Lavoro to close 70 stores in Brazil amid sales decline

Brazilian input distributor Lavoro announced the closure of 70 out of the 183 stores it operated at the end of September last year. 

According to Ruy Cunha, CEO of Lavoro, the primary goal of this measure is to reduce fixed costs and eliminate overlaps that remain after a cycle of acquisitions.

Lavoro's downsizing is a result of credit difficulties with suppliers and banks. Facing purchasing challenges, the country's largest retail network was unable to replenish stocks at the end of 2024, a critical period for Brazil's soybean harvest.

Cunha stated that "liquidity problems escalated significantly at the end of last year. Cash purchases, which accounted for 25% to 30% of the total, dropped to low single digits, increasing the need for working capital."

"Additionally, the judicial recovery of a major input retailer caused an abrupt halt in inventory financing," added the Lavoro CEO during a teleconference. He was referring to Agrogalaxy, another giant in Brazil's input distribution sector, which entered judicial recovery in September 2024.

Anderson Nacaxe, a financial consultant at Oken Finance, explained that the financing collapse that broke AgroGalaxy now challenges Lavoro: "The strategy that seemed promising a few years ago was based on raising funds in the financial market at lower interest rates than those offered by the input industry. The idea was simple: buy inputs in cash—taking advantage of lower funding rates—and extend credit to producers with more attractive conditions, expanding operating margins. However, this model proved vulnerable in the face of a drastic change in the financial landscape."

What went wrong? "AgroGalaxy, which adopted this strategy to finance farmers, faced a scenario reversal. When international interest rates began to rise, and the spread between funding costs and industry rates widened, the financial, competitive advantage disappeared," Nacaxe explained.

Additionally, the expert recalled that input prices rose, and inventories purchased in cash became much higher than expected, making it unviable to offer attractive credit conditions to producers. 

"As a result, adjusted net losses soared—reaching around R$1.6 billion in the third quarter of 2024—culminating in its judicial recovery and the decision to sell a debt portfolio of approximately R$760 million to strengthen its capital structure," he added.

"Similarly, though more conservatively, Lavoro bet on raising funds at low interest rates to purchase inputs in cash from the industry while maintaining lower leverage, thus financing partly with industry capital and partly with market funds. However, with the decline in commodity prices, exchange rate volatility, and rising interest rates, the expected margin for extending credit shrank considerably. In Q1 2025, Lavoro reported a 13% drop in consolidated revenue (R$2.05 billion) and a significant increase in net losses—from R$71 million to R$267 million—despite a 10% growth in gross profit," according to the financial analyst.

According to him, this deterioration was driven by high financial costs and the inability to adjust operations to the new market scenario. This led the company to announce the closure of 70 stores and revise its projections for FY2025. It now expects consolidated revenue between R$6.50 and R$7.50 billion, with no growth in adjusted EBITDA. 

"The model simply could not withstand the tightening of credit conditions and the drop in input prices," he pointed out.

"Without the flexibility to adjust costs—inherent to cash purchases—these companies became 'trapped' in a mechanism that proved unsustainable. The AgroGalaxy experience and the challenges faced by Lavoro made it clear that to innovate in agricultural financing, it was essential to rethink the strategy, diversify funding sources, and incorporate adjustment mechanisms that could absorb global and local market fluctuations," Nacaxe said in conclusion.

(Editing by Leonardo Gottems, reporter for AgroPages)