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Can Assai Help Companhia Brasileira Tread the Growth Path?

Zacks Equity Research
Updated

Things are not looking up for Companhia Brasileira de Distribuicao CBD, which was in the green territory for quite some time. Unfortunately, this Zacks Rank #5 (Strong Sell) stock has tumbled about 10.9% in the past six months, as against the industry’s surge of 19.6%. We note that Companhia Brasileira has been battling a tough retail environment at Brazil, where food deflation, persistently high unemployment level along with sluggish consumer spending have been playing spoilsport.




 

These factors weighed on the company’s fourth-quarter 2017 performance, following which its shares lost close to 6%. However, Assai — which remains its major growth driver — continued to yield sturdy results, helping the company tread on growth trajectory. So, let’s delve deeper into what went wrong in the fourth quarter and if the company’s growth drivers can help it come out of the woods.

Food Deflation — A Major Hurdle

Acute food deflation along with a tough retail environment remained hurdles for Companhia Brasileira in fourth-quarter 2017. During the quarter, net income declined 18.4% year over year. Results were largely hit by a 150-basis points (bps) contraction in EBITDA margin, owing to soft EBITDA margins at both Assai and Multivarejo — largely stemming from acute food price deflation.

In Multivarejo, adjusted EBITDA margin shrank 190 bps to 4.7% on account of food deflation on sales, inflated costs, expenses associated with renovations at Pao de Acucar and some costs related to the fire at the Osasco DC. In fact, increased deflation in food-at-home categories also marred comps at this segment, which slipped 0.6%. At Assai, EBITDA margin came in at 5.3%, down 50 bps year over year. This was a result of deflationary pressure along with costs related to store openings and conversions. Unfortunately, food deflation is expected to persist in 2018, which remains a threat to the EBITDA margin.

Overall, a tough economic environment in the retail space has been raising concern for the company. The retail industry is consumer-driven and hence very sensitive to the health of the economy. Macroeconomic challenges such as high household debt and unemployment levels restrain consumer spending, and impact the company’s business. Incidentally, major food deflation, persistently high unemployment level and sluggish consumer spending were major headwinds for the retail industry in Brazil in 2017, also raising concerns over the forthcoming periods.

Can Strength in Assai Help CBD Turn Around?

Nevertheless, Companhia Brasileira’s Assai segment, remained the highlight of its fourth-quarter 2017 performance. During the quarter, sales at this segment surged 28.2%, adjusted for the calendar effect. The sturdy growth was driven by higher comps and contributions from new stores. Despite major food deflation in Meat, Staples and Dairy categories, Assai’s comps jumped 10.7%, on the back of greater sales volume. Sale volume was backed by improved customer traffic and continued rise in market share even amid stiff competition.

Notably, sales from Assai constituted about 43.5% of the company’s total sales in the fourth quarter, marking 730 bps growth year over year. Management’s focus on making constant investments in this segment clearly reflects its robust prospects. For 2018, management envisions same store sales at Assai to be more than the inflation level. Also, both Assai and Multivarejo are anticipated to witness continued market share gains.

We believe that these factors, along with Companhia Brasileira’s focus on its 2018-20 strategy should help it offset the aforementioned obstacles related competition in the appliances business.

Unsure About Companhia Brasileira? Check These Solid Retail Bets  

Buckle BKE has an impressive earnings surprise history. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Walmart WMT, with a Zacks Rank #2 (Buy) flaunts a splendid comps record.

Children's Place PLCE with a Zacks Rank #2, has a splendid earnings surprise history and a long-term earnings growth rate of 9%.

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