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4 Reasons Why Companhia Brasileira is Worth Giving a Shot Now

Zacks Equity Research
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Companhia Brasileira de Distribuicao CBD or Grupo Pao de Acucar is worth a shot, right now, as the company has long been benefiting from strength in its units as well as robust strategic endeavors. These upsides have helped this Zacks Rank #2 (Buy) stock, which belongs to the Retail – Supermarkets industry, rally close to 17% over the past year compared with the S&P 500’s growth of almost 4%.

So let’s delve deeper into the factors that are likely to keep driving Companhia Brasileira’s momentum.

Q4 Results & Outlook Raise Hopes

Companhia Brasileira delivered impressive fourth-quarter 2018 performance, wherein net income from continuing operations increased significantly (in local currency) year over year. We believe increased sales and higher adjusted EBITDA led to the upside. Further, gross revenues increased 12.1% in local currency, backed by growth in the Assai and Multivarejo units. The company is on track with its digital transformation efforts, which include focus on innovation and implementation of omni-channel strategies to enhance customers’ experience. For 2019, management expects same-store sales at Multivarejo and Assai to be above-inflation levels. Further, EBITDA margins for Multivarejo and Assai are projected to expand 30 basis points (bps) and 30-40 bps, respectively. Multivarejo is expected to gain from optimization projects, improved operating efficiency and portfolio repositioning. Assai is anticipated to benefit from recent store openings.

Assai Remains a Key Driver

The company’s Assai segment, which has long been the company’s major growth driver, delivered a stellar performance in fourth-quarter 2018 as well. During the quarter, gross sales at this segment climbed 23.6% in local currency. Sturdy growth was driven by higher sales volume, enhanced traffic and market share gains. Furthermore, Assai’s same-store sales jumped 9.9%, backed by new commercial activities, solid marketing and enhanced product assortments. Management’s focus on making constant investments in this segment clearly reflects its robust prospects. For 2019, Assai is anticipated to continue with its robust expansion, with same-store sales estimated to rise 200 bps above inflation level and total sales to advance more than 20%.

Impressive Pilot Projects

The company is on track with its two pilot projects (Compre Bem and Mercado Extra) for the Extra Super banner, to raise penetration in its targeted customer base. The Compre Bem project includes 20 store conversions to tap a market niche that is currently controlled by regional supermarkets. The project is aimed at lowering operating expenses, mainly logistics and IT costs. The Mercado Extra project at 10 stores is aimed at reinvigorating the Extra Super banner by strengthening the quality of perishables and customer service.  Notably, Companhia Brasileira revitalized 23 Extra Super stores, converting those to Mercado Extra in 2018. During the same period, management converted 13 stores into the Compre Bem, including 12 Extra Super stores and 1 Extra Hiper store.

Strategic Endeavors in Place

The company remains focused on its strategy for 2018-2020, which aims at delivering solid food segment performance. The company plans to achieve this by utilizing its multi-network and multi-format existence in order to offer consumers the innovative services and products. Apart from this, the company also remains on track with digital transformation, as highlighted by the launch of My Discount platform at Multivarejo, which has garnered considerable success.

Management stated that focus on digital development will remain a major priority in 2018, given consumers’ evolving shopping patterns. This apart, the company’s core growth plans involve continued organic expansion and stores optimization, enhancing retail format offerings and extending offerings of financial services (particularly at Assai). Moreover, the company targets generating synergies of more than $85 million from Latin America.

Clearly, these factors place Companhia Brasileira well for the future, which should help it remain in investors’ good books.

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