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Assai Unit Drives Companhia Brasileira (CBD) in Q2 Earnings

Assai Unit Drives Companhia Brasileira (CBD) in Q2 Earnings
Companhia Brasileira's (CBD) net income from continuing operations increases nearly 2.7 times in Q2. Increased sales and higher adjusted EBITDA lead to the upside.

Companhia Brasileira de Distribuicao CBD or Grupo Pao de Acucar reported second-quarter 2018 results, wherein consolidated net income from continuing operations came in at R$431 million ($119.9 million), which increased nearly 2.7 times (in local currency) from R$160 million ($44.5 million) recorded in the year-ago period. Increased sales and higher adjusted EBITDA led to the upside.

However, this Zacks Rank #4 (Sell) company continued to battle food deflation in Brazil, which has long been weighing on investors’ sentiments. Evidently, Companhia Brasileira has lost 16.8% in the past six months, wider than the industry’s decline of 15%.

Results in Detail

Gross revenues in the quarter came in at R$12,772 million ($3,551.9 million), compared with R$11,623 million ($3,232.4 million) in second-quarter 2017. The Zacks Consensus Estimate is pegged at $3,119 million. Gross revenues increased almost 10% year over year in local currency, backed by growth across both Assai and Multivarejo units.

Gross profit jumped 5.5% in local currency to R$3,098 million ($861.6 million), whereas the gross margin contracted 120 basis points (bps) to 26.3%. Adjusted EBITDA advanced 25.5% to R$679 million ($188.8 million), with the adjusted EBITDA margin expanding 70 bps to 5.8%, courtesy of higher margins at both segments.

Segment Details

Multivarejo gross sales came in at R$7,030 million, while same store sales grew 5.3%, excluding calendar effect. This was backed by enhanced sales across all banners (Extra Hiper and Pao de Acucar), which, in turn, led to market share growth of 100 bps. Also, the segment benefited from successful promotional activities and greater commercial actions, which drove sales volumes across all banners.  

Gross margin remained nearly flat at 28.1%, as success from promotions was countered by competitive pricing. SG&A costs at this segment dropped 2.7%, courtesy of productivity gains in stores, hypermarket store closures, and efforts to enhance efficiency and counter inflationary impacts. Improved sales and operational efficiency also benefited adjusted EBITDA margin, which expanded 90 bps to 5.6%.

The company renovated 6 Pao de Acucar stores under Generation 7 concept, which forms part of its plan to refurbish 20 stores in 2018. Also, the company plans to include 30 stores in its Premium Project to provide customers with enhanced experience along with quality perishables, and an exclusive assortment.

Gross sales at Assai remained strong, surging 22.8% in local currency to R$5,742 million. This also led to a 200 bps increase in market share. Markedly, Assai’s same-store sales jumped 4.7%, excluding calendar effects (up 2.5% excluding conversions).

Gross margin grew 50 bps to 16.4%, courtesy of store expansion efforts, somewhat offset by food deflation. SG&A costs (as a percentage of sales) remained flat year over year as solid performance from mature stores was countered by expenses related to increased store count. However, adjusted EBITDA margin grew 50 bps to 6.1% on account of gross margin growth and higher sales.

During the quarter, the company opened 3 Assai stores, including one that was converted from Extra Hiper to Assai. The company plans to open 20 stores this year, including new and the converted ones. 

Financial Details

The company ended the quarter with cash and marketable securities of R$3,054 million ($787.3 million), net debt (adjusted for unsold receivables) of R$2,711 million ($698.9 million) and total shareholders’ equity of R$13,740 million ($3,542.1 million).

During the quarter, the company spent R$330 million ($91.8 million) as capital expenditure for its food segment. This was allocated toward expansion of Assai and renovations of Pao de Acucar stores.

Also, the company unveiled two pilot projects (Compre Bem and Mercado Extra) for the Extra Super banner, to raise penetration in its targeted customer base. 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.


Companhia Brasileira’s performance in the quarter remained solid, owing to continued strength at Assai and improved trends at Multivarejo. That said, the company remains confident of strengthening this position.

For 2018, management continues to envision same store sales at Assai to be more than the inflation level, while that in Multivarejo is expected to be at par with food inflation. Both segments are anticipated to witness continued market share gains.

Further, EBITDA margins for Multivarejo and Assai are likely to come in a range of 5.5-5.6% and 5.8-5.9%, respectively.

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