* Carrefour Spain on the right track: Carrefour’s 2Q performance in Spain seemingly
marked a turning point as like-for-like sales were positive in both food and non-food.
Thanks to its multi-format strategy, adapted non-food offer and strong execution, we see
Carrefour as well positioned to take advantage of the improving economic environment in
Spain. Given that Carrefour’s cost structure in this country is lean, we believe that its
operating leverage is significant and we do not see any reason why its operating margin
could not gradually return to pre-crisis levels (4-5%). We expect the 1H results (due 31
July) will show evidence of Carrefour’s margin potential in Southern Europe thanks also to
lower operating losses in Italy (we include our 1H preview in this note).
* The story is not over in France: Even though Carrefour’s 2Q performances were
admittedly a touch below our expectations, we expect the performances will improve in
2H partly thanks to easier comps and the ongoing remodeling programme. Although
DIA’s restructuring includes risk factors and we forecast Carrefour’s operating profit in
France will decline in both 1H and FY15 partly due to DIA France’s estimated €70mn
losses, we think DIA’s performance offers further upside potential in the future. We
remain confident that Carrefour could raise DIA’s sales densities, which are the lowest in
the French food retail sector (€3,100 per sq m per annum vs a minimum of €4,500 for
Carrefour’s existing convenience store formats in France.
* Overweight rating reiterated with a price target of €34.50: We raise our EPS forecasts
by an average of 2% to factor in our more upbeat outlook on the group’s Spanish
performances. We now expect consolidated operating profit of €2.52bn for this year, in line
with the company’s guidance, leading to double-digit EPS growth. Although Carrefour will
likely continue to face headwinds in emerging markets, we believe it still offers an attractive
risk/reward trade-off, while there are still potential positive catalysts ahead (recall that
Carrefour announced that it might contemplate an IPO of its Brazilian division and/or its
Carmila real estate unit at some point). Carrefour is trading on a FY16E P/E of 15.5x vs
16.8x for the European sector average and 15.8x for its most comparable peer Casino.