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Shipping changes boost revenue but hit profitability

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Shares fall some 4% in post-market trading

(Adds shares move in paragraph 3, analysts comments in

paragraph 11, remark from earnings call in paragraph 12 and

earnings detail in paragraph 13)

By Andre Romani

SAO PAULO, Aug 4 (Reuters) - Latin American e-commerce

giant MercadoLibre ( MELI ) on Monday missed analysts' estimates

for second-quarter net profit and core earnings, as increased

free shipping in Brazil drove sales up but also hit margins.

MercadoLibre ( MELI ), Latin America's largest company by market

value, reported net income of $523 million for the quarter

through the end of June, down 1.5% year-on-year and below the

$596 million expected by analysts in an LSEG poll.

Shares in MercadoLibre ( MELI ), which operates an online marketplace

and the fintech Mercado Pago, fell some 4% after the bell. The

firm, based in Uruguay, sells products in around 20 Latin

American countries.

Net revenue of $6.8 billion was up 34% year-on-year, beating

the estimate of $6.7 billion, with sales measured by gross

merchandise value rising 37% on a forex-neutral basis.

In early June, MercadoLibre ( MELI ) cut the threshold for purchases

eligible for free shipping in Brazil, after also lowering

shipping costs for companies and users selling on its platform

in May, amid fierce competition in the country's e-commerce

segment.

Brazil, the firm's main market, together with Mexico helped

MercadoLibre ( MELI ) to increase total items sold by 31% in the quarter,

the fastest pace year-on-year since mid-2021.

However, that also hurt margins, said Chief Financial

Officer Martin de los Santos.

"We don't want to miss the growth opportunities ahead of

us," he said in an interview. "That might generate some

short-term margin pressure, but we are very optimistic about the

long-term trajectory of our profitability."

Earnings before interest and taxes (EBIT) reached a record

high of $825 million, but also missed the $869 million forecast.

The EBIT margin stood at 12.2%, down from 14.3% a year earlier.

The CFO said that among the main impacts on margins were

investments in free shipping and related marketing, and growth

in its so-called 1P business, which sells directly to customers.

"We expect a negative reaction given the earnings miss,

however, we do not expect sustained underperformance as downward

revisions should be limited," Santander analysts, including

Ruben Couto, wrote in a note to clients.

Asked if similar free-shipping policies could take place in

other countries, MercadoLibre ( MELI ) commerce head Ariel Szarfsztejn,

who is set to become chief executive next year, told an

analysts' call that the firm "will evaluate, and we will decide

eventually which policies we want to bring where."

In its earnings report, MercadoLibre ( MELI ) also said deeper

currency-related losses, mainly due to Argentina's peso, and a

higher tax rate hit its net profit in the quarter.

The firm's fintech arm grew its credit portfolio by 91% to

$9.3 billion, while the 15-to-90-day default ratio fell 1.5

percentage point to 6.7%, the lowest since it started to release

the figure seven years ago, the CFO said.