CBD Reports Solid 4Q

Zacks

Brazilian retailer Companhia Brasileira de Distribuicao (CBD) reported fourth quarter 2012 adjusted earnings growth of 15.2% (in local currency), while earnings increased 32.1% (in local currency) in the year 2012.

The increase reflected sales growth, expense control over the electronics operations and reduction in financial expenses. The continuing operational improvements in the four business segments of food retail, cash and carry, electronics and home appliances retail (bricks and mortar) and e-commerce also added to growth. These segments are further grouped into two categories, namely GPA Food and Viavarejo.

GPA Food comprises supermarkets, hypermarkets, neighborhood stores, cash-and-carry stores, gas stations and drugstores. Viavarejo includes household appliances and e-commerce operations through Nova Pontocom.

Quarter in Detail

In the fourth quarter of 2012, consolidated gross sales (excluding real estate projects), comprising GPA Food and Viavarejo, increased 8.0% (in local currency) driven by improved food retail performance, and double-digit growth in same-store sales, partially offset by the slowdown in e-commerce business growth trend due to the fierce competition in the sector. Consolidated net sales climbed 8.7% during the quarter. Consolidated gross sales increased 8.4% in the year 2012, while net sales increased 9.0%.

The company launched two new websites under Nova Pontocom in the quarter. The barateiro.com.br website will sell refurbished or minor-damaged products, while the Patiu Viagens website will book tickets, packages and other travel-related services.

Though gross profit (excluding real estate projects) climbed 8.3%, gross margin contracted 10 basis points to 27.9% from the prior-year quarter, pressured by increased competition and higher logistics costs in the electronic segment.

Earnings before Interest, Tax, Depreciation and Amortization (:EBITDA) increased 28.0%, while EBITDA margin expanded 130 basis points year on year to 8.7%, driven by operational improvement at Viavarejo and improvement in food margin.

Category Details

GPA Food’s gross sales increased 9.0% in the quarter, driven by 5.6% growth in gross same store sales. The growth in same store sales was driven by increase in food sales, particularly in perishables and beverages categories. The 35 new stores added in the quarter also boosted sales of the segment.

Viavarejo’s gross sales increased 6.9% in the quarter, driven by 6.0% growth in gross same store sales.

Other Financial Update

During December, CBD announced its plan to open 100 new Minimercado Extra stores by 2013 to expand its supermarket business.

The company has been focusing on its food business, instead of other categories of appliances and electronics, as consumers find it difficult to purchase these items in the current economic scenario. Further, the company is targeting northeast and mid-west regions for expansion. In addition, the company plans to open more than 150 stores in 2013.

However, the retail sector has experienced economic slowdown in 2012 that has led to a decline in consumer spending. The continued weakness in consumer expenditure may impact the company’s home appliances sector. Currency translation headwinds and tough employment conditions, particularly in Europe also remain a threat. We expect slow recovery in the U.S. and expect consumer sentiment to recover at a mild pace.

CBD holds a Zacks Rank #3 (Hold). Retail and wholesale stocks that are presently doing favorable business include Dollar Tree Inc (DLTR), Ross Stores Inc (ROST), TJX Companies Inc. (TJX), all of which carry a Zacks Rank #2 (Buy).

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