Companhia Brasileira de Distribuicao (CBD) also known as Grupo Pão de Açúcar (GPA) has been expanding its stores and market share and cutting down on costs in the face of a tough retail environment. Despite increased sales and profits, the company’s comparable store sales continued to remain sluggish. Last week, this Brazilian retailer reported fourth-quarter and full-year 2014 sales results, which were benefited by the expansion of stores. Comps, however, remained weak.
CBD’s net sales increased 16.2% owing to comparable store sales growth of 4.3% in the fourth quarter. Pão de Açúcar opened 117 new stores in the fourth quarter, which fueled sales growth. The results also improved from the preceding quarter’s sales growth of 10.9% and same store sales of 3%.
Full-Year Sales Results
In 2014, CBD reported net sales growth of 13.3%, owing to comparable store sales growth of 5.9%. Pão de Açúcar opened 212 new stores in 2014, 84 more stores than 2013, thus fueling sales growth. Food Business’ net sales increased 9.2% in the quarter, while non-food businesses posted sales growth of 18.4%.
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.
Food Business: The Food Business comprises supermarkets, hypermarkets, neighborhood stores, cash-and-carry stores, gas stations and drugstores. Food Business’ net sales increased 5.8% in the quarter. However, it was weaker than the preceding quarter’s growth of 6.2%. Comp sales growth in the fourth quarter of 2014 was also weaker than the preceding quarter. In the food business category, CBD reported comp sales of 1%, weaker than 2.3% growth reported in the third quarter of 2014.
Non-Food Business: TheNon-Food business segment comprises Via Varejo and Cnova. While Viavarejo includes household appliances, the e-commerce segment, Cnova, is indirectly owned by CBD, Via Varejo and certain founding shareholders of Nova Pontocom, which hold participation of 53.5%.
Non-Food businesses posted sales growth of 29% in the fourth quarter, much better than last quarter’s 17% growth. The promotional campaigns such as Black Friday benefited the quarter.
Comp sales growth was however weaker in the fourth quarter 2014. Cnova posted comps growth of 21.6%, lower than the preceding quarter’s growth of 22.8%. However, comps at Via Varejo increased 1.5%, much better than the preceding quarter’s growth of just 0.2%.
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, focus 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.
Companhia Brasileira de Distribuicao currently has a Zacks Rank #3 (Hold).
Stocks to Consider
Some better-ranked stocks worth considering in the retail sector include Ingles Market Inc (IMKTA), The Kroger Co. (KR) and J. C. Penney Company, Inc. (JCP). While Ingles Market sports a Zacks Rank #1 (Strong Buy), Kroger and J.C. Penny hold a Zacks Rank #2 (Buy).
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