We maintained a Neutral rating on Companhia Brasileira de Distribuicao (CBD) following appraisal of the first quarter 2012 results.
CBD reported first quarter 2012 net income of R$167 million ($94.6 million), which climbed 25.8% on a year over year. The increase reflected the continuing operational improvements in the two business segments GPA Food and Viavarejo. Net margin expanded 20 basis points to 1.4% in the quarter. Earnings in the first quarter of 2012 were R$0.64 per share (36 cents), up 24.4%. However, the first quarter 2012 earnings of 36 cents lagged the Zacks Consensus Estimate of 41 cents. In the first quarter of 2012, consolidated net sales climbed by 11.8%.
We are optimistic about the company’s position in the retail sector. CBD is a leading player in the global food retail sector based on both gross sales and number of stores, with market share of approximately 23.5% of the Brazilian food retail sector. As of December 31, 2011, CBD generated total gross sales of R$52.7 billion ($31.64 billion). On the same date, the company operated 1,571 stores, 78 gas stations and 154 drugstores in 19 Brazilian states and the Federal District, in addition to a logistics infrastructure supported by 52 distribution centers located in 14 Brazilian states.
The company has also strengthened its portfolio with acquisitions. It has acquired many super market chains since 1981 in order to increase its market share. The acquisitions include Coopercitrus, Lourenção, Barateiro, Peralta, Paes Mendonça, ABC Supermercados, Sé Supermercados, Sendas, São Luiz, Nagumo and Rosado. The acquisition of Assaí chain stores (2009) helped the company enter into cash-and-carry operations. The company forayed into the home appliances retail sector with the acquisition of Viavarejo (2009) and Nova Casa Bahia (2010) and became the largest home appliance retailer in Brazil. Since 2009, the company has acquired 983 stores in the home appliances retail sector, and spent an aggregate of R$1.6 billion Brazilian reals in cash on acquisitions from 2009 through 2011. We expect that the company will enhance its portfolio with more acquisitions in the long term.
Further, the company has expanded its e-commerce business with the acquisition of Nova Casa Bahia, and by concentrating all e-commerce assets of the Pão de Açúcar Group and Casa Bahia Comercial Ltda. into Nova Pontocom. The acquisition of E-Hub, a service company in the e-commerce segment, further enhanced company’s e-commerce business.
However, the retail sector has been experiencing economic slowdown that has led to declines in consumer expenditures. The continued weakness may impact the success of operations in the home appliances retail sector as it depends a lot on disposable income of consumers. Further the company faces intense competition from its rivals, such as Wal-Mart Stores, Inc. (WMT) and Carrefour SA as well as from local and regional players in the respective countries. In addition, the sour relationship between the holding groups of the company will remain a significant overhang.
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