Dean Best

On the money: Market buys into Casino's confidence

By Dean Best | 18 February 2014

Casino confident about prospects for Brazilian arm GPA despite market concerns about economic slowdown

Casino confident about prospects for Brazilian arm GPA despite market concerns about economic slowdown

Casino's share price has been on something of a rollercoaster in the early weeks of 2014. However, the French retailer's 2013 results and optimism for the months ahead seemed to be echoed by the market today (18 February) with its stock recovering some of the ground it had lost since the start of the year.

In the year to date, the owner of chains including France's Leader Price and Monoprix and Brazil's Pao de Acucar has seen its share price fall 3.49%, with suggestions the market is wary of the retailer's exposure to slowing emerging markets. Casino's recent travails in France cannot have done the shares any good either.

However, the retailer's annual results and outlook for the year ahead have appeared to win over some of the doubters, with its shares closing up 3.2% on the day and hitting EUR80.85.

Casino reported higher annual underlying profits that beat analyst forecasts. Net profit for 2013 was up 9.7% at EUR618m (US$850.1m), helped by lower financial costs and a reduction in its tax rate.

However, the retailer's trading profit was up 18.1% at EUR2.36bn, with its trading margin ahead of the consensus forecast among analysts.

Casino's profitability was were boosted by strong sales from its international business, which enjoy healthier margins that in France.

The retailer's international sales were up 23.9% at EUR29.15bn; on an organic basis, and excluding fuel, Casino's sales outside France grew 11.2%.

On closer inspection, Casino's underlying sales in Latin America fared better than in Asia.

Underlying sales in Latin America increased more than 12%, with same-store sales up 8.6%. In Asia, sales rose 7.1% on an organic basis but same-store sales dipped 0.3%.

Casino said its performance in Brazil was "excellent", with its businesses enjoying "sustained expansion and market share gains". Same-store sales from its Brazilian food arm were up 10.4%.

Latin America accounts for over 60% of Casino's group trading profit and is truly a powerhouse of the business. There has been some concern about the economic slowdown in Brazil in recent quarters among consumer goods companies but Casino remains upbeat about trading conditions, a point not lost on some analysts.

"There have been a lot of fears about consumption in Brazil but Casino sees no negative signs," Natixis analyst Antonie Parison told just-food.

Meanwhile, although Casino's same-store sales in Asia were down year-on-year, it said its profits from the region were up. "Internationally, the group's banners performed extremely well," Casino said

There was agreement from the investment community. "Casino confirmed growth from emerging markets, with strong margins based on distinct retail offers," Sanford Bernstein analyst Bruno Monteyne, who has an 'outperform' rating, on the retailer's stock, said today.

However Casino's domestic arm has been under scrutiny in recent quarters. The retailer's French business no longer accounts for the majority of Casino's sales or profits but, nevertheless, its local chains have been causing concern.

In 2013, on a reported basis, sales in France were up. Revenue increased 5.7% to EUR19.45bn, helped by a full contribution from convenience chain Monoprix. Casino took full control of Monoprix after buying out venture partner Galeries Lafayette for EUR1.18bn. 

However, on an organic basis, domestic sales, excluding fuel were down 3.6%. Same-store sales, excluding fuel, from each of Casino's French banners fell. Nonetheless, Casino said it was seeing improvement from its domestic business. Same-store food sales from its newly-consolidated Monoprix stores were up. After investment in price, the retailer said traffic and volumes at its namesake supermarkets and Géant hypermarkets was on the rise.

Monteyne said Casino still has work to do in France, pointing to discount formats Franprix to Leader Price. However, he insists Casino is showing signs it is on the right track. "Leaderprice and Franprix are its weakest domestic formats; suffering from bad availability, weak fresh food offer and, until recently, poor pricing. A lot still needs to be done to make it a competitive format but Casino is taking the right steps by taking back franchisee agreements - allowing greater control over store operations and making appropriate investments in price," he explained. "We do see a future for discount formats in France, but only if discounters execute well. We expect Casino to focus on these formats in 2014 and beyond and that may require additional investment."

Casino's French business may generate lower margins but Monteyne, after the retailer's work, particularly on price, described it as "stable" and added: "It is well diversified into high growth and high margin segments of the French market."

Not all analysts share such positive sentiments about Casino's domestic arm. Cantor Fitzgerald managing director Mike Dennis, who has a 'sell' rating on Casino's stock, pointed to a fall in French margins year-on-year and added: "Our concern remains over the fall in sales densities in France, which we see as not being totally recoverable via rebasing costs and removing promotional spend."

However, broadly speaking, analysts covering Casino are more comfortable about the prospects for the retailer's domestic arm.

Parison acknowledged Casino's investment in price in France had weighed on margins but he backed the strategy. He noted Casino has improved the price positioning of its chains in France, with Leader Price, for example, now the cheapest discount chain in the country for brands and own label.

"I would rather have 1% of EUR1bn than 2% of EUR300m," Parison told just-food. "What matters to me is the top-line trend."

Sectors: Emerging markets, Financials, Retail

Companies: Pao de Acucar, Casino

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