Shares of Companhia Brasileira de Distribuicao (CBD) dropped to a 52-week low of $33.62 on Jan 20 after the company reported sluggish comparable store sales for the fourth quarter 2014 on Jan 13. In fact, share price of this Brazilian retailer has been losing momentum since then and eventually closed at $33.85 on Jan 20.
Sluggish Fourth Quarter Comps
On Jan 13, CBD reported sluggish comparable store sales in its food and non-food categories in the fourth quarter of 2014, despite increased sales and profits, given tough macroeconomic conditions.
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 growth of 1%, weaker than 2.3% growth reported in the third quarter of 2014.
Non-Food Business: The Non-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%.
The non-food businesses posted sales growth of 29% in the fourth quarter, better than last quarter’s 17% growth, aided by the promotional campaigns such as Black Friday. Comp sales growth was however weaker in the fourth quarter of 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 preceding quarter’s growth of just 0.2%.
Overall too, the retailer is witnessing margin compression over the past few quarters despite 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.
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).
Some better-ranked retailers worth considering in the industry include Ingles Market, Inc. (IMKTA), J. C. Penney Company, Inc. (JCP) and The Kroger Co. (KR). 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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