Brazil’s Azzas reports 35.8% drop in Q4 profit amid merger challenges

Azzas, one of the largest fashion groups in Brazil and Latin America, reported a net profit of R$168.9 million (approximately $28 million) for the fourth quarter of 2024, marking a 35.8% decline from the previous year.

According to a report from local media outlet E Investidor, Azzas’ stock price dropped 7.38% to R$24.48 by 10:30 a.m. (local time) as markets reacted swiftly to the disappointing results.

Analysts have labelled the company’s performance as “cloudy,” owing to decreased margins caused by the ongoing merger of Arezzo and Soma.

Weakened margin and profitability

Financial experts at XP Investimentos emphasized to E Investidor, that while Azzas’ balance sheet remained sound, profitability was the primary concern.

The recurring gross margin decreased by 0.6 percentage points, which is attributable to a complicated interplay of circumstances.

Analysts noted that a favourable channel mix was offset by inventory adjustments in the “Reserva” clothing brand and increased discounts on discontinued items.

Furthermore, the recurring adjusted EBITDA margin decreased by 1.2 percentage points between Q4 2024 and Q4 2023.

This drop was heavily driven by post-merger changes, such as double operational costs associated with Reserva, increased travel expenses, and greater investments in branding and creative teams for the Farm and NV brands.

According to E Investidor, analysts Danniela Eiger, Gustavo Senday, and Laryssa Sumer focused on these aspects in their analysis, emphasizing the unfavorable consequences for Azzas’ overall performance.

Management plans to prioritize projects with higher internal returns while maximizing cash generation.

“Our main strategic priority for 2025 will be to improve operational efficiency and optimize capital allocation,” the company stated.

Sales performance

Full-year sales reached R$8.38 billion ($1.397 billion), marking a 72.9% increase from 2023, while annual net income declined to R$341.73 million ($57 million) from R$399.4 million ($67 million).

The company accelerated its consolidated growth rate to 15.1% in the fourth quarter, up from 12.1% in the previous quarter.

Three of its four business units posted growth above 17.0% during the quarter, underscoring the strength of its diversified portfolio.

For Azzas, however, the move to merge with Soma has become a double-edged sword.

According to analysts from Banco Safra, the merger cost the company R$565 million and increased the tax burden, generating a negative accounting EBITDA of R$46 million.

The quarter was described as difficult for Azzas, mainly due to challenges to recurring profitability driven by inventory destabilization and merger-driven deep accounting EBITDA losses.

Analysts Vitor Pini, Renan Sartorio and Tales Granello highlighted that, although several business units have been observing a healthy double-digit growth, such growth is associated with ever-increasing expenses with sales campaigns, putting pressure on the financial metrics.

What’s ahead for Azzas?

Ativa Investimentos in their own analysis recognized that Azzas’ financials had some positives but the integration complexities of the Arezzo and Soma (now Azzas) merger have proved to be very tough.

Analysts are still cautiously optimistic about 2025, and they even say new strategic projects might start producing positive results and steer the ship away from the financial wreckage.

Now that Azzas is working through the consequences of its merger and attempting to consolidate assets, all eyes will be on the company to see whether it can recover and achieve profitability again over the next few quarters.

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