Shares in Carrefour dipped today (14 January) as the French retailer continued to struggle in its home market, while posting stronger performances in its emerging markets, particularly Latin America and Asia. Analyst responses to the results have been mixed, with uncertainty over whether the retailer will be able to fulfil its ambitious transformation programme.
Philip Gorham – Morningstar
Our investment thesis for Carrefour maintains that financing for the firm’s emerging market growth plans will hinge upon a turnaround in the domestic market of France. While the firm’s fourth-quarter sales figures were far from impressive, the world’s second-largest grocer appears to have stabilised its performance in France – but we think the road to recovery will be long and bumpy. Our fair value remains intact, and we still believe the company’s stock has upside potential.
In line with similar comments from Tesco, Carrefour stated that bad weather in Europe caused a slowdown in sales at the end of the year. While the snow undoubtedly had an impact, we think the firm has much more deep-rooted problems to work through. The hypermarket format appears to be losing relevance among consumers, and we think a turnaround will depend on the success of the firm’s smaller format locations. Therefore, we were pleased to note the organic growth achieved by those stores, and we believe that if the firm continues to gain incremental market share over the next few quarters, our thesis will play out and the stock should rally from current levels.
Christopher Hogbin – Sanford Bernstein
While Carrefour’s sales growth suggests that the consumer environment is not as bad as we had feared, Carrefour’s inability to turn the better-than-expected sales results in France and Europe into profit suggests that the competitive environment is as challenging as ever.
In 2010, Carrefour achieved EUR800m in savings (cost and purchasing), which was EUR70m ahead of its targets. Yet expected activity contribution [operating profit] is expected to fall short of Carrefour’s initial target of EUR3.1bn by circa EUR79m. Had Carrefour been able to retain all of its cost cutting initiatives, we estimate that 2010 activity contribution could have been as high as EUR3.6bn. However, we estimate it retained the benefit of just 20% of the savings.
In order to achieve its 2013 activity contribution targets (announced in September), we estimate that Carrefour will need to retain roughly 50% of its cost cutting efforts, assuming that it cuts EUR500m each year in 2011-2013, and that targeted like-for-like sales growth attracts a 20% contribution margin. Since we estimate that Carrefour was able to retain just 20% of its cost cutting measures in 2010, we remain sceptical of Carrefour’s ability to retain the majority of cost cutting implied by its 2013 targets.
Matthew Truman – JP Morgan Cazenove
Carrefour’s Q4 sales release has done more than re-assure in our view. Whilst the sales performance was in line at with total sales at EUR27.1bn versus our EUR26.9bn and underlying profit was confirmed marginally above EUR3bn, the presentation alluded to better things to come.
Despite the problems of the last few months and the credibility issues that we believe have resulted, we remain committed to Carrefour for the reasons we outlined in our October initiation. For 2011, we believe talking must stop and execution must ensue. Whilst peripheral strategies around disposals, listings and real estate are supportive, the execution of the re-invention of the European hypermarkets is the single biggest catalyst and one that promotes the largest debate. To do that, a comparatively new management team by European food retail standards requires time to execute and fulfil on the targets made at the plethora of strategic updates over the last three years.