We reaffirm our Neutral recommendation on
Companhia Brasileira de Distribuicao
) following the appraisal of its third quarter 2012 results. The
company posted robust year-over-year earnings and revenue growth
despite currency translation headwinds and tough employment
conditions, particularly in Europe.
Why the Reiteration?
Companhia Brasileira's third quarter earnings of 69 cents shot
up 122.6% year over year, reflecting continuing operational
improvements in the two business segments, namely GPA Food and
Consolidated gross sales, comprising GPA Food and Viavarejo,
increased 8.7% (in local currency), driven by same store sales
growth owing to improved product mix and addition of new stores.
Consolidated net sales climbed 9.7% during the quarter.
Where gross margin contracted 140 basis points to 26.4%,
pressured by increased logistics costs in the electronic segment;
EBITDA margin expanded 10 basis points year on year to 6.6%,
driven by operational improvement at GPA Food.
Overall, we are optimistic about the company's position in the
retail sector. Companhia Brasileira is a leading player in the
global food retail sector based on both gross sales and number of
stores in 2011, with market share of approximately 23.5% in the
Brazilian food retail sector. In addition, Companhia Brasileira
is the second biggest retail company in Latin America in terms of
2011 revenue and the second largest online retailer in
The company has also strengthened its portfolio with
acquisitions. It has acquired many supermarket chains since 1981
in order to increase its market share. To further expand its
supermarket business, the company has planned to open 100 new
Minimercado Extra Stores in 2013 with an investment of $860
million. We expect the company to enhance its portfolio with more
store openings in the long term.
Further, the company has expanded its e-commerce business with
the acquisition of Nova Casa Bahia and by concentrating all
e-commerce assets of the Pão de Açúcar Group and Casa Bahia
Comercial Ltda. into Nova Pontocom. The acquisition of E-Hub, a
service company in the e-commerce segment, further enhanced the
company's e-commerce business.
However, the retail sector has experienced economic slowdown
in 2012 that has led to a decline in consumer spending. The
continued weakness in consumer expenditure may impact the
company's home appliances sector. Currency translation headwinds
and tough employment conditions, particularly in Europe also
remain a threat.
The company faces intense competition from its rivals, such as
Carrefour SA as well as from local and regional players in the
respective countries. In addition, the sour relationship between
the holding groups of the company will remain a significant
Other stocks in the discount, variety store sectors that are
presently doing favorable business include
Wal-Mart Stores, Inc.
). Both these companies carry a Zacks Rank #3 (Hold).
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