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Brazilian retailer Companhia Brasileira de Distribuicao (CBD - Analyst Report) or Pão de Açúcar reported third quarter 2013 earnings of R$1.07 (47 cents per share) compared with R$0.72 per share (36 cents per share) in the year-ago quarter. The year-over-year increase in earnings reflects growth in all its business segments. CBD also reduced its administrative costs in its supermarket unit and streamlined distribution of its home furnishing business, which contributed to earnings.

The company managed to deliver positive results in the four business segments of food retail, cash and carry, electronics and home appliances retail (bricks and mortar),and e-commerce. These segments are further grouped into two large categories, namely GPA Food and Viavarejo.

GPA Food comprises supermarkets, hypermarkets, neighborhood stores, cash-and-carry stores, gas stations and drugstores while Viavarejo includes household appliances and e-commerce operations through Nova Pontocom.

Quarter in Detail

In the third quarter of 2013, consolidated gross sales, comprising GPA Food and Viavarejo, increased 15.0% year over year (in local currency), benefiting from the 132 stores opened in the last 12 months. Consolidated net sales climbed 15.8% during the quarter.

The company posted same store sales growth of 10.8% in the reported quarter, driven by strong performance of GPA Food and Viavarejo. The company opened 20 new stores in the quarter which fueled growth.

Gross profit climbed 16.6% and gross margin expanded 10 basis points to 26.4% from the prior-year quarter, driven by increased margin at Viavarejo, which was offset by price repositioning in food retail and the opening of Assaí stores.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) increased 28.3%. Adjusted EBITDA margin increased 80 basis points to 7.5% in the third quarter of 2013. However, the selling, general and administrative expense ratio decreased from 19.8% in the year-ago quarter to 19.2% in third quarter 2013.

Category Details

GPA Food’s gross sales increased 12.9% in the quarter, driven by 7.1% growth in gross same store sales on the back of increased store traffic and market share gains. In the quarter, 12 Minimercado, 2 Assaí and 1 Pão de Açúcar were opened, totaling 15 stores. Sales of non-food categories in the hypermarkets also improved in the quarter led by successful marketing campaigns of electronics. Net sales increased 14.5% in the quarter.

Viavarejo’s gross sales increased 17.6% in the quarter, driven by accelerated sales growth in all businesses (bricks and mortar and e-commerce). The company’s market share also improved in the quarter. Same store sales in the quarter grew 15.4% in the quarter. In the quarter, five new Viavarejo stores were opened. Net sales increased 17.4% in the quarter.


CBD expects to invest up to R$2 billion in 2013 and expand food sales area by over 6%. Management intends to convert its savings into lower prices for consumers to increase store traffic. With such a strategy, the company’s market share is expected to increase over the next quarters.

Our Recommendation

We are impressed with CBD’s strong market position and economies of scale that have helped the company deliver strong results despite continued weakness in consumer expenditure. The company’s cost savings in its Viavarejo appliance and home furnishings unit are also encouraging.

However, currency translation headwinds and tough employment conditions, particularly in Europe remain a threat. We expect slow recovery in the U.S. and therefore consumer sentiment will recover at a mild pace. CBD holds a Zacks Rank #4 (Sell).

Retail companies that warrant a look at the current level include Kirkland’s Inc (KIRK - Analyst Report), hhgregg Inc (HGG - Analyst Report) and Best Buy Inc (BBY - Analyst Report). While Kirkland’s and hhgregg hold a Zacks Rank #1 (Strong Buy), Best Buy carries a Zacks Rank #2 (Buy).

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