Casinos need cash. Casino Guichard-Perrachon is a prime example.
The beaten-up grocer and retailer reported a much-needed bit of good news on Thursday. Same-store sales in France were up 2.4 per cent in the third quarter. They had been flat the quarter before, and negative for the three quarters before that. Casino’s shares rose 7 per cent.
It was a decent card in an otherwise scary hand. In Latin America, where the company made most of its profits last year, collapsing currencies pushed sales down by a quarter. Even after Thursdays’s pop, the shares are down a third in six months, driven down by a price war in France and economic turmoil in Latin America. Weaker Latin American sales particularly hurt group results because growth and margins are both higher there. France generates half of sales but less than a fifth of operating profit.
These issues are pressing because of Casino’s high debt. It spent $4bn on acquisitions over the past decade, and in recent years has been splashing out on reformatting its hypermarkets. The company’s net debt at the half year (which is usually higher than the full year) was 2.9 times rolling 12-month earnings before earnings, tax, amortisation and depreciation. So maintaining the company’s investment-grade credit rating is the first priority of management. Very sensible. The company hopes to generate enough free cash flow to pay down debt, starting next year.
The head of Carrefour, its French competitor, said recently that the price war had gone too far. Casino surely feels the same way. Price competition does not subside just because it hurts, however — as the experience of UK grocers shows. The sales figures in France are a hopeful sign, but certainty on improved earnings and cash flow will only come with full-year results. What will happen in Latin America is even harder for Casino to control or predict. If neither variable improves, Casino may have to cut its dividend or sell assets to keep the game going.