Morningstar | Carrefour's 4Q Reveals Slight EBIT Beat, but Don't Buy Into It (Yet); Shares Fairly Valued
Carrefour reported its fourth-quarter sales update with like-for-like group sales up 1.9% (1.4% for the year) at constant exchange rates, higher than our annual expectations of 0.8% like-for-like sales growth, mainly due to outperformance in Latin America. The firm continues the implementation of its transformational plan, and management now expects operating profit to be EUR 1,930 million, some 2% higher than our estimates and 3% higher than consensus, while reaffirming long-term guidance (EUR 2 billion cost-reduction plan and EUR 500 million disposals of nonstrategic real estate assets, among others). Despite this slightly better-than-expected set of results, we are maintaining our EUR 17.90 fair value estimate and no-moat rating, as we prefer to wait until Feb. 28, when full-year results and presumably 2019 guidance will be released (management didn't provide any for fiscal 2019). After a 7% jump at the time of writing, the shares at EUR 17.50 are close to our fair value estimate.Despite meaningful progress, we are still skeptical about Carrefour's turnaround strategy with regard to its offline assets (hypermarkets in France continue to underperform), its price position versus main competitors (Leclerc and Geant Casino) and its still-negative European like-for-like sales development. We also urge investors not to read too much into the EBIT beat, as this could have been the result of high cost savings drop-through at the expense of necessary long-term margin investments in the competitive position.
Regional sales for the fourth quarter were mixed, with France slightly lower at 0.1% (versus up 0.5% for Casino Group in France for the same quarter), dragged down by hypermarkets (down 2.2% versus flat for Casino's Geant hypers) and social unrest (yellow vest movement). In Europe, sales were down 1.7%, driven by continued underperformance in Spain (down 1.4%), Italy (down 4.6%), and Belgium (down 3.1%).
Latin America continued to drive growth for the group, up 12.9% (up 6.4% in the first half), with Brazil (more than 80% of segment sales) increasing like-for-like sales by 6.2%, supported by Atacadao's positive momentum. In Asia, trends are improving but are still negative (down 4.1%).
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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