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Shares of MercadoLibre (MELI 5.72%) flew higher last week, jumping 16% on Thursday and Friday, on some surprising news. A top rival in Brazil, Americanas S.A., was unraveling in an accounting scandal that led to the ouster of its CEO and CFO and wiped out roughly 80% of its stock price in one day.
Americanas is Brazil’s largest online retailer, but the company is reeling following the revelation of $3.88 billion in accounting inconsistencies — debt that it hadn’t previously reported. The implications of the error aren’t fully clear, but they could offer an opening to MercadoLibre if Americanas’ retail business suffers.
Image source: Getty Images.
Americanas’ management said in a statement that the cash impact of the error isn’t material. But outgoing CEO Sergio Rial, who had just taken over two weeks earlier, said the company has $1.6 billion in cash and can continue paying suppliers and liabilities, though he said it may need to raise cash to pay off debt. As of the third quarter of 2022, Americanas already had nearly $4 billion in debt on its books, so its debt burden has roughly doubled. And with the stock price down substantially, the company’s ability to raise cash through an equity offering is significantly impaired.
The fallout in the investment community was immediate and widespread. In addition to the plunge in Americanas stock on Thursday — though it did recover some of its losses on Friday — a number of investment banks suspended their recommendations on Americanas. And its bonds were trading at just 38 cents on the dollar on Thursday, indicating that investors thought a default was more likely than not. The accounting irregularities revolve around the debt the company apparently owes related to supplier financing operations.
Fitch Ratings downgraded its credit rating on Americanas from BB to CC and said its debt had effectively doubled. The agency also said it expected Americanas to enter a standstill agreement with its creditors to prevent a takeover, and called its capital structure unsustainable. S&P Global also downgraded its rating on Americanas to BB.
In its filing with the Brazilian securities regulator, Americanas said: “At this time, it is not possible to determine all the impacts of such inconsistencies on the company’s income statement and balance sheet.”
Like MercadoLibre, Americanas operates in e-commerce through both a first-party direct retail business and a third-party marketplace; it also has physical stores. Through the first three quarters of 2022, Americanas brought in about $3.5 billion in net revenue, up 6% in constant currency from the year before. Its gross merchandise volume (GMV) — the total value of goods sold on its platform in that period — was nearly $8 billion, an increase of 7.5% from the year before.
By comparison, MercadoLibre generated $7.5 billion in revenue in the first three quarters of 2022, and gross merchandise volume rose 32% in constant currency to $8.6 billion in the third quarter, for a run rate of roughly $25 billion over three quarters. The company operates throughout Latin America, but roughly half of its sales come from Brazil.
MercadoLibre is already gaining market share in Brazil, with GMV up 20% in the third quarter. It touted its business’s outperformance on Black Friday week, with 10% revenue growth compared to a 23% decline in the overall Brazilian e-commerce market.
Americanas’ challenges potentially put a significant chunk of market share up for grabs. While it isn’t about to go out of business, its accounting irregularities are likely to impair its ability to borrow, grow, and invest in its business. And that could make it easier for MercadoLibre to outcompete it.
MercadoLibre already seems to be firing on all cylinders. The company continued to deliver strong revenue growth through 2022, even as American e-commerce counterparts like Amazon.com faltered. And its profit margins are ramping up thanks to the growth of businesses like advertising, credit solutions, and its third-party marketplace. Its operating margin reached 11% in the third quarter, and free cash flow is also soaring.
With a major competitor of MercadoLibre now faltering, investors have one more reason to buy this top growth stock.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon.com and MercadoLibre. The Motley Fool has positions in and recommends Amazon.com, MercadoLibre, and S&P Global. The Motley Fool has a disclosure policy.
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