On Dec 19, we reaffirmed our Neutral recommendation on
Companhia Brasileira de Distribuicao
). While we are optimistic on the company's long-term growth
outlook, we remain on the sidelines due to the tough retail
environment and consistent margin pressure.
Why the Reiteration?
This Brazilian retailer is witnessing compression in margins
over the past few quarters. It is struggling hard to keep prices
down in the face of inflation in Brazil. In fact, economists in
Brazil forecast sluggish growth and higher inflation rate in
2014. The company is also focusing on store openings in new
states, which will pressurize margins. In addition, rapidly
rising food costs will more than offset the improving earnings of
cash and carry business.
A tough retail environment also poses a challenge for the
company. A slowdown in consumer spending has been affecting the
company's home appliances sector as it depends largely on the
disposable income of consumers. In the home appliances
sector, large multinational chains and other specialized
Brazilian companies pose significant competitive threat to the
company's secured market share.
However, Companhia Brasileira remains positive on its growth
outlook for the next three years. Despite currency headwinds and
inflation, the company expects its sales to grow faster than the
inflation rate. Moreover, the company plans to expand its stores
and market share by reducing costs in the face of a tough retail
Companhia Brasileira expects to open 400 new food stores by
2016, which includes 360 new convenience stores in its Mini
Mercado format. The company also has expansion plans for its
wholesaler, Assai, which has been posting solid results for the
last few quarters. The company is expected to open 12 to 15
stores per year through 2016 under the Assai banner, particularly
in the fast-growing Northeast region.
In addition, Companhia Brasileira plans to open 210 stores
during the next three years in the ViaVarejo unit, which includes
household appliances and e-commerce operations.
In order to maintain its market share and deliver robust
growth, the company expects to follow an aggressive price
strategy by running stores efficiently and maintaining its
operating profit margin by cutting expenses. The company also
expects to reduce selling, general & administrative costs to
17% of net revenue by 2016 from 19.2% in the third quarter of
During the third quarter of 2013, Companhia Brasileira focused
on reducing administrative costs in its supermarket unit and
streamline distribution of its home furnishing business, which
contributed to quarterly earnings growth.
Management intends to convert its savings into lower prices
for consumers to increase store traffic. With such a strategy,
the company's market share is expected to increase over the next
quarters. CBD holds a Zacks Rank #3 (Hold).
Better-ranked retail companies include
Harris Teeter Supermarkets Inc
Best Buy Inc
). While Kirkland's sports a Zacks Rank #1 (Strong Buy), Harris
Teeter and Best Buy carry a Zacks Rank #2 (Buy).
BEST BUY (BBY): Free Stock Analysis Report
COMPANHIA BRASL (CBD): Free Stock Analysis
HARRIS TEETER (HTSI): Free Stock Analysis
KIRKLANDS INC (KIRK): Free Stock Analysis
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