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Companhia Brasileira Up 38% in a Year: Can Momentum Sustain?

The Zacks Retail-Wholesale sector has depicted a marvelous bull run over the past year as evident from its surge of 33.4% compared with the S&P 500's gain of 22%. Notably, Companhia Brasileira de DistribuicaoCBD is a behemoth that has rallied 38.2% in a year's time, outpacing the sector's robust trend and performing nearly in line with the industry . On the contrary, this grocery retailer's industry peers Kroger KR and Carrefour SA CRRFY lost 14.6% and 9.6%, respectively, whereas Tesco TSCDY grew 15.5% in the same time frame.

Coming back to Companhia Brasileira, the company remains vulnerable to macroeconomic uncertainties in the Brazilian market and stiff competition in the industry wherein it operates. So, let's look at the factors that drove Companhia Brasileira despite these hurdles and see if it can sustain this trend in 2018 as well.

What's Driving Companhia Brasileira?

Companhia Brasileira has mainly been gaining from continued market share gains at its Assai and Multivarejo segments. Notably, Assai has been the company's major growth driver for a long time and remained the highlight of its third-quarter 2017 performance as well. In fact, it marked Assai's strongest quarter of combined volume and traffic growth in the recent times. The sturdy growth was driven by higher comps and contributions from new stores.

Despite major food deflation in some key categories, Assai's comps grew 7.7% on the back of improved customer traffic and sales volume. Further, this segment contributed about 43% to the company's total food sales and witnessed market share gains of 330 bps year over year. Meanwhile, management remains committed toward converting Extra Hiper stores into Assai stores to optimize its portfolio. This clearly reflects robust prospects from the segment.

Additionally, the company has been gaining from improved volumes of Pao de Acucar and consistent recovery at Extra Hiper that have been boosting its Multivarejo segment. Evidently, Multivarejo same-store sales inched up by 0.6% in the third quarter, backed by volume recovery at the Pao de Acucar banner. Consistent growth of Extra Hiper (which retained the best banner performance) and continued market share gains also drove the quarter's performance. Again, initiatives like My Discount program, Collect & Win promotional plan along with solidifying iconic products drove Pao de Acucar's results.

Together, these factors helped Companhia Brasileira's third-quarter sales increase 8.1% (adjusted for calendar effect). Also, adjusted EBITDA improved 11.4% with the EBITDA margin expanding 20 bps to 5%, fueled by improvements at both Multivarejo and Assai. For 2017 too, management envisions the Food segment EBITDA margin of approximately 5.5% backed by greater profitability at both the divisions.

Can Growth Sustain Amid Hurdles?

Companhia Brasileira remains prone to the volatile retail landscape, which is consumer-driven and very sensitive to the health of the economy as well as constantly evolving trends. Macroeconomic challenges such as high household debt and unemployment levels may restrain consumer spending and impact the company's business. Also, in the home appliances sector large multinational chains and other specialized Brazilian companies pose a threat to the company's market share.

Nonetheless, the company remains focused on enhancing its food business by making investments in Assai and Pao de Acucar that are yielding solid returns. All said, this Zacks Rank #3 (Hold) company anticipates continued market share gains at both its segments. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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