I was from Americanas: an indecisive investor and a company in crisis
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Summary
Victor, a novice investor, faces crucial decisions as he explores the trajectory of Lojas Americanas. Influenced by affective memories and the boom in e-commerce, he receives guidance from Ronan and Brenno. The company's track record, including acquisitions and control by the 3G Capital Group, creates a positive narrative through 2022. However, the turnaround occurs with an accounting error of R$ 20 billion in 2023. Shares plummet, the company faces financial challenges, and is sued for overestimating the value of the shares. Victor, faced with the dilemma, illustrates the volatility of the market and the need for informed decisions. This advanced case study offers a concise analysis of the complexity of the stock market, challenging students to understand the risks and rewards by applying concepts of corporate finance and business strategy.
Keywords: Corporate Finance, Investment Analysis, Business Strategy, Tax Fraud, Bankruptcy, Equities
Abstract
Inexperienced investor Victor faces critical decisions while delving into the journey of Lojas Americanas. Influenced by sentimental memories and the e-commerce boom, he seeks guidance from Ronan and Brenno. The company's history, including acquisitions and control by the 3G Capital Group, paints a positive picture until 2022. However, a sudden twist unfolds with a R$20 billion accounting error in 2023. Stocks plummet, the company grapples with financial challenges and faces legal action for overestimating stock value. Victor, confronted with a dilemma, exemplifies market volatility and the imperative need for informed decisions. This advanced case provides a concise analysis of stock market intricacies, challenging students to comprehend risks and rewards by applying concepts from corporate finance and business strategy.
Keywords: Corporate Finance, Investment Analysis, Business Strategy, Tax Fraud, Financial Setback, Stocks
Novice investor: knowing the history of Americanas
Victor is a novice investor who has two great friends: Ronan, a childhood friend and employee of Americanas, and Brenno, an investment analyst he met at university. Throughout his life, Victor found himself frequenting Lojas Americanas with his friends. Because of this affective memory and Ronan's influence, he intends to invest part of his money in Lojas Americanas, but is afraid because of everything that has been happening with the company in recent months.
When researching Lojas Americanas, Victor discovered that the company was founded in 1929, the year of the great depression, in Niterói, Rio de Janeiro. Its founders were Americans who sought to create a store with low prices, a wide variety of products and focused on the low-income public. This idea had worked in the United States and Europe.
The company began to expand throughout the country when its founders, moved by the success of the model abroad, decided to open the company's capital to raise funds and promote the opening of new units throughout Brazil. With the passage of time in capital operations, the former Banco Garantia, of which Jorge Paulo Lemann was a partner, became a major shareholder of Lojas Americanas in 1982 and with that the Bank came to control the company at the time.
Lojas Americanas began to grow, opening stores throughout Brazil, acquiring other companies such as Blockbuster and Submarino, and also offering different types of services in addition to the traditional retail store, such as Americanas express, Americanas.com, local Americanas, digital Americanas, among others.
Upon discovering that Banco Garantia was sold to Credit Suisse First Boston in 1998, Victor realized that the portfolio of assets was not within the sale agreement, so Jorge Paulo Lemann and his partners, as owners of the retailer's shares, they founded the 3G Capital Group that manages Lojas Americanas to this day with 40% of the shares in addition to other businesses.
The past matters
After learning more about the company, Victor went looking for a career investor and met Brenno, a very promising investor who was part of the financial market league, an extension project that Vitor also participated in at his university, and who currently works as a financial consultant and had been making a lot of money from it. Victor quickly approached Brenno and soon became friends and talked about investments. Brunno starts by explaining to him the basics of investing, what it is and how it works:
1. Shares - Owning a piece of companies: Breno explained that buying shares means acquiring a part of the ownership of a company. He likened it to being a shareholder in a company and being entitled to a share of the profits and a say in the company's decisions.
2. Stock Market - Where business happens: Breno informed that shares are traded on stock exchanges, places where buyers and sellers meet to carry out transactions. He mentioned the famous stock exchanges such as the NYSE and the NASDAQ.
3. Risk and Return - The delicate balance: Breno pointed out that investing in stocks involves risks, but also offers opportunities for return. He likened the situation to a balance sheet, where you need to balance risk and earning potential.
4. Diversification - Don't put all your eggs in one basket: Brenno advises Vitor not to invest all his money in a single stock, but rather to distribute it in different companies and sectors. He explained that this would help reduce the overall risk of the investment portfolio.
5. Dividends - The fruits of investment: Breno mentioned that some companies pay dividends to the company's stock holders, shareholders, which are a part of the profits distributed regularly in general. This can be a source of income for investors.
6. Fundamental Analysis - Know the company: Breno introduced the idea of fundamental analysis, which involves assessing a company's financial health, including its revenue, profit, and debt, to make informed investment decisions.
7. Technical Analysis - Studying trends: Breno mentioned that technical analysis involves analyzing price charts and indicators to predict future movements based on historical patterns.
8. Quarterly and Annual Reports: Breno also said that traded companies disclose financial information regularly. These reports are valuable to understand the company's performance, so it is Victor Daniel to follow its disclosures
9. Market Research: And also conduct research and analysis before choosing which stocks to buy. Information about the company, industry, and economic trends can be crucial.
10. Investment S-curve (Figure 1): it is divided into two supply curves and the demand curve.
- Supply Curve: This curve represents the quantity of a good or service that producers are willing to offer in the market at different prices. Typically, the supply curve has a positive slope, meaning that producers are usually willing to offer more units of a good or service when the price increases.
- Demand Curve: This curve represents the amount of a good or service that consumers are willing to purchase in the market at different prices. Generally, the demand curve has a negative slope, meaning that consumers tend to buy fewer units of a good or service when the price increases.
Victor hears the following tip from the investor: to know if a company is good to invest in, one of the first things he should look at is if the service offered fits the "S" curve of performance and effort, in this curve we can see if the service offered is still growing and being absorbed by the market or if this service has stagnated ready to go into decline being less requested by buyers, Breno says that in the case of Americanas, its main service would be to sell with variety of products.
The company's past is also important, according to Brenno. However, for there to be applicability, this past cannot be very short, close in the period of time that will be analyzed, that is, the results need to show what trend the company is really going to, instead of being an isolated sample of the company, and not so far away as not to have a real reading of the company. Breno advises him to look at the last five years.
With a look back of a few years until the end of 2022, Americanas' shares were growing and there was an expectation that they would appreciate a lot due to e-commerce. In recent times, Lojas Americanas has sought several expansion opportunities, including operations in e-commerce through the Americanas.com platform, which has achieved remarkable success
Brenno shows Victor that the drop in the price of a stock does not mean immediate loss. Showing that even in just one day a stock can go up and down a lot in the market, and this relationship is due to several factors, including investor speculation.
Hearing this, Victor is impressed because he thought that the fall in shares meant immediate loss and that he should abandon this investment.
Breno explains that sometimes, when the stock price falls, people can be worried thinking that they are having an immediate loss. However, it is important to understand that this drop in the stock price actually represents a loss in the market value of your shares, but this does not translate into an actual loss unless you sell the shares at a lower price than the price at which you bought them.
Imagine, for example, that you bought shares in a company for a certain amount. If the price of these shares falls, the value of your investment also decreases, but this is not a real loss until you make the decision to sell shares at a lower price. If you hold the stock for a longer period of time, the market may rebound and the stock price may rise again, potentially offsetting the initial drop.
This is particularly relevant when adopting a long-term investment strategy. If you invest with a wider time horizon, as many successful investors do, short-term fluctuations in the stock market are normal and expected. Historically, the stock market tends to appreciate in the long term, despite temporary declines.
Additionally, for some investors, a drop in the stock price may be seen as a buying opportunity. If you believe that the underlying company remains solid and that the stock price has fallen due to temporary factors, buying more shares at a lower price may be a strategy to increase your profit potential in the future.
This is how Breno presents the income statements of Americanas.
Who warns, friend is: seeing the numbers
Upon learning that his friend Victor was considering investing in Lojas Americanas, Ronan, an enthusiastic employee of Lojas Americanas, was eager to share a special perspective with him. The two met in a cozy café, and Ronan couldn't hide his excitement as he struck up the conversation.
"Victor, you can't imagine the opportunities that are emerging at Lojas Americanas. As an employee here, I have been closely following the company's growth and believe me, it is a great investment chance," said Ronan, looking excitedly at his friend.
Intrigued, Victor asked: "Really? Tell me more about it, Ronan."
Then, Ronan went on to explain how the company was thriving in recent years. He mentioned that Lojas Americanas had a consolidated presence in the Brazilian market, with a well-established store network and a loyal customer base. He also highlighted that the company was constantly innovating and investing heavily in its online presence, adapting to the ever-evolving digital landscape.
In addition, Ronan shared his vision of the retail market in Brazil and how the company was standing out from competitors. "Lojas Americanas has a solid track record of growth and has achieved consistent results even in challenging economic periods," explained Ronan.
Victor was still a little skeptical and mentioned that investing in stocks always involved risks. However, Ronan smiled and replied: "It's true, every form of investment carries some risk, but I believe that Lojas Americanas is well positioned to face them. The company has efficient management, a strong brand and a successful expansion strategy."
And to back up his claims, Ronan presented some concrete data on the company's financial performance in recent years. He explained through a vertical and horizontal analysis his financial statements how net income and revenue were growing significantly, exceeding analysts' expectations.
In the vertical analysis of the Balance Sheet, it is feasible to observe the proportion that each element of the Balance Sheet represents in relation to the total Assets and Liabilities. While in the Income Statement (P&L), it is possible to verify the relevance of each component in relation to net sales revenue.
In 2018, the company recorded a rather modest growth in its assets, with Total Assets increasing by only 2.59% compared to the previous year. However, in 2019, there was a significant growth of 17.77% in Total Assets compared to 2018.
After a drop of 0.84% in 2018, Current Assets (AC) showed a remarkable growth in 2019, registering an increase of 8.31%. This growth was mainly driven by the accounts of taxes to be recovered, which had an increase of 37.16%, and by financial investments, which grew by 33.19% in the same period.
On the other hand, Non-Current Assets (ANC) registered a growth of 33.08% in 2019, compared to the previous year (2018). In 2018, this component had shown a more modest growth, with an increase of only 8.65% compared to 2017.
In relation to Current Liabilities (PC), there was a significant change of 26.49% in 2019, compared to 2018, after a drop of 13.55% in 2018 compared to 2017. This reduction in 2018 was mainly attributed to the considerable decrease in the company's loans and financing, which showed a decrease of 46.09%.
On the other hand, in 2019, the growth of Current Liabilities was mainly driven by "Other Obligations and Provisions", which contributed to the increase in this account on the balance sheet.
As for Non-Current Liabilities (PNC), there was a growth of 12.60% in 2019 and 15.63% in 2018. Meanwhile, the company's Shareholders' Equity (PL) has shown continuous growth over the years, and in 2019 this growth was even higher than in the previous year.
In the vertical analysis, it can be seen that in 2019, of the Total Assets, 56.84% is represented by Current Assets, while Non-Current corresponds to 43.16%. This indicates a tilt toward short-term investments. Among the Current Assets accounts, the most significant are Cash and Equivalent, which represents 33.27%, followed by Financial Investments, with 22.82%.
As for Non-Current Assets, the most significant accounts are Fixed Assets, with 43.98% of representativeness, and Long-Term Realizable Assets, with 28.36%.
Regarding the Total Liabilities accounts, the one that stands out the most is Non-Current Liabilities, with an increase of 46.08%. This suggests a preference for third-party and long-term sources of funds.
In 2018, Current Assets (AC) correspond to 61.80% of Total Assets, representing a slight reduction compared to 2017, when this percentage was slightly higher, reaching 63.93%. In both years, a preference for short-term investments can be observed.
On the other hand, when analyzing the sources of funds, it is evident that the company has a penchant for long-term third-party funding sources.
When examining the horizontal analysis of the Income Statement (P&L), it is observed that in 2017, the company's Net Revenue reached the amount of R$ 16,345,589.00. In the following year, this revenue showed an increase of 8.22%, and in 2019, it recorded an additional growth of 7.16%.
As for general and administrative expenses, in 2017, they totaled R$ 963,790. In the following year, this account had an increase of 21.55%, and in the last year analyzed, there was a more expressive growth of 50.20%. This increase is explained in the company's annual report, which mentions the hiring of a large number of employees to meet the needs of the 230 new stores opened in the last year alone, when the expansion project entitled "85 years in 5 - Somos Mais Brasil" was completed.
According to the vertical analysis of the Income Statement (P&L), in 2017, the Costs of Goods and/or Services Sold represented 67.20% of net revenue. The following year, this value decreased slightly to 65.75%, and in 2019, it registered a slight reduction to 63.63%.
As for General and Administrative Expenses, in 2017, they represented 5.90% in relation to net revenue. In 2018, this percentage increased to 6.62%, and in the last year analyzed, it reached 9.28% of net revenue.
In 2017, net income was recorded at R$ 81,234.00, which corresponded to 0.50% of sales of goods and/or services in that year converted into profit. In 2018, this proportion increased to 1.29%, and in the following year, in 2019, it reached 3.07%, reaching a total of R$ 581,283.00 in net income.
As Ronan shared more information, Victor's confidence began to grow. Ronan's internal and passionate point of view, combined with financial evidence, began to persuade him that investing in Lojas Americanas stock could be a wise decision.
That meeting not only strengthened the friendship between Ronan and Victor, but also opened the door to a new chapter in their financial lives. Ronan was thrilled to help his friend better understand the potential of investing, and Victor, in turn, felt grateful to have an expert in his circle of friends.
Thus, the perspective of an insider, combined with careful analysis of the numbers and trends, led Victor to seriously consider the opportunity to invest in Lojas Americanas. With new information in hand, he was ready to embark on this exciting financial journey alongside his friend Ronan.
I went from Americanas: the Fiscal Hole
On January 11, 2023, Lojas Americanas reported an error in its accounting in the amount of BRL 20.0 billion, and even said that this problem has been occurring for many years. He soon connected the dots and saw that with the information that was passed to him that the company is in debt and does not have the money to pay this gap. The market lost confidence in the company and its shares depreciated.
What happened with Lojas Americanas was an error in accounting for the money it borrowed from banks in relation to what was paid to suppliers, it was a problem in the risk operation. Expenses and indebtedness appeared on the balance sheet with a value lower than they really were and the net worth as well as the profit was higher than they really were. The company will possibly need an intake of capital in order not to go bankrupt. The Brazilian Institute of Citizenship decided to sue Americanas alleging that Brazilian investors were induced to overestimate the value of these shares.
Victor, when looking at the reaction of the media, investors and the general public in relation to Lojas Americanas, sees that he will have to be convinced in his decision to invest or not in the company. He knows that the risk is greater to invest in Americanas, compared to other competing stores such as Magazine Luiza, Via and Mercado Livre, but the reward can be greater as well.
After analyzing so many numbers, Victor needs to make a decision, will he continue with his stock portfolio and risk losing money, will he bet on appreciation and expand his portfolio or will he sell everything while there is time.
Questions for the discussion
- What role should shareholders and management have played in the supervision and strategic decision-making, considering the control by the 3G Capital Group in Lojas Americanas?
- To what extent should investors trust information from internal sources, given the clear motivations of optimism from employees like Ronan, and how does this affect transparency and trust in the market?
- How did the lack of transparency in communication, both internal and external, contribute to the negative consequences of the crisis, and what effective practices could have been adopted to minimize the impact?
- How did the internal control system allow accounting inconsistencies to reach significant amounts, and what was the role of internal and external audit in detecting these irregularities?
- How did the crisis impact Lojas Americanas' reputation and investor confidence, and what ethical measures could have been implemented to avoid loss of confidence and mitigate the consequences for stakeholders?
- How does the financial market react to sudden upheavals, such as the revelation of the accounting error, and what would be the most prudent approach for individual investors in crisis scenarios?
Gallery
References
Alves, R. H. (2021). The complete history of the Lojas Americanas brand: The most loved brand in Rio de Janeiro. Youtube. Raphael H. Alves. Available at: https://youtu.be/lj6zsqd0pZg?si=hkHtbnaV0v0WBci-
Costa, A. P. P. D. (2011). Cases of financial corporate fraud: background, related substantive and symbolic resources (Doctoral dissertation). Available at: https://repositorio.fgv.br/bitstreams/c367d462-15bb-4524-ba36-e5e321f0405b/download
Costa, A. P. P. da., & Wood Jr., T.. (2012). Corporate frauds. Journal of Business Administration, 52(4), 464–472. Available at: https://doi.org/10.1590/S0034-75902012000400008
InfoMoney. (2022, November 10). Americanas (AMER3) reverses profit and has a loss of R$ 212 million in the 3rd quarter. Available at: https://www.infomoney.com.br/mercados/resultado-americanas-amer3-terceiro-trimestre-2022/
KRAUSPENHAR, J. H.; ROVER, S.(2020). The relevance of accounting fraud that occurred in Via Varejo S.A.: a study of events. Revista Brasileirade Administração Científica, v.11, n.3, p.242-257. Available at: http://doi.org/10.6008/CBPC2179-684X.2020.003.0017
About The Authors
- Rayron Françoise da Silva Vieira is a Business Administration student at the University of Brasília and a member of the Casoteca ADM Team. Email: rayron1994@gmail.com
- Kalebe Lopes de Alencar is a Business Administration student at the University of Brasília and a member of the Casoteca ADM Team. Email: kalebealencar@gmail.com
- Carlos Henrique Marques da Rocha is a Full Professor at UnB and is accredited to the Graduate Program in Transportation (PPGT-UnB). PhD in Economics from the University of Liverpool. He develops research in the area of Transport Economics, Transport Finance and Corporate Finance. He works as a reviewer for national and international journals. Email: chrocha@unb.br
Editor: Nicole Alonso Santos de Sousa is a graduate student of the Department of Administration (ADM/FACE) at the University of Brasília (UnB). She is co-coordinator of the Casoteca ADM. She has a postgraduate degree in Finance and Controllership (MBA USP/ESALQ) and a bachelor's degree in Administration (UnB). E-mail: nicolealonso2000@gmail.com
This case was written from secondary information and based on other references cited. It is not the authors' intention to evaluate or judge the company in question. This text is intended exclusively for academic study and discussion, and its use or reproduction in any other form is prohibited. Copyright infringement will subject the offender to the penalties of Law No. 9,610/1998.