EUR 850.00 For Business Accounts Only

Morningstar | Casino Reports 2Q Sales Update, Reaffirms 2018 Guidance; Shares Fairly Valued

No-moat Casino reported a second-quarter sales update of EUR 8.9 billion, 3% lower than the year-ago period including a negative 7.6% unfavourable currency effect, while France retail sales organic growth was up 1.3%, in line with our expectations. We are maintaining our fair value estimate.

In France (50% of group sales), same-store sales growth was 1.8%, supported by hypermarkets (up 2.5%) and Leader Price (up 2.2%), counterbalancing lower growth coming from Monoprix, Franprix, Casino Supermarkets, and Convenience (1.4%, 1.3%, 1.5%, and 0.2% respectively).

In the Latin America retail segment, GPA Food posted organic sales growth of 11.7% (4.7% same-store growth), while sales at Exito Group were up on both an organic and same-store basis.

Although management reaffirmed its guidance for fiscal 2018, it didn't provide any update on the recently announced disposal plan. As a reminder, on June 11, the group announced a two-year EUR 1.5 billion asset-disposal plan including real estate property (50% in the second half of 2018 and the rest in the first half of 2019).  However, a lack of detail on what seems to be potentially a reaction to negative market sentiment makes it difficult to assess the valuation impact and opens up execution risk, in our view.

In the short term, the benefits for Casino are the reduction of net debt in France by EUR 1 billion in fiscal 2018 (guidance) and a moderate boost on sentiment. In the medium to longer term, though, we think Casino Group continues to face serious structural issues: Competition in the Paris area is intensifying, while larger peers are boosting investment in online capabilities, where Casino's presence is anaemic. On top of that, we believe that the group's complex structure and Rallye's (Casino's parent) reliance on Casino's dividends (9% dividend yield; we expect dividends to remain materially higher than earnings for the foreseeable future) will continue to erode value for long-term shareholders.

We are maintaining our negative moat trend rating for Casino Group, as we believe the company will have to eventually sacrifice profitability at its main French banner, Monoprix, to defend its market position against Leclerc's disruptive online offering in the Paris area, the most important region for Casino’s most significant marquee (60% of Monoprix’s sales come from Paris and its suburbs). We estimate that Monoprix accounts for 23% of sales and 65% of operating income in the France retail segment, which in turn is responsible for more than half of overall revenue and almost half of Casino’s profitability.

We expect volatility in the stock price to persist (it was up 5% on Tuesday's open after second-quarter sales update) in the coming months as key refinancing dates approach for Rallye (October) and the asset-disposal program takes effect (second half of 2018 and first half of 2019).