Key Takeaway
CA’s industry backdrop remains challenged, and the margin reinvestment required to inflect sales momentum positively is still largely unknown. We doubt Q1 results will shed more light on either headwinds. We stay on Hold with a new TP of €16.6, reflecting recent incremental fx challenges.
Another tough quarter... is what we expect from CA on 11 April. We model for Q1 salesof €20.9bn, a YoY decline of 1.7%, with strongly pressured LatAm currencies the main factor
behind a 5.2% fx hit in the quarter. Looking at the major business units we expect continued
lag in French hypers (LFL -1%), with resilient sales at French supers (+1.5%). We forecast a
softer comp induced improvement in both Brazil (to LFL of +4%) and Spain (LFL +1.3%).
But we assume competition to have continued to weigh in Italy (LFL -1.3%). We expect the
cautious mgmt tone seen at the FY earnings to remain a feature given that: the path to
French mkt share inflection remains complex; Brazilian deflationary dilution is subsiding only
gradually; and tough competitive attrition remains a feature in many other major European
markets. Weak LatAm currencies represent an added complication.
...leading to more cautious estimates. We have better reflected some of the keymessages from the finals update. And we have also shifted to €BRL of 4.10 and €ARS of 24.
The consequent 8/10% downgrades assume that French margins already troughed at 1.9%
in 2017, but that the rebuild will be only gradual (especially in 2018, when loss reduction
from the deconsolidation of the most pressured Dia stores will be offset by sharper domestic
gross margin engagement). We similarly assume a tougher competitive context elsewhere
in Europe in 2018, and assume that the speed of ARS devaluation will make it extremely
difficult for Carrefour to rebuild local profitability this year.
Steering clear for now. We believe that the turnaround plan outlined by the new mgmtteam earlier this year () provides a sensible recovery framework.click here for more details
However, it is typically the case that entrenched, negative sales momentum tends to be
costly to inflect at grocers. And at this early stage of the recovery we cannot find solace in
valuation, historical FC or upcoming macro levers to support a braver stance on the stock.
Valuation/RisksValuation: €16.6 PT=14.3x 2019E P/E, mid-point of recent history to reflect depressed
margins but also lack of ST visibility. Risks: Weakening consumption, deteriorating
competition in key markets.