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Thesis
El Puerto de Liverpool (OTCPK:ELPQF) (LIVEPOL1.MX) is a popular Mexican department store that is undervalued from an EPS perspective. They’ve had four quarters of positive earnings surprises. While the pandemic has affected them, their recent expansion efforts seem to be succeeding.
Introduction
Though a recession looms over consumer cyclicals, Mexican-based department store El Puerto de Liverpool (known by their department store brand name Liverpool) has weathered economic turbulence in the past. With four quarters of positive earnings surprises and an expansion effort that should reduce costs of distribution, the company can survive a recession and thrive in the years after.
Their expansion plan includes an enhanced distribution network to fill online orders faster, lower the cost of goods sold and allow the stores to keep less inventory on hand. As the company has already developed the central hub in central Mexico, the network seems feasible even if a recession slows expansion efforts.
Liverpool is growing beyond Mexico; they purchased a furniture business in Central America and acquired a 9.9% stake in Nordstrom (JWN) announced in September. The Nordstrom board adopted a poison pill that will prevent a takeover for the time being, though they say it has nothing to do with Liverpool’s stake and are not opposed to a buyout).
But even if Liverpool stays in Mexico, the Mexican market should reward them. Twenty-five percent of Mexico’s population is under 15, making it primed for growth. At about 42%, Mexico’s middle class is smaller than the Organization for Economic Development and Cooperation (OECD) average, and the pandemic was brutal to the middle class. But in general Mexico’s middle class is growing, and in places like Mexico City the middle class represents about 58% of the population.
Body
Liverpool started in Mexico City in the 1840s. It has an essential place in the history of Mexican business. Accomplishments like being the first Mexican business to have escalators seem quaint today, but they show how long Liverpool has been a favored Mexico City brand. In the 1980s, the company spread to other parts of Mexico. Good leadership and a strong brand got them through the peso devaluation of the 1990s, and by 2015 they had 100 locations across the country. Today, with 15 million unique customers and 122 stores, they’re the largest department store in Mexico.
In addition to the Liverpool brand, the company manages commercial real estate, 124 specialized boutiques, 165 Suburbia stores, and a credit system through a partnership with Visa. Mexican companies lagged U.S. companies on tech initiatives like same-day delivery and ordering online for in-store pickup, but the pandemic has forced them to catch up. Liverpool is a leader in this field.
Their CEO, Graciano F. Guichard G., stepped into the role in 2015 after having been with the company since 2000. Through acquisitions like Central American furniture maker Regal Forest, he’s expanding the company into a pan-Latin America brand.
A recession would undoubtedly impact expansion, but management has so far kept pace with timelines on their logistics network. This “PLAN” (Plataforma Logística Arco Norte) would connect warehouses across the country to support new and existing stores. Even if a recession slows growth, the PLAN reduces the possibility of excess merchandise at stores.
When the company announced the Nordstrom purchase in September, a Liverpool press release called it “an attractive opportunity to diversify assets geographically.”
That said, management is comfortable getting defensive. While as of August, they still planned to open seven new Suburbia stores and two new Liverpool stores in the second half of 2022, their investor day presentation emphasizes the logistics network and renovations to existing stores to make them more “sticky” and experiential.
The company has a AAA(Mex) rating as of June 2022 by Fitch, which estimated an 11% revenue growth in 2022 and 5% in 2023 assuming a recession. While Banco Santander recently described the store as facing possible revenue declines from inflation, they noted the company adapted well during the pandemic and is “well-positioned to continue being the department store leader in Mexico.”
Financials
Liverpool used pandemic-era cash to reduce debt to below 2019 levels. Except for the pandemic-related dip of 2020, their revenue and earnings have been steadily increasing. They kept their total inventory low during the pandemic, and it still hasn’t recovered to pre-pandemic value. This should help in the short term, as they aren’t facing the inventory glut of some of their U.S. peers.
Free cash flow is down from 2021 highs by quite a bit – it was $15.5B MXN TTM in September compared to $20.7B MXN in 2019. But before the pandemic, it hovered around $8.5B MXN, suggesting the company still has momentum from pandemic-era growth.
For a department store, Liverpool is somewhat in the middle of its U.S. peers in regards to profitability. Their profit margin is 9.75%, compared to 2.60% at Nordstrom and 5.98% at Macy’s but more than 13% at Dillards. But at 5.5, EV/EBITDA is higher than these U.S. competitors.
Return on assets and return on equity are also less impressive when compared to U.S. department stores: Liverpool has a TTM ROA of 6.78% and ROE of 13.59%, compared to Nordstrom with ROA 4.89% and ROE 88.08%, Dillards with ROA 22.95% and ROE 61.02%, and Macy’s with an ROA of 8.36% and an ROE of 46.22%.
While the ELPQF ARD doesn’t pay a dividend, the Mexican-traded stock (BMV:LIVEPOL1) pays a dividend of $1.77 MXN ($0.09) per share, which is about 2%, though this was suspended during 2020.
Valuation
One of the allures of international markets for value investors is the possibility of finding good companies trading at low prices. Liverpool is a well-known brand in Mexico with strong expansion plans. The fact that it has a real estate side means that even if the expansion plans sour, they can sell real assets.
Liverpool’s Mexican stock has a price-to-book of 0.93 and a forward P/E of 8.26, making it cheap by many value investors’ definitions. Using a conventional Graham measure of Earnings Per Share, Liverpool’s Mexican stock could be worth up to $137 MXN, giving it a margin of safety of more than 35% from its October 4 price.
Risks
Macro events could weigh heavily on the stock. The company claims to have bounced back from the pandemic, and they’ve opened new Suburbia and Liverpool stores in 2022. But Mexico is dealing with inflation. As consumer cyclicals suffer in a recession, it’s worth asking how many of the products they sell are discretionary – and the answer is, a lot. Their revenue may take a hit in the short term, and the Suburbia brand may be the hardest hit since it lacks the local brand recognition of Liverpool.
While the brand has gained traction in other parts of Mexico besides Mexico City, many people in Mexico have family in Mexico City and may have heard of Liverpool before it arrived. As they try to expand, they face the possibility that people outside Mexico may be less interested in the first Mexican department store to have an escalator. It is likely expansion efforts will be successful in Mexico even if a recession slows them down, but outside of the country, it may be harder. Failing to pull it off could mean a contraction of value.
Catalysts
Under Guichard’s leadership, Liverpool has a solid plan to grow. Assuming this plan is not defeated by inflationary pressures, the growth of assets that began this year could result in an increase to the stock price over the next few years.
Liverpool is the biggest Nordstrom shareholder behind Nordstrom family members. In September 2023, Nordstrom’s shareholder rights plan expires; if Liverpool can acquire Nordstrom, this would add value to the stock as well as a U.S. footprint. But even if they don’t, it is clear they want to spread the brand’s footprint.
Conclusions
Someone who is concerned about consumer cyclicals during a recession might be best steering clear of this stock. But for a great brand at a good price and international diversification, Liverpool is appealing for its ability to weather a storm.
If it still doesn’t seem like a good bargain, it might be worth revisiting the company in September 2023, when Nordstrom’s poison pill expires.
Compared to U.S. competitors, Liverpool is average. But brand loyalty and expansion efforts make them a good source of international diversification. Liverpool may not buy Nordstrom, but the speed with which the Nordstrom board moved shows they take Liverpool seriously. Investors should take them seriously as well.
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