Our target price of R$38.0 is DCF derived, in which we use a cost of equity (Ke) of 15.7%, which in turn is composed of a 4.4% risk-free rate in dollars, 3.0% country risk, 5.5% equity risk premium, 1.15 beta, and a 2.0% inflation differential between Brazil and the US. Nominal growth (g) was set at 4.7%.

We rate Azzas as High Risk mainly given the greater risk perception on the integration of Arezzo&Co and Grupo Soma. Other downside risks factors that could cause the shares to underperform our target price include: weaker than expected US operations; decreasing popularity of the brand product design; a slowing apparel/footwear cycle; potential inability to respond to changing fashion trends and/or consumer demand; sourcing problems; a slowdown in comparable store sales; and inventory obsolescence and/or expansion execution risk.

Upside risk factors that could cause the shares to outperform our target price include: an acceleration of comparable-store sales above our estimates; an upward revision in store growth; greater-than-expected full price selling; stronger-than-expected growth in sales productivity; and greater-than-expected operating margin leverage.