FREE

DIA: This mountain may be too high to climb

Dia’s Q1 results were a harsh reminder of the multiple challenges that Letterone needs to address: i) In Spain the legacy Dia banner had a negative LfL despite the ongoing store upgrades and the major step up of the promotional effort started in September; ii) In Portugal, LfL was negative for the second quarter in a row and the lag to Pingo Doce has widened to 8pp from 3pp in Q4; iii) In Brazil, sales per sqm in BRL have fallen 6% YoY on top of a 10% drop in FY17 and Dia also lagged its listed peers; iv) restructuring costs continued to climb, reducing the visibility on underlying profitability; and v) last but not the least, the negative top-line performance led to a higher than expected increase in net debt. In what we see as the first major change driven by Letterone, Dia’s CEO said in the Q1 conf call that his top-priority is now to drive top-line growth both through an acceleration of LfLs and store expansion, effectively putting margins and FCF guidance on the backburner. We think that for LfLs to structurally improve a further margin reset is unavoidable as Dia starts in a very weak competitive position both in Spain and Portugal. We believe this margin risk is not properly reflected in BBG consensus (we are 13% below for ‘18e EPS) or in Dia’s market value (our FV is 25% below the current share price). We also see DIA’s P/E ‘19e of 16.8x and EV/EBIT ‘19e of 14.0x as quite expensive given Iberia still accounts for 68% of the valuation. In this note we finetune our numbers post Q1 results and we cut our FV from Eur2.65 to Eur2.55 mostly on EMs. We reiterate our SELL rating.