Sports And Lifestyle Online Retailer, Netshoes (Cayman) Prepares For IPO

Summary

Netshoes (Cayman) Ltd. (Pending:NETS) filed an F-1/A for its upcoming initial public offering. The company intends to sell 8.25 million shares of its common stock at a marketed price range of $18-20. It has an additional 1,237,500 shares as an overallotment option for its underwriters. The company is expected to IPO on Wednesday, April 12.

We previewed this deal on our IPO Insights platform.

The underwriters for the IPO include Goldman, Sachs & Co., J.P. Morgan, Bradesco BBI, Allen & Company LLC and Jefferies.

Assuming Netshoes prices at the midpoint of its price range, it would have a market cap $611 million and trade at a price/sales range of 1.14x.

Business overview

Based in São Paulo, Brazil, Netshoes (Cayman) Ltd. is one of the top online retailers in Latin America, and it is the top online retailer of sports and lifestyle products in the region. The company's operations are focused in Argentina, Brazil and Mexico. Since launching in 2000, Netshoes has sold to more than 12.8 million customers. It started as a brick-and-mortar shoe store in São Paulo, but closed its brick-and-mortar operations in 2007, refocusing on online sales. Netshoes offers more than 190,000 SKUs from major brands, including Ralph Lauren, Nike, Adidas, Tommy Hilfiger and others.

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Executive management team overview

Marcio Kumruian is the co-founder, chairman and chief executive officer of Netshoes. He served on the boards of Netfarma and Modnet until January 2016. Kumruian holds an undergraduate degree in economics from Mackenzie University.

Financial highlights and risks

Netshoes generated revenue of $533.75 million in 2016, an increase of 33.7% from that in 2015. Gross margins have decreased from 32.8% in 2015 to 31.6% in 2016, which is slightly below average for the specialty retail industry. The company has not yet reported profits, and generated a net loss of $46.6 million in 2016. As of December 31, 2016, Netshoes had $34.1 million in cash and cash equivalents and total liabilities of $303.6 million.

The company expects $142 million in net proceeds from the offering and plans to use all of the proceeds to increase its capital so it can expand as well as purchase software and other needed equipment.

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Competitors

The e-commerce presence in Brazil and Latin America is still in a development stage, with internet penetration and online shopping much lower than in developed countries. However, internet use is rapidly growing. As of June 20, 2016, there were 378 million internet users in Latin America, representing 62.3% penetration. The number of internet users in Latin America grew at an 11.5% CAGR from 2010 to 2015.

Netshoes does not have a direct competitor in Brazil. However, it faces indirect competition from some global and local companies as well as brick-and-mortar retailers. Assuming NETS prices at the mid-point of its price range, it would trade at a price/sales multiple of 1.14x. This is slightly below the 1.52x average for specialty retailers.

Netshoes is growing revenue at a much faster pace than the average retailer. However, an investment in the stock comes with increased risk due to its exposure to conditions in Brazil, exchange rate risk, and with ecommerce in Latin America still in the development stage. In addition, the company has not yet generated profits.

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Conclusion: Consider Sitting This IPO Out

Netshoes has shown impressive revenue growth and is well positioned if the trend towards increased internet use and ecommerce shopping in Latin America continues.

However, the company has not yet generated a profit in its seventeen years of operating, and shows profit margins below the industry average. Uncertain economic and political conditions in Brazil add additional risk.

We suggest investors sit this IPO out.