Natura&Co: Charting a New Course for Profitability

Natura&Co (NTCO3) is strategically maneuvering to bolster its profitability and market expansion following significant restructuring.

The company has divested assets and managed liabilities to focus on innovation and marketing in Latin America, with a strong emphasis on Brazil, where it sees substantial growth potential.

Profitability and Growth: Itaú BBA recommends a market performance rating for Natura, setting a target price of R$ 17 for the year, signaling a 37% potential upside.

The bank projects an adjusted EBITDA of R$ 3.19 billion ($0.53 billion) for 2024, with expectations of margin growth through logistics enhancements and the Wave-2 project.

This initiative, aimed at increasing efficiency and reducing costs in Brazil, Argentina, and Mexico, involves cost-sharing with Avon International. It could positively impact margins post-sale.

Market Adjustments and Challenges: Despite these steps, Natura anticipates short-term volatility due to the Wave-2 model’s implementation. It predicts a mid-single-digit revenue decline in the first half of 2025.

Recovery is expected in later quarters, though transformation costs are anticipated to hit R$ 110 million in Q4 2024. The project’s launch will initially decrease revenues as Natura optimizes its consultant team, with past data suggesting a three-quarter recovery period in Brazil.

Market Expansion: Natura is also pushing for global market share growth, with a focus on both physical and digital channels. Retail stores currently represent 11.6% of its total addressable market, while digital sales, at 7.1%, show significant growth potential.

Natura’s Strategic Growth and Financial Outlook

The company’s strategy includes adjusting its consultant teams in markets like Argentina and Mexico for long-term profitability. Financial Outlook: Natura projects net revenues of R$ 30.4 billion ($5.07 billion) in 2025 with an adjusted EBITDA of R$ 3.55 billion ($0.59 billion).

However, challenges from Avon’s integration and marketing investments might keep net income negative until a forecasted positive turn by 2026. This is expected to include an 8.5% growth in adjusted P/E.

Dividends and Future: Dividend distribution might be deferred to 2026 due to Avon‘s impact, Wave-2 costs, and Brazil’s macroeconomic uncertainties.

Nevertheless, Itaú BBA sees Natura’s focus on Brazil and Latin America as key to unlocking long-term value. The company will achieve this through expanded sales channels and operational efficiencies.

This narrative outlines Natura&Co’s strategic direction, highlighting both the immediate challenges and the long-term opportunities. Stakeholders, including investors and policymakers, should consider these factors carefully.

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