Advertisement

Companhia Brasileira de Distribuicao's Q3 Sales Sluggish

Brazilian retail giant Companhia Brasileira de Distribuicao (CBD) or Grupo Pão de Açúcar (:GPA) reported year-over-year growth in profit and sales in the third quarter of 2014. However, growth was much weaker than the preceding quarter due to tough macroeconomic conditions.

In the third quarter, CBD delivered profits of R$390 million (*$172 million), which increased 9.3% (in local currency) from the year-ago quarter. The year-over-year increase in profits reflects higher profitability at Assaí, Multivarejo and Via Varejo. However, in the preceding quarter, net income had increased 26.3%.

Results in Detail

In the third quarter of 2014, consolidated gross sales, comprising the Food Business (Multivarejo and Assaí), Nova Pontocom and Viavarejo, increased 10.2% year over year (in local currency) to R$17.356 billion ($7.67 billion), driven by improved performance of the Food businesses and Cnovo.

Consolidated net sales climbed 10.9% during the third quarter, driven by new store openings and positive same-store sales growth. Sales were however weaker than the preceding quarter’s 13.8% growth due to a tough macroeconomic scenario, which mainly affected the performance of non-food categories.

Organic growth was mainly seen in the Assaí, Pão de Açúcar and convenience stores formats.

The company posted net same store sales growth of 3% in the reported quarter, driven by same store sales growth of 0.6% in Food Business, 0.2% in Viavarejo and 22.8% in Cnova. The company opened 50 new stores in the quarter, which fueled growth. However, net same store sales growth was lower 9.5% growth in the preceding quarter.

Gross profit increased 9.2% in the quarter. However, gross margin contracted 50 basis points from the prior-year quarter to 25.7%, owing to greater contributions from Assaí and Cnova in the sales mix, which have lower margins. The lower margins were also due to the company’s aggressive pricing policy. Gross profit growth rate in the preceding quarter was 11.8%.

Adjusted earnings before interest, tax, depreciation and amortization (:EBITDA) increased 12.7%. Adjusted EBITDA margin increased 10 basis points to 7.6% in the third quarter of 2014, driven by higher efficiency in all its business segments. However, adjusted EBITDA growth was much weaker than the preceding quarter’s growth of 21.1%.

Category Details

The company operates through the food retail, cash and carry, electronics and home appliances retail (bricks and mortar), and e-commerce business segments. These segments are grouped into three large categories, namely Food Business, Viavarejo and Cnova.

The Food Business comprises supermarkets, hypermarkets, neighborhood stores, cash-and-carry stores, gas stations and drugstores while Viavarejo includes household appliances.

The e-commerce segment, Cnova, was formed after the completion of the corporate reorganization in July by combining the operations of Cnova Brasil and Cdiscount in France, including its specialized websites and international websites. Cnova is indirectly owned by CBD, Via Varejo and certain founding shareholders of Nova Pontocom, which hold participation of 53.5%.

Food Business: Food Business’ net sales increased 6.2% in the quarter, with store expansions and same store sales growth of 2.3%, which benefitted from meat, poultry and beverage categories. The company opened 35 new stores in the period, of which 33 were convenience stores (33 Minimercado Extra and 2 Minuto Pão de Açúcar) and 2 were Assaí stores. However, sales growth in the quarter was weaker than 14.5% growth in the preceding quarter.

Sales in this category were driven by continued solid performance at Assaí, which posted sales growth of 31.2% year over year, driven by solid same-store sales growth and expansion in the store network. At Multivarejo, Pão de Açúcar and Minimercado Extra banners continued to capture market share in the reported quarter.

Cnova: The category’s net sales surged 96.9% on the back of higher business volume and same store sales growth of 22.9%.

Viavarejo: Viavarejo’s net sales increased only 0.7% in the quarter, driven by same-store sales of just 0.2%. Sales growth in the quarter was weaker than 8% growth in the preceding quarter.

During the quarter, the company had to close 32 stores to comply with Brazil’s antitrust authority which negatively impacted the quarterly performance. Sales were also impacted by shorter business hours at stores during the World Cup in July. However, sales recovered in August and improved in September, led by higher sales in smartphone and white line categories. The company opened 15 new stores in the quarter, of which 11 were under the Casas Bahia banner and 4 under the Ponto Frio banner.

Our Take

Despite increased sales and profits owing to new store openings and tighter cost discipline, the company’s aggressive pricing strategy has proven to be a drag on gross margins. The aggressive pricing strategy, taken up by the company since May 2013, focuses on lowering selling prices. This has helped it to win customers but at the cost of its gross margins.

In fact, the retailer is witnessing margin compression over the past few quarters. It is struggling hard to keep input costs down in the face of inflation in Brazil, which is hurting gross margins. Also, strong growth in the Assaí business (cash and carry business), though helping the top line, is negatively impacting margins as this business is characterized by lower prices.

Moreover, the company is focusing on store openings in new states, which results in higher pre-opening costs. In addition, higher investments to increase competitiveness in the Food Retail segment and intense promotional activities, especially at the e-commerce segment are also adversely impacting operating margins.

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.

However, the company is optimistic over the long term and expects to open 400 new food stores by 2016. The company also has expansion plans for its wholesaler, Assai, which has been posting solid results in the last few quarters. Companhia Brasileira de Distribuicao currently sports a Zacks Rank #1 (Strong Buy).

Other Stocks to Consider

Other retailers worth considering in the industry include Safeway Inc. (SWY), The Kroger Co. (KR) and Roundy's, Inc. (RNDY). While Safeway sports a Zacks Rank #1, Kroger and Roundy’s carry a Zacks Rank #2 (Buy).

*1R$=$0.44172 for the quarter ending Sep 30, 2014

Read the Full Research Report on KR
Read the Full Research Report on SWY
Read the Full Research Report on CBD
Read the Full Research Report on RNDY


Zacks Investment Research