After a sluggish first half of 2015, Brazilian retail giant Companhia Brasileira de Distribuicao CBD or Grupo Pao de Acucar posted unimpressive third quarter 2015 results, mainly due to a weak economic scenario in Brazil.
In the third quarter of 2015, CBD’s adjusted net income declined 87.7% (in local currency). The year-over-year decline in profits reflects a rise in expenses and thereby margin contraction. The company incurred higher expenses related to organic expansion, with the opening of 210 new stores in the last 12 months. A difficult macro-economic environment in Brazil also led to the soft results. In the preceding quarter, the company had posted a decline of 89.4%. Adjusted net margin increased only 0.3% (in local currency), down 220 basis points from the year-ago quarter.
Results in Detail
In the third quarter of 2015, consolidated gross sales grew 2.9% year over year (in local currency). However, it compared unfavorably with growth of 6% and 15.4% in the second and first quarter, respectively.
CBD’s net sales increased just 2.6% in the third quarter, which compared unfavorably with sales growth of 6% in the second quarter. The sluggish sales growth was due to a 2.7% decline in comparable store sales.Also, a weak macroeconomic environment in Brazil restricted consumer spending, which hurt sales in the third quarter. While the food segment (Via Varejo +Cnova) had better resilience and grew 7.3% in the quarter, the non-food segment was affected more intensely and as a result, its sales declined 2.5%.
Nevertheless, Pao de Acucar opened 23 new stores in the third quarter, of which 18 were in the Food segment (7 Minimercado Extra, 6 Minuto Pao de Acucar, 4 Pao de Acucar and 1 Assai) and 5 were Casas Bahia stores.
Gross profit declined 6.4% in the quarter, more than a decline of 2.4% in the preceding quarter. Gross margin declined 230 basis points (bps) to 23.4% due to lower contribution of Viavarejo in gross profit.
Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) decreased significantly by 42.9%. Adjusted EBITDA margin declined 340 bps to 4.2% in the third quarter. Adjusted EBITDA declined 35.1% in the preceding quarter.
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 two large categories, namely Food Business (Multivarejo and Assai) and Non-Food Business (Viavarejo and Cnova).
The Food Business comprises supermarkets, hypermarkets, neighborhood stores, cash-and-carry stores, gas stations and drugstores while the non-food business includes the e-commerce business segments and 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 7.3% in the quarter, driven by solid performance by Assai and improved performance of renovated Extra stores. Further, sales growth was better than the preceding quarter’s growth of 6.4%.
Same store sales grew 3.3%, compared with 1.8% in the preceding quarter. The company opened 124 new stores in the last 12 months, which included 100 Proximity stores (71 Minimercado Extra and 29 Minuto Pao de Acucar), 11 Pao de Acucar, 8 Assai, 4 Extra Supermercado stores and 1 drugstore. CBD also renovated 52 Extra stores (24 supermarkets and 28 hypermarkets) in the quarter. Additionally, it plans to renovate 60 Extra stores and open 10 to 12 new Assai stores by the end of 2015.
Non-Food Business
Net sales of the Non-Food Business declined 2.5% in the quarter. However, it was weaker than preceding quarter’s growth of 5.3%, due to unfavorable economic environment mainly affecting the Viavarejo segment.
Cnova: Category net sales surged 48% on the back of same store sales growth of 23.4%. Sales growth in the preceding quarter was 122%.
Viavarejo: Viavarejo’s net sales declined 22.7% in the quarter due to same-store sales decline of 24.6%. The net sales decline was wider than the preceding quarter’s decline of 21.7%. The main reason for the decline was a decline in consumption. During the quarter, 5 new Casas Bahia stores were opened.
Companhia Brasileira de Distribuicao has a Zacks Rank #4 (Sell).
Stocks to Consider
Better-ranked stocks in the retail sector include Target Corp. TGT, Roundy’s, Inc. RNDY and The Kroger Co. KR. All of them carry a Zacks Rank #2 (Buy).
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