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CBD's 2Q Earnings Fall Y/Y

Zacks Equity Research

Brazilian retailer Companhia Brasileira de Distribuicao (CBD) reported second quarter 2013 earnings of R$0.16 (8 cents per share) compared with R$1.00 per share (51 cents per share) in the year-ago quarter. The year-over-year decline in earnings reflects sluggish retail industry and eroding consumer confidence.

However, the company managed to deliver positive results in the four business segments of food retail, cash and carry, electronics and home appliances retail (bricks and mortar),and e-commerce. These segments are further grouped into two large categories, namely GPA Food and Viavarejo.

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

Quarter in Detail

In the second quarter of 2013, consolidated gross sales, comprising GPA Food and Viavarejo, increased 11.2% year over year (in local currency), driven by solid improvement in Viavarejo. Consolidated net sales climbed 12.1% during the quarter.

The company posted same store growth of 7.3% in the reported quarter, driven by strong performance of Viavarejo in the past quarters.

The company opened 33 new stores in the quarter which fueled growth. The company was however forced to shut certain stores for some hours in specific periods in the second half of June due to unrest in Brazil but it did not significantly impact sales and the overall performance of the company in the quarter.

For 2013, the company plans to open more than 150 stores, targeting northeast and mid-west regions.

Gross profit climbed 13.4% and gross margin expanded 30 basis points to 26.5% from the prior-year quarter, reflecting the price repositioning in food retail along with a reduction in expenses.

Adjusted earnings before interest, tax, depreciation and amortization (:EBITDA) increased 37.6% benefiting from lower operating expenses at Viavarejo. EBITDA margin increased 140 basis points to 7.2% in the second quarter of 2013 owing to operational efficiency. The company managed to reduce Viavarejo’s selling, general and administrative (SG&A) expense ratio by 160 basis points to 21.5% in the second quarter, which fueled margins.

Category Details

GPA Food’s gross sales increased 8.8% in the quarter, driven by 4.8% growth in gross same store sales. The growth in same store sales was driven by both retail and cash and carry sales growth. However, it was less than the prior quarter due to an early Easter in 2013. Net sales increased 10.6% in the quarter.

Viavarejo’s gross sales increased 14.2% in the quarter, driven by growth of 9.5% in gross same store sales owing to effective marketing campaigns. Net sales increased 14.0% in the quarter.


Management expects further reductions in operating expenses over the year. Management intends to convert the resultant savings into lower prices for consumers to increase store traffic. With such a strategy, the company’s market share is expected to increase over the next quarters.

Our Recommendation

We are impressed with CBD’s strong market position and economies of scale that have helped the company deliver strong results despite continued weakness in consumer expenditure. The company’s cost savings in its Viavarejo appliance and home furnishings unit are also encouraging.

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. However, inflation in Brazil is denting CBD’s food business and the company is struggling hard to keep prices down. The company is thus counting on a turnaround in its appliance division to make up for the shrinking profit margins in its supermarkets category.

Currency translation headwinds and tough employment conditions, particularly in Europe remain a threat. We expect slow recovery in the U.S. and therefore consumer sentiment will recover at a mild pace.

CBD holds a Zacks Rank #5 (Strong Sell). Retail companies that warrant a look are Ingles Markets Inc (IMKTA), Kroger Inc (KR) and The Fresh Market Inc (TFM). While Ingles holds a Zacks Rank #1 (Strong Buy), Kroger and Fresh Market carry a Zacks Rank #2 (Buy).

Read the Full Research Report on KR

Read the Full Research Report on CBD

Read the Full Research Report on TFM

Read the Full Research Report on IMKTA

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