Morningstar | Colruyt Reports Underwhelming FY19 as Competition Intensifies; Shares Down 15% but Still Rich
No-moat Colruyt issued fiscal 2019 results, with revenue at 4.5% growth versus the year-ago period, broadly in line with our expectations. Colruyt said it expects price and promotional pressure to intensify in a challenging Belgian retail market. We maintain our no-moat rating and do not anticipate altering our FVE of EUR 35.50 as we roll our model forward to account for fiscal 2019 results.Operating income was in line with our estimates but lower than consensus. EBIT was down 0.7% to EUR 485 million, implying a 5.1% margin, a function of lower gross margin (promotional pressure) and higher operating expenses (up 0.4% as a percentage of sales because of an increase in marketing investments and energy-supply initiatives). Net income at EUR 372 million was below our EUR 376 million estimate and in line with guidance to exceed the previous year's net income.
We maintain our bearish thesis on Colruyt, purely on valuation grounds. We feel shares (even after a decline of more than 15% on the day of the announcement) still imply a generous 20 times fiscal 2020 earnings versus 13 times for European peers (and 17 times own historical average). We believe this reflects Colruyt’s past growth and profitability record, a subdued competitive environment, and the structural growth of the discounter channel (of which Colruyt Belgium is a member) in the region, while it fails to account of a more mature and intense Belgian competitive landscape.
While our estimates for the medium term are only slightly lower than consensus, the driver of our FVE is the value assigned to the long-term prospects of the firm in a sector with no sustainable competitive advantages, which ultimately should lead returns closer to the firm's cost of capital.
Major risks to our valuation and thesis is the continuing soft competitive environment in Belgium (implying share gains), outperformance of the group's operations in France (profitability and sales-density improvements) and the announcement of additional buyback programmes.
We maintain our negative trend rating. Although we believe Colruyt will continue to achieve operational improvements (incremental thanks to the company's already lean operations) in future, we doubt the competitive environment will remain the same. Competition is getting stronger relative to a historically more benign market environment: Ahold Delhaize recently installed a new management team in Delhaize Belgium (CEO, CFO, supply chain) with an intense focus on promotional activities; Carrefour is proceeding with a radical consolidation of the group’s European purchasing operations; Lidl has revealed plans for aggressive expansion, including opening 50 more stores in Belgium (investing EUR 500 million over the next five to seven years); and there are potential threats from the entry of new foreign players (Jumbo, the Dutch soft discounter and second-largest food retailer in the Netherlands, is looking to open 30 stores in Belgium by the end of 2019, according to RetailDetail).
Management said an announcement over whether a new buyback programme is going to take place (the existing one is almost complete, with EUR 12 million of the initial EUR 350 million left) will be made following the annual general meeting scheduled for Sept. 25, 2019.
Etablissements FR Colruyt is engaged in wholesale, food service, distribution of fuels, production of electricity and digital printing. Co. has three operating segments: retail, which relates to stores under Co.'s own management which directly sell to retail customers and bulk consumers; wholesale and foodservice, which supplies to wholesalers, commercial customers and affiliated independent merchants; and other activities, which operates gas stations, engaged in printing and document management and provides alternative energy.
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