By Brazil Stock Guide — After closing 298 stores and filing for court-supervised restructuring to reorganize R$17.3 billion in debt, Grupo Casas Bahia (B3: BHIA3) is preparing for the second stage of its turnaround. CEO Renato Franklin’s message is straightforward: the company that emerges from the crisis is expected to be smaller, with a sharper focus on generating higher returns.
“Our strategy from here is to operate a smaller, more selective company focused on businesses capable of generating returns and cash,” Franklin said in a statement. According to the CEO, that means preserving the operations with the strongest economics, aligning costs and investments with the company’s new scale, improving inventory turnover and reducing the amount of capital tied up in the business.
The so-called Phase 2 of the Transformation Plan comes after one of the most significant reductions in Casas Bahia’s physical footprint in recent years. The 298 stores that were shut represented roughly 29% of Grupo Casas Bahia’s store network, which had slightly more than 1,000 locations before the downsizing. The figure includes the group’s different banners, including Casas Bahia and Ponto Frio, rather than Casas Bahia-branded stores alone.
In its restructuring filing, the group said that following the closures, the Casas Bahia banner still operates more than 700 physical stores, while Ponto Frio has more than 65 locations.
Franklin, however, makes clear that Phase 2 is not about quickly rebuilding the scale that was lost. Volume is no longer the overriding priority. Stores, sales channels and product categories will increasingly have to justify the capital allocated to them through margins, cash generation and returns on invested capital.
The same logic applies to e-commerce. The company plans to review its digital channels and says margins, cash generation and returns will take precedence over volume growth that fails to produce adequate economic returns. Casas Bahia currently has commercial agreements with Amazon and Mercado Livre.
That marks an important shift for a retailer whose turnaround had partly been associated with expanding digital sales and regaining market share. In the new phase, selling more is no longer enough. The question becomes how much capital each sale requires — and how much value that capital ultimately generates.
In practical terms, the strategy leaves the door open to further store closures. Casas Bahia has not announced a new target beyond the 298 locations already shut, but the framework outlined by management means additional stores could come under review if they fail to meet the company’s new profitability and cash-generation thresholds.
Investors had already been focusing more on Casas Bahia’s ability to generate cash, control leverage and build a sustainable operating model than on top-line growth. Reports from XP and BTG Pactual ahead of the company’s second-quarter results had placed those variables at the center of the investment case.
The court-supervised restructuring raises the pressure for that process to move faster. The group entered proceedings with R$17.3 billion in debt after failing to secure the fresh funding contemplated in its financial plan. According to Franklin, the company had sought either an equity injection or new credit lines, but a deterioration in global conditions and greater investor risk aversion derailed those discussions.
The proceeding covers 10 companies within the group, including operations tied to the Casas Bahia and Ponto Frio brands, Extra.com and Bartira. Of the R$17.3 billion declared, about R$16.4 billion consists of unsecured claims, alongside roughly R$754 million in labor-related claims and R$154 million owed to small and micro-sized businesses.
The contrast with some of the company’s operating metrics helps explain the nature of the crisis. In the second quarter, Casas Bahia said financial leverage fell to 0.5 times adjusted EBITDA, from 2.2 times a year earlier, while free cash flow reached approximately R$800 million.
Even so, the improvement in those indicators was not enough to solve the company’s funding problem. Without access to the fresh capital envisioned under its plan, Casas Bahia turned to court protection to restructure its liabilities and create room to continue shrinking its cost and capital base.
The issue, in other words, is no longer simply how much Casas Bahia owes. It is also how much capital the company needs to keep operating.
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