8
NA
34%
12%
16%
13%
8%
4%
NA
Credit cards, active (mn)
NA
NA
NA
NA
1.6
1.7
1.7
YoY
NA
NA
NA
NA
NA
1%
3%
Credit cards, issued (mn)
YoY
14%
La Polar
20 May 2013
page 28
Between 2004 and 2010, La Polar launched new proprietary brands, including a
brand aimed at teens called Icono (2005) and a brand for heavyset women called
Extra Lindas (2008). The company also received the exclusive license to sell several
international brands in Chile, including Body Glove, Beverly Hills Polo Club and
Soviet, among others.
In 2005, the company paid its first stock bonus to employees and inaugurated a new
58,500 square meter distribution center.
In October 2006, Southern Cross sold its controlling stake in La Polar through a
public auction in the Santiago Stock Exchange. Norberto Morita, a founding partner of
Southern Cross, stayed on as chairman of the board at La Polar, and Raul
Sotomayor, a partner at Southern Cross, also remained as a director.
In 2007, the company launched a new corporate logo and made significant
adjustments to its capital structure. La Polar successfully completed an offering of
15.9mn shares for US$70mn, with the purpose of financing the company’s future
growth and setting up a compensation plan (with 10% of the shares). That year, the
company also issued its fourth securitized bond, for a total of US$40mn, and its first
corporate bond, a 10-year note for UF7mn (US$250mn).
With the Chilean economy booming from 2004-07 (average annual real GDP growth
of 6.0%), La Polar reported sustained double-digit revenue, Ebitda, and net income
growth. Its net accounts receivables tripled in that four-year period, reflecting the
expansion of its credit card division.
Table 24: Financial highlights (2004-10)
(CLPmn)
Revenue
YoY
Ebitda
YoY
2004
2005
2006
2007
Chilean GAAP
IFRS
2009
2009
2008
2004-10
2010
180,807
240,210
303,071
379,386
445,534
440,876
472,541
540,190
32%
33%
26%
25%
17%
-1%
6%
14%
23,570
33,516
44,541
64,118
89,956
71,268
83,750
69,445
46%
42%
33%
44%
40%
-21%
-7%
-17%
Ebitda mgn
13%
14%
15%
17%
20%
16%
18%
13%
Net income
13,784
19,209
27,055
33,573
37,556
45,744
48,148
29,767
64%
39%
41%
24%
12%
22%
28%
-38%
8%
8%
9%
9%
8%
10%
10%
6%
YoY
Net mgn
Source: La Polar, BTG Pactual. Financials stated in Chilean GAAP up to 2009. In 2010 LaPolar begins to report in IFRS (and restates 2009).
But as the global subprime credit crisis gained momentum in the second half of 2008,
Chile’s economy began to feel the repercussions. Real GDP growth slowed from
5.2% the year before to 3.3%, average inflation for 2008 was nearly 9%, the CLP
depreciated 22% against the USD by year-end, and unemployment began to rise. In
2008, La Polar’s top line and net income decelerated sharply, but on the balance
sheet, net accounts receivable grew by over 55% YoY for the second year in a row.
After significantly outperforming the IPSA index from 2005-07, La Polar’s stock
underperformed in 2008.
CAGR
20%
20%
14%
La Polar
20 May 2013
Chart 15: La Polar’s stock price compared to the IPSA Index
150%
150
100%
100
50%
50
0%
Share price - CLP (LHS)
Share count - mns (RHS)
La Polar
In 2009, Chile’s macro environment deteriorated even further. The economy
contracted by 1% in real terms, the specter of deflation raised its head, and
unemployment averaged 9.7% for the year. For the first time in a decade, La Polar’s
top line and Ebitda contracted. The stock, however, resumed its upward trend, as
investors likely anticipated a quick recovery in Chile’s economy, which would favor
cyclical names like La Polar.
That same year, the company issued its first commercial paper for CLP30bn and
issued its fifth securitized bond for CLP34.5bn. In November of that year, the
company raised CLP67.4bn in another share offering and announced plans to enter
Colombia in 2010, with six stores in three years.
Also in 2009, Norberto Morita and Raul Sotomayor, of Southern Cross, stepped down
from the board of directors. Pablo Alcalde, CEO of La Polar since 1999, resigned in
order to replace Morita as chairman of the board. Nicolas Ramirez, the commercial
director, was promoted from the ranks to replace Alcalde as the new CEO.
In 2010, the company issued a second corporate bond, a 21-year note for UF5mn,
classified as A- by Feller Rate and A by Fitch Ratings. The funds were used to
restructure debt. The company also issued CLP30bn in commercial paper.
The fraud that triggered the 2011 La Polar crisis
On January 19, Ramirez resigned his post as CEO, citing “health issues”. He was
replaced by interim CEO Martin Gonzalez, who, until then, was the commercial
director at La Polar. On April 29, La Polar elected new members to its board of
directors, including Fernando Tisne, one of the founders and partners of Moneda
Asset Management.
In late May 2011, Chile’s Consumer Protection Agency (Sernac) presented a class
action lawsuit that alleged that La Polar’s clients had been victims of unilateral debt
restructurings. According to the press, immediately after learning about the Sernac
lawsuit, Tisne reportedly asked Alcalde to call an extraordinary meeting of the BOD.
After several meetings and conferring with management, on June 9 La Polar’s BOD
informed the Chilean securities regulatory authority (Superintendencia de Valores y
IPSA Index
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
-50%
Jun-08
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
Jun-08
Dec-07
Jun-07
Dec-06
Jun-06
0
Dec-05
0
200%
200
Dec-07
1,000
250
Jun-07
2,000
250%
Dec-06
3,000
300
Dec-05
4,000
Jun-06
Chart 14: La Polar historical stock performance
page 29
La Polar
20 May 2013
Seguros, SVS) and the market that management had engaged, without the board’s
approval or knowledge, in credit practices that violated the company’s policies.
The credit practices in question consisted of taking past-due consumer loans and
credit card debt, applying penalties and commissions that the client had not agreed
to, and restating those loans as brand new loans. Again, all of this was done without
the client’s consent. The unilaterally “renegotiated” loans would then appear on La
Polar’s balance sheet as new, larger loans. The alleged practice would have
generated non-cash credit card revenue, inflated net receivables, and hidden losses
given that these loans, in reality, should have been recognized as delinquent. Many
of these credit card loans were unilaterally renegotiated more than once.
When the news hit the ticker, La Polar’s stock lost over 70% of its value in one day,
with further declines in the following days and months. Alcalde resigned as chairman
on June 10 (and later stepped down as a director in July). Over the next few days, La
Polar’s board hired new auditors to determine the true state of the loan book, among
other measures.
Chart 16: La Polar’s stock price and share count
4,000
1,200
3,500
1,000
3,000
800
2,500
2,000
600
1,500
400
1,000
200
500
0
0
Share price - CLP (LHS)
Shares outstanding- mns (RHS)
On June 17, the board informed the SVS that, according to revised estimates, La
Polar’s provision for bad debt for CLP118bn should be increased to CLP538bn in
order to properly reflect the true standing of the loan book. Recognizing a CLP420bn
loss would, in effect, push the company into bankruptcy.
The first steps toward a turnaround
On June 19, La Polar’s shareholders and creditors agreed to ask Cesar Barros, a
Stanford Ph.D. in Economics, with years of experience in banking and finance, to
step in as the new chairman of the board. Barros had previous experience with largescale turnarounds. When the ISA virus devastated salmon fisheries in the south of
Chile, Barros was appointed president of the Chilean Salmon Industry Association
page 30
La Polar
20 May 2013
(SalmonChile), and he successfully helped the group restructure its debts and return
to profitability.
On July 8, La Polar’s shareholders elected a new board of directors, keeping Barros
as chairman. Tisne, who reportedly played a major role in uncovering the fraud, was
asked to say on as a director, at least for the transition period.
At the same shareholders’ meeting, Barros informed that the following measures had
been taken: i) 15 top executives had been fired; ii) the company had hired a law firm
to file civil lawsuits against six former executives on behalf of shareholders; iii) the
company was in discussions with the consumer protection agency to find a solution to
the class action lawsuit; iv) the company was actively collaborating with investigators
from the securities authority; v) Deloitte had been hired to determine the true value of
the loan book; and vi) Ernst & Young was hired to conduct an extensive audit of the
company’s financial statements.
On July 28, the board announced that it had entered into formal negotiations with its
creditors, which primarily included local banks and pension funds, in order to
restructure the company’s debt. La Polar’s restructuring proposal was accepted by its
creditors in November. Liquidation of La Polar’s assets would have only recovered
roughly 7% of the debt owed by La Polar to its creditors, so keeping the company a
going concern was a strong argument in La Polar’s favor.
On July 29, respected retail industry veteran Patricio Lecaros was named CEO.
Lecaros worked at Ripley for 14 years, rising up to the rank of commercial vice
president. Among many other accomplishments, Lecaros led the initiative to launch
Ripley’s operations in Peru. Lecaros was CEO of Ripley Peru for five years.
In the following months, La Polar also hired an external consultant and Ph.D. in
Finance, Eduardo Walker, to study the impact on customers of the company’s
irregular credit practices. Walker’s investigation concluded that, of the over one
million customers whose debt was unilaterally restructured, roughly 80% of those
clients had not paid enough to cover the initial purchase. In other words, those clients
had not made excess payments with regards to penalties and commissions. The
investigation concluded that roughly 140,000 clients had overpaid as a result of the
unilateral restructurings.
Accomplishments since the early days of the crisis
Debt restructuring
On November 7, 2011, La Polar reached an agreement with its creditors to
restructure the company’s debt. The agreement was contingent on La Polar raising at
least CLP120bn (US$250mn) in cash in new equity.
In the creditors’ agreement, all of the outstanding unsecured debt (bank debt,
commercial paper & corporate bonds) would be combined and reissued as a senior
bond and a junior bond. The senior, or A bond, would represent 44% of the
unsecured debt, and the junior, or B bond, would represent the other 56%. The
securitized bonds (Patrimonio Separado 27, or PS 27) would be kept apart, given that
they had been secured with a portion of La Polar’s receivables.
page 31
La Polar
20 May 2013
page 32
The goal of the creditors’ agreement was to not overburden La Polar with large
amortization or interest expense payments in the first years of its turnaround.
Therefore, the senior bond was structured as a 10-year note (due in 2022),
denominated in Chilean pesos, with amortization of the principal beginning on
January 31, 2015. Interest expense payments would begin on July 31, 2013. The
junior bond was structured as a 20-year, no-interest bullet (due in 2032),
denominated in UF, an inflation-adjusted currency based on the Chilean peso.
The PS 27’s amortization payments are set to begin on January 31, 2018. The
interest expense payments are scheduled to start on July 31, 2013. The interest
expense rate will be the Chilean Central Bank 10-year note (BCP 10) plus 1%.
Given Chile’s IFRS accounting rules, La Polar’s restructured debt needed to be
accounted for at present value in 4Q12. The debt restructuring, therefore, generated
CLP296bn in non-operating, non-recurring, non-cash financial income in that period,
mostly from the reduction in value of the junior bond.
Table 25: Debt pre-restructuring (CLPbn)
Table 26: Debt post-restructuring (CLPbn)
Bank debt
Commercial paper
Corporate bonds
Unsecured debt
Total debt
Senior bond
195.8
% of debt
44%
Junior bond
249.2
% of debt
56%
445
Subtotal
25
Securitzed bonds (PS 27)
Secured debt
Table 27: PV of restructured debt (CLPbn)
Junior bond
18
18.1% discount rate
Subtotal
Subtotal
25
Subtotal
20
Total debt
470
Total debt
174
154
Securitized bonds (PS 27) - 9.6% discount rate
La Polar estimated a discount rate for the senior and junior bonds by compiling a
sample of bonds in the U.S. with similar characteristics (credit rating, amortization
schedule, covenants), estimating their average spread over the U.S. 10-year
Treasury, and applying that spread to the Chilean 10-year Central Bank note (BCP
10).
136
14.1% discount rate
445
Securitzed bonds (PS 27)
470
Senior bond
La Polar
20 May 2013
Table 28: Senior, or B, bond (amortization)
Amortization schedule
7/31/2013
1/31/2014
7/31/2014
1/31/2015
7/31/2015
1/31/2016
7/31/2016
1/31/2017
7/31/2017
1/31/2018
7/31/2018
1/31/2019
7/31/2019
1/31/2020
7/31/2020
1/31/2021
7/31/2021
1/31/2022
7/31/2022
0.0%
0.0%
0.0%
0.5%
0.5%
1.0%
1.0%
1.5%
1.5%
2.0%
2.0%
5.0%
5.0%
5.0%
5.0%
10.0%
10.0%
25.0%
25.0%
Table 29: Senior, or B, bond (interest)
Interest expense
7/31/2013
1/31/2014
7/31/2014
1/31/2015
7/31/2015
1/31/2016
7/31/2016
1/31/2017
7/31/2017
1/31/2018
7/31/2018
1/31/2019
7/31/2019
1/31/2020
7/31/2020
1/31/2021
7/31/2021
1/31/2022
7/31/2022
4.0%
4.0%
4.0%
6.0%
6.0%
10.0%
10.0%
10.0%
10.0%
10.0%
10.0%
10.0%
10.0%
10.0%
10.0%
10.0%
10.0%
10.0%
10.0%
The senior bond is secured by 100% of the shares of Empresas La Polar S.A.S., La
Polar’s subsidiary in Colombia. The junior bond is secured with the loan book from
the unilaterally restructured customer debt. Any sale of this loan book or payments
received from those customers should be allocated 50% to the junior bond holders.
Consumer protection agency class action suit
On May 23, 2012 La Polar reached an agreement with Chile’s consumer protection
agency (Servicio Nacional del Consumidor, or Sernac) to put an end to the class
action lawsuit filed by Sernac against La Polar on behalf of La Polar clients who were
allegedly victims of unilateral debt restructurings. In December 2012, Chile’s courts
ratified the agreement.
The agreement was based on the study realized by Eduardo Walker, the Ph.D. and
consultant hired by La Polar to estimate the impact on clients of the unilateral
restructurings. Walker calculated that roughly one million clients had their debts
unilaterally restructured. Walker then recalculated the debt history for each of these
clients in the following manner. The starting point was the debt each client owed La
Polar the month before his or her debt was restructured for the first time. Walker then
applied a below-market interest rate to calculate interest expenses (applied for a
maximum period of ten months) and excluded all penalties, commissions and fees
associated with the restructurings. If the client’s recalculated debt exceeded total
payments made by the client, then Walker concluded that the client was still
considered a net debtor. If the client’s payments exceeded the recalculated debt,
then the client was a net creditor, entitled to a refund from La Polar.
page 33
La Polar
20 May 2013
This methodology concluded that roughly 860,000 clients were net debtors and
140,000 clients were net creditors. Walker concluded that these net creditor clients
were owed US$21mn in refunds. Of the net debtors, 520,000 clients had paid less
than 10% of their original debt, pre-unilateral restructurings.
Sernac, using Walker’s methodology with some adjustments, arrived at the
conclusion that La Polar’s net creditor clients should receive CLP17.5bn in refunds
plus CLP2.2bn as a bonus compensation (for a total of roughly US$41mn). Given that
La Polar had already voluntarily compensated clients for CLP3.7bn, the remainder to
be paid amounted to roughly CLP16bn (US$34mn). La Polar has provisioned roughly
US$40mn to provide compensation to these clients, and it began to reimburse clients
on January 14, 2013.
Sernac also estimated that the net debtor clients’ debt should be reduced by
CLP305.8bn (related to the interest expenses, penalties, fees and commissions tied
to the restructurings as well as a bonus compensation applied toward debt reduction),
which did not impact La Polar’s financial statements, as the company at this point had
already increased provisions in excess of this amount.
Equity raise
In October 2012, La Polar successfully issued 750mn new shares for a total of
CLP132.7bn, at an average price of CLP177 per share. The equity raise surpassed
the CLP120bn stipulated in the creditors’ agreement. In the prospectus, La Polar
stated that cash raised in excess of the CLP120bn could be used for prepayment of
debt.
page 34
La Polar
20 May 2013
Appendix
La Polar’s new board of directors
Cesar Barros – Chairman of the Board: PhD and MA in Economics, Stanford
University. Agriculture Engineer, Pontificia Universidad Catolica de Chile.
Georges de Bourguignon – Vice President: MBA, Harvard Business School.
Business Administration & Economics degree, Pontificia Universidad Catolica de
Chile.
Alberto Marraccini – President of Directors’ Committee: Business Administration
& Economics degree, Pontificia Universidad Catolica de Chile.
Juan Pablo Vega – Director: MBA, Kellogg School of Management. Civil Engineer,
Pontificia Universidad Catolica de Chile.
Jorge Id – Director: MBA, University of Chicago. Business Administration &
Economics degree, Universidad de Chile.
Aldo Motta – Director: MBA, Emory University. Business Administration &
Economics, Universidad Diego Portales.
Bernardo Fontaine – Director: Business Administration & Economics degree,
Pontificia Universidad Catolica de Chile.
page 35
La Polar
20 May 2013
La Polar’s new management team
Patricio Lecaros – CEO: Lecaros worked at Ripley for 14 years, rising up to the rank
of commercial vice president. Among many other accomplishments, Lecaros led the
initiative to launch Ripley’s operations in Peru. Lecaros was CEO of Ripley Peru for
five years. He holds a Business Administration and Economics degree from Pontificia
Universidad Catolica de Chile.
Gino Manriquez – Controller: Manriquez has over 20 years of experience in
finance, in Chile and abroad. Prior to joining La Polar, he worked at Chilean
brokerage house LarrainVial for five years. He also held positions at Corpbanca and
Dresdner Bank. He holds a Business Administration and Economics degree and MBA
from Pontificia Universidad Catolica de Chile.
Alvaro Araya – CFO: Araya worked at Chilean commodities company SQM for over
11 years. Before joining La Polar, he was the deputy finance officer at SQM. He holds
a Business Administration and Economics degree from Pontificia Universidad
Catolica de Chile and MBA from Emory University, in the U.S.
Ricardo Rubio – CTO: Rubio has over 27 years of experience in corporate IT
solutions. The past seven years he worked at the pharmaceutical retail chain
Salcobrand.
Andres Molina – Apparel Manager: Molina has 17 years of experience in the retail
industry. Prior to joining La Polar, he worked in the Apparel divisions of Ripley and
Hites. He holds a Business Administration and Economics degree from Universidad
Diego Portales in Chile.
Victor Wipe – Financial Retail Manager: Prior to joining La Polar, Wipe worked at
BBVA and CMR Falabella (Falabella’s credit card business). He holds a Business
Administration and Economics degree & MBA from Pontificia Universidad Catolica de
Chile and completed a Corporate Management Program at IESE Business School,
Spain.
Jose Tomas Larrain – Planning Manager: Before joining La Polar, Larrain was
deputy manager of Planning at Falabella Retail S.A. He holds an Engineering degree
from Pontificia Universidad Catolica de Chile.
Francisco Martinez – CEO Colombia: He joined La Polar in June 2012 from
Falabella Chile, where he had been commercial director. He holds a Business
Administration and Economics degree from the University of Chile.
The team also includes: Carlos Arredondo, Logistics Manager; Marcelo Acosta, Sales
Manager; Rodrigo Nazer, Marketing Manager; Rodrigo Karmy, Home & Electronics
Manager; Maria Olivia Brito, Head of HR; and Andres Escabini, in-house counsel,
among others.
page 36
La Polar
20 May 2013
Lawsuits
La Polar sued its former external accountants, PricewaterhouseCoopers Chile. La
Polar is asking for CLP31bn in compensation for PwC’s alleged gross negligence in
auditing La Polar’s financials before the scandal that unveiled the accounting fraud in
2011.
La Polar currently has civil lawsuits outstanding against Pablo Alcalde, Julian
Moreno, Maria Isabel Farah, Nicolas Ramirez, Pablo Fuenzalida and Ivan
Dinamarca.
page 37
La Polar
20 May 2013
New Brands
La Polar defines the Alma brand with the following adjectives: feminine, romantic,
original, charming, chic, versatile, relaxed and authentic. The brand favors natural,
light, comfortable fabrics, with warm colors. The general esthetic is rustic, vintage.
Age: 28 – 35 years old
The brand targets university students, entrepreneurs and young professionals.
Business segments: apparel, footwear, accessories, perfume, home
Price range: mid to high
Figure 7: Alma
Figure 8: Mirror brands
page 38
La Polar
20 May 2013
Mila Jeans
La Polar defines the Mila Jeans brand with the following adjectives: youthful, classic,
natural, spontaneous. The brand focus is on sportswear, basics mixed with items that
make a fashion statement. Other adjectives that describe the esthetic: clean,
informal, comfortable.
Age: 18 – 25 years old
The brand targets high school and university students.
Business segments: apparel & footwear
Price range: mid to high
Figure 9: Mila Jeans
Figure 10: Mirror brands
page 39
La Polar
20 May 2013
Example of a re-launched brand – Zibel
The following graphics show Zibel before (left) and after (right) La Polar’s new
apparel team gave the brand a mayor makeover.
Figure 11: Old Zibel
Figure 12: New Zibel
page 40
La Polar
20 May 2013
La Polar
page 41
La Pol ar
Income Statement (CLPmn)
Revenue
Operating expenses (ex depn)
EBITDA (BTG Pactual)
Depreciation
Operating income (EBIT, BTG Pactual)
Other income & associates
Net Interest
Abnormal items (pre-tax)
Profit before tax
Tax
Profit after tax
Abnormal items (post-tax)
Minorities / pref dividends
Net Income (local GAAP)
Net Income (BTG Pactual)
Tax rate (%)
Per Share
EPS (local GAAP)
EPS (BTG Pactual)
Net DPS
BVPS
Cash Flow (CLPmn)
Net Income
Depreciation
Net change in working capital
Other (operating)
Net cash from operations
Cash from investing activities
Cash from financing activities
Bal sheet chge in cash & equivalents
Balance Sheet (CLPmn)
Cash and equivalents
Other current assets
Total current assets
Net tangible fixed assets
Net intangible fixed assets
Investments / other assets
Total assets
Trade payables & other ST liabilities
Short term debt
Total current liabilities
Long term debt
Other long term liabilities
Total liabilities
Equity & minority interests
Total liabilities & equities
12/2008
445,534
(355,578)
89,956
(9,789)
80,167
(21,512)
(13,401)
0
45,254
(7,698)
37,556
0
(188)
37,368
37,368
17
12/2008
169.38
169.38
46.00
1,027.91
12/2008
37,368
9,789
(113,864)
(7,186)
(73,892)
(15,839)
68,505
(47,305)
12/2008
50,250
356,617
406,866
72,267
5,885
142,944
627,962
71,012
81,952
152,964
247,326
100
400,390
227,572
627,962
Company Profile:
Financial ratios
EBITDA margin
Operating margin
Net margin
RoE
RoIC
EBITDA / net interest
Net debt / EBITDA
Total debt / EBITDA
Net debt / (net debt + equity)
La Polar is the fourth largest department store operator in Chile,
with 40 locations totaling roughly 161,000 square meters of
selling space. In addition, the company has five department
stores in Colombia. In both Chile and Colombia, La Polar
provides credit to customers through its credit card operation. In
terms of department store sales, La Polar has about 9% market
share in Chile.
12/2009
440,876
(370,523)
70,353
(9,471)
60,882
12,538
(19,920)
0
53,500
(7,756)
45,744
0
33
45,777
45,777
14
12/2009
184.39
184.39
45.32
1,303.53
12/2009
45,777
9,471
(132,177)
66,411
(10,518)
(4,970)
15,805
25,333
12/2009
75,582
481,338
556,921
64,709
1,893
123,812
747,335
63,556
144,602
208,158
211,732
3,830
423,720
323,615
747,335
12/2010
540,190
(470,745)
69,445
(26,183)
43,262
(5,451)
(3,458)
0
34,353
(4,586)
29,767
0
0
29,767
29,767
13
12/2010
119.90
119.90
56.00
1,424.90
12/2010
29,767
26,183
(5,517)
(12,293)
38,140
(15,438)
123,959
5,301
12/2010
80,884
482,144
563,028
69,320
32,027
255,428
919,803
58,845
0
58,845
494,196
13,016
566,057
353,746
919,803
12/2011
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
12/2011
NM
NM
NM
NM
12/2011
NM
NM
NM
NM
NM
NM
NM
NM
12/2011
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
12/2012
381,910
(433,301)
(51,391)
(7,125)
(58,516)
7,694
278,081
0
227,259
(39,730)
187,528
0
0
187,528
187,528
17
12/2012
187.79
187.79
0.00
91.24
12/2012
187,528
7,125
26,591
(34,425)
186,820
(117,704)
86,533
24,856
12/2012
144,913
181,645
326,558
70,553
0
42,466
439,577
112,898
15,861
128,759
177,599
42,106
348,463
91,114
439,577
12/2013E
439,914
(443,866)
(3,952)
(7,730)
(11,682)
(2,387)
(5,998)
0
(20,067)
4,100
(15,967)
0
0
(15,967)
(15,967)
0
12/2013E
(15.99)
(15.99)
0.00
75.25
12/2013E
(15,967)
7,730
(60,497)
8,150
(60,584)
(23,348)
(1,616)
(77,311)
12/2013E
67,602
229,000
296,602
86,172
0
29,719
412,493
99,756
11,617
111,373
180,227
45,746
337,346
75,147
412,493
12/2014E
554,894
(527,947)
26,946
(8,150)
18,796
(387)
(9,270)
0
9,139
1,381
10,520
0
0
10,520
10,520
0
12/2014E
10.54
10.54
0.00
85.78
12/2014E
10,520
8,150
(40,861)
20,667
(1,523)
(33,987)
4,938
(49,243)
12/2014E
18,359
286,400
304,759
112,009
0
31,072
447,840
116,295
13,573
129,868
183,208
49,096
362,173
85,667
447,840
12/2015E
636,887
(592,653)
44,234
(9,723)
34,511
(387)
(16,071)
0
18,053
(3,611)
14,442
0
0
14,442
14,442
20
12/2015E
14.46
14.46
4.82
95.42
12/2015E
14,442
9,723
(25,316)
26,887
25,737
(16,667)
4,671
(10,424)
12/2015E
7,935
323,457
331,392
118,952
0
31,879
482,224
128,036
19,530
147,566
186,737
52,625
386,928
95,295
482,224
12/2011
NM
NM
NM
NM
NM
NM
NM
NM
NM
12/2012
-13.5%
-15.3%
49.1%
78.8%
-10.6%
0.2x
-3.8x
-3.8x
68.0%
12/2013E
-0.9%
-2.7%
-3.6%
-19.2%
-4.2%
-0.7x
-48.5x
-48.5x
71.9%
12/2014E
4.9%
3.4%
1.9%
13.1%
6.8%
2.9x
7.3x
7.3x
69.7%
12/2015E
6.9%
5.4%
2.3%
16.0%
11.8%
2.8x
4.7x
4.7x
68.4%
Source: Company reports and BTG Pactual estimates. Valuations: based on the last share price of that year(E)
based on share price as of 17 May 2013
La Polar
20 May 2013
page 42
Required Disclosures
This report has been prepared by Celfin Capital S.A. Corredores de Bolsa.
The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results.
BTG Pactual
Rating
Buy
Neutral
Sell
Definition
Coverage *1
IB Services *2
Expected total return 10% above the company’s sector
average.
Expected total return between +10% and -10% the
company’s sector average.
Expected total return 10% below the company’s sector
average.
46%
50%
49%
49%
5%
11%
1: Percentage of companies under coverage globally within the 12-month rating category.
2: Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months.
Absolute return requirements
Besides the abovementioned relative return requirements, the listed absolute return requirements must be followed:
a) a Buy rated stock must have an expected total return above 15%
b) a Neutral rated stock can not have an expected total return below -5%
c) a stock with expected total return above 50% must be rated Buy
Analyst Certification
Each research analyst primarily responsible for the content of this investment research report, in whole or in part, certifies that:
(i) all of the views expressed accurately reflect his or her personal views about those securities or issuers, and such recommendations were elaborated independently, including in relation to Banco
BTG Pactual S.A., Celfin Capital Corredores de Bolsa S.A.. and/or its affiliates, as the case may be;
(ii) no part of his or her compensation was, is, or will be, directly or indirectly, related to any specific recommendations or views contained herein or linked to the price of any of the securities
discussed herein.
Research analysts contributing to this report who are employed by a non-US Broker dealer are not registered/qualified as research analysts with FINRA and therefore are not subject to the
restrictions contained in the FINRA rules on communications with a subject company, public appearances, and trading securities held by a research analyst account.
Part of the analyst compensation comes from the profits of Banco BTG Pactual S.A. or Celfin Capital Corredores de Bolsa S.A. as a whole and/or its affiliates and, consequently, revenues arisen
from transactions held by Banco BTG Pactual S.A., Celfin Capital Corredores de Bolsa S.A. and/or its affiliates.
Statement of Risk
The main risks to our investment thesis are: i) business plan execution risk, given that this is a turnaround story; ii) competitive and crowded retail and credit market; iii) increased regulatory
restrictions for retail credit operators; iv) FX risk; v) weaker than expected consumption in the countries of operation; vi) deterioration of credit quality.
Company Disclosures
Company Name
La Polar 18, 19, 20, 21, 22
Reuters
LAPOLAR.SA
12-mo rating
Neutral
Price
CLP184.00
Price date
17-5-2013
18. As of the end of the month immediately preceding the date of publication of this report, neither Celfin Capital Corredores de Bolsa S.A., Banco BTG Pactual S.A., nor its affiliates or subsidiaries
beneficially own 1% or more of any class of common equity securities.
19. Neither Celfin Capital Corredores de Bolsa S.A., Banco BTG Pactual S.A. nor its affiliates or subsidiaries have managed or co-managed a public offering of securities for the company within the
past 12 months.
20. Neither Celfin Capital Corredores de Bolsa S.A., Banco BTG Pactual S.A. nor its affiliates or subsidiaries engaged in market making activities in the subject company's securities at the time this
research report was published.
21. Celfin Capital Corredores de Bolsa S.A., Banco BTG Pactual S.A. or its affiliates or subsidiaries have not received compensation for investment banking services from the companies in the past
12 months.
22. Celfin Capital Corredores de Bolsa S.A., Banco BTG Pactual S.A. or its affiliates or subsidiaries do not expect to receive or intends to seek compensation for investment banking services from
the companies within the next 3 months.
La Polar
20 May 2013
La Polar
Stock Price (CLP)
Price Target (CLP)
4000.0
3500.0
3000.0
2500.0
2000.0
1500.0
1000.0
Buy
Neutral
Sell
No Rating
Source: BTG Pactual and Economatica. Prices as of 17 May 2013
20-May-13
20-Feb-13
20-Nov-12
20-Aug-12
20-May-12
20-Feb-12
20-Nov-11
20-Aug-11
20-May-11
20-Feb-11
20-Nov-10
20-Aug-10
0.0
20-May-10
500.0
page 43
La Polar
20 May 2013
page 44
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La Polar
20 May 2013
page 45
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La Polar - Nueva Polar

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