On Jun 1, 2015, Zacks Investment Research downgraded Companhia Brasileira de Distribuicao CBD to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Hold) after the company reported sluggish results in the first quarter of 2015 on May 7. Going by the Zacks model, companies holding a Zacks Rank #4 are likely to underperform in comparison to the broader market.
Sluggish First Quarter Results
Companhia Brasileirade Distribuicao reported a year-over-year decline in profit and sales in the first quarter of 2015, mainly due to a weak economic scenario in Brazil. CBD’s adjusted net income decreased 14.3% (in local currency) from the year-ago quarter, reflecting a rise in expenses and thereby margin contraction.
Consolidated net sales climbed 14.8% during the first quarter, driven by strong organic growth and new store openings. However, sales were worse than the preceding quarter’s growth of 16.2%. The company also posted sluggish same store sales growth, particularly at Viavarejo, due to store closures. Margins also declined in the quarter.
Gross margin declined 100 basis points on a year-over-year basis to 24%, mainly due to Cnova and Assaí mix effect. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) decreased significantly by 9.6%. Adjusted EBITDA margin declined 150 basis points to 5.5% in the first quarter. Adjusted EBITDA growth in the preceding quarter was 21.7%. (Read: Companhia Brasileira de Distribuicao Posts Weak Q1 Sales).
The retailer is witnessing margin compression over the past many quarters. It is struggling hard to keep prices down in the face of inflation in Brazil, which is hurting gross margin. Also, strong growth in the Assaí business (cash and carry business), though helping sales growth, is negatively impacting margins as this business is characterized by low prices.
Moreover, the company is focusing on store openings in new states, which result in higher pre-opening costs. In addition, higher investments to increase competitiveness in the Food Retail segment and intense promotional activities, especially at Nova Pontocom are also adversely impacting operating 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.
Companhia Brasileira de Distribuicao has a Zacks Rank #4 (Sell).
Stocks to Consider
Better-ranked stocks in the industry include Gordmans Stores, Inc. GMAN, Ingles Market, Inc. IMKTA and Etablissements Delhaize Frères et Cie "Le Lion" (Groupe Delhaize) SA DEG. While Gordmans Stores sports a Zacks Rank #1 (Strong Buy), Groupe Delhaize and Ingles Market carry a Zacks Rank #2 (Buy).
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