Brazilian Shoemaker Arezzo&Co Eyes US Retail Expansion

SÃO PAULO, Brazil — A free endorsement by Lady Gaga is a pretty good way to start a foray into the US market, even if the retail landscape there looks like it might turn into a bit of a wasteland.

The singer and fashion icon posted pictures of herself Saturday night on Instagram posing in Dallas in a pair of Schutz leather heels — which some Italians in the business say are as good as anything made there. Facing a fashion emergency thanks to Gaga’s almost 27 million followers, Brazil’s Arezzo Industria e Comercio SA, which owns the Schutz brand, quickly stocked a plane to the states filled with heels to answer an expected boom in demand.

"We'll send what's needed," Arezzo&Co chief financial officer Daniel Levy said in an interview at Bloomberg's São Paulo office. He also cited Kate Middleton and Gigi Hadid as Schutz aficionados. "We don't pay celebrities to wear our shoes." A post like Lady Gaga's, he said, "that's worth $100,000."

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The timing couldn't be better for Arezzo&Co, which has a staff of 25 in New York and is poised to open its first two non-flagship Schutz stores, likely on the East Coast, in 2018. It's a bold move when other retailers are closing stores by the dozen — Michael Kors may close up to 125 — and rivals like Kate Spade are being gobbled up. And this year's forecast for US retail sales was lowered by the National Retail Federation amid Census Bureau revisions to personal income and consumption.

But Schutz is convinced it’s the right time and place to make a move.

"We’re financially solid, almost without comparison. We’re a strong cash generator and we have an extremely efficient structure of working capital," Levy said.

We're financially solid, almost without comparison. We're a strong cash generator and we have an extremely efficient structure of working capital.

The Schutz brand is already sold at Nordstrom's, and flagship stores are open in Beverly Hills and New York. Next year, Arezzo&Co will open at least two stores on the East Coast, possibly at New Jersey's Short Hills Mall and Florida's Aventura Mall. If those perform well, Arezzo will push harder in 2019. Levy described the brand as better than Steven Madden, and cheaper than Stuart Weitzman.

"We found a rare white space in the US that’s a good opportunity for Schutz," Levy said. "It’s hard to find the quality at the price — $150 to $200 — that Schutz offers. Our proposal isn’t to go to the US and buy victory. We do things very carefully."

Schutz has been selling in the US for five years, but initial department store contracts put the company at a disadvantage. It was forced to swallow markdowns and had little control. Last year, it negotiated a new deal with Nordstrom — giving Arezzo&Co more control of the floor space — and reached 20 locations by the end of the last month, more than a year ahead of schedule.

"We are doing this very carefully," Levy said. "We’ve never discontinued a brand, and we’ve never not had the success we’ve expected."

This is the first year of a five-year plan. Stand-alone stores in Europe, Latin America and the Middle East are also in the works, and Schutz is opening an office and showroom in Milan.

"This investment in the US is positive," Guilherme Bauer, senior equity analyst at FAMA Investimentos, said by telephone. "We see space there, although it won’t be easy and it’s competitive. We do think they’re doing it right."

Arezzo&Co has rallied 98 percent so far this year, about four times the Ibovespa’s 23 percent advance. It’s trading at a 2018 price to earnings ratio of 26 times, compared to fashion retailers Lojas Renner SA at 25 times and Guararapes Confececcoes SA at 18 times.

The shares have three buys, eight holds and one sell rating, according to data compiled by Bloomberg. Two months ago, the company had six buys, five holds and one sell. Itau BBA analysts led by Ruben Couto downgraded Arezzo&Co to neutral from buy on October 31, urging investors to take profits and seek better investment opportunities elsewhere.

"We acknowledge that Arezzo might continue to trade above its intrinsic value, given its strong fundamentals and the gradual improvement in the outlook for Brazil, which coupled with no negative catalysts in sight prevents us from attributing an underperform rating to the name," the Itau analysts said.

Levy doesn’t deny the high cost of the shares.

"The stock’s expensive if you think about how much it advanced this year," Levy said. "But our portfolio lays out a path of enormous growth."

By Christiana Sciaudone and Paula Sambo, with assistance from Janet Freund; editors: Sebastian Silva, Arie Shapira and Christiana Sciaudone.

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