Morningstar | Carrefour Reports Broadly In-Line 2018 Results, Hikes Cost-Saving Guidance; Shares Fairly Valued
Carrefour reported 2018 results with like-for-like group sales up 1.4% at constant exchange rates (up 2% in the second half), higher than our full-year expectation of 0.8% like-for-like sales growth, mainly due to outperformance in Latin America. The firm reported operating profit of EUR 1,938 million, or EUR 1,905 million after the implementation for the first time of IAS 29 (applicable to the group's operations in Argentina). Management updated its long-term guidance, raising the cost-reduction plan to EUR 2.8 billion from EUR 2 billion while confirming other 2022 financial targets (EUR 500 million in disposal of real estate assets, EUR 5 billion of food e-commerce sales, and EUR 5 billion of organic sales). Although the hike in the cost-saving target is a sign of a changing culture and self-help potential, w e do not expect to alter our EUR 17.90 fair value estimate materially after we roll our model forward to account for 2018 results. Management didn't provide guidance for 2019. The shares trade in 3-star territory.Despite meaningful progress, we are still skeptical about Carrefour's turnaround strategy concerning its offline assets (capital expense of EUR 1.6 billion versus EUR 2.4 billion a year ago), its price position versus main competitors (Leclerc and Geant Casino), and its still-negative European like-for-like sales development. We also note that although cost savings in 2018 amounted to EUR 1,050 million (almost EUR 400 million higher than our estimate), operating margin was flat (in line with our view), meaning that there was no benefit flowing through the bottom line. The primary driver has been France, which disappointed with operating income at EUR 466 million (versus EUR 607 million) driven by "upfront investments...ahead of cost cuts," the impact of the yellow vest movement, and online investments. Weakness in France was offset by stronger profitability in Latin America (EUR 767 million versus EUR 677 million in our model).
Carrefour is a distribution group based in France. Co. is engaged in retailing business, primarily in Europe (France, Belgium, Spain, Italy, Poland, and Romania); Asia (China, India, and Taiwan); and Latin America (Argentina and Brazil). Co. offers a variety of fresh produce, products from local suppliers and major-brand products. Co. operates Hypermarkets, Supermarkets, Convenience stores and Cash & Carry stores, as well as food and non-food e-commerce sites. Co. also offers services such as financial and insurance services, travel, entertainment, after-sales services, and leasing of commercial vehicles. As of Dec 31 2013 Co. operated 10,105 stores under its brand.
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