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Companhia Brasileira Up 16% in 3 Months: Will Momentum Stay?

Zacks Equity Research

Companhia Brasileira de Distribuicao CBD or Grupo Pao de Acucar is strongly gaining from the Assai unit along with Pilot Projects and strategy for 2018-2020. These helped the company stay firm amid hurdles like stiff competition and a volatile macroeconomic environment. Consequently, shares of the company have gained 15.8% in the past three months, outpacing the industry’s growth of 5.2%.

Let’s delve deeper and see if these upsides can retain this Zacks Rank #3 (Hold) stock’s momentum.

 



Factors Telling Companhia Brasileira’s Growth Story

Companhia Brasileira’s Assai segment has long been a major growth driver. During the fourth quarter of 2018, gross sales at this segment rallied 23.6% in local currency, driven by higher sales volume, enhanced traffic and market share gains. Further, Assai’s same-store sales increased 9.9%, courtesy of new commercial activities, solid marketing and enhanced product assortments. This along with growth at Multivarejo boosted gross revenues in local currency.

Also, EBITDA margin expanded 70 basis points (bps), courtesy of higher margins at the Assai and Multivarejo segments. At Multivarejo, the margin expansion was backed by improved sales and solid cost discipline measures, whereas Assai’s margins benefitted from productivity gains and higher sales. 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.

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

Companhia Brasileira is also working on the two pilot projects (Compre Bem and Mercado Extra) for the Extra Super banner to increase penetration in the targeted customer base. The Compre Bem 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.

However, in the home appliances sector, large multinational chains and other specialized Brazilian companies pose competitive threats to the company’s market share. Further, a slowdown in consumer expenditure is likely to have a negative impact on the home appliances retail sector, which depends a lot on the disposable income of consumers. Other than this, macroeconomic challenges such as high household debt and unemployment levels may restrain consumer spending and impact its business.

Nonetheless, 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 increase 30 bps and 30-40 bps, respectively. That said, we expect Companhia Brasileira to keep up its robust show.

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