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Brazilian retailer giant Companhia Brasileira de Distribuicao (CBD - Analyst Report) or Grupo Pão de Açúcar (GPA) is gearing up to expand its stores and market share by cutting down on costs in the face of tough retail environment.
CBD expects to open 400 new food stores by 2016, which includes 360 new convenience stores in its Mini Mercado format. The company also has expansion plans for its wholesaler, Assai, which has been posting solid results in the last few quarters. The company is expected to open 12 to 15 stores per year through 2016 under the Assai banner, particularly in the fast-growing Northeast region.
In addition, CBD plans to open 210 stores during the next three years in the ViaVarejo unit, which includes household appliances and e-commerce operations through Nova Pontocom.
CBD’s three-year forecast came at a time when economists in Brazil are forecasting weaker growth and higher inflation rate in 2014. Nevertheless, the company expects its sales to grow faster than the inflation rate.
In order to keep up the market share and deliver robust growth, the company expects to be aggressive in its price strategy by running stores efficiently and maintaining its operating profit margin by cutting expenses. The company also expects to reduce selling, general & administrative costs to 17% of net revenue by 2016, from 19.2% in the third quarter of 2013.
During the third quarter, CBD also focused to reduce its administrative costs in its supermarket unit and streamline distribution of its home furnishing business which contributed to the quarterly earnings.
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.
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, difficult retail environment, inflation, currency translation headwinds and tough employment conditions, particularly in Europe, remain the concerns. CBD holds a Zacks Rank #3 (Hold).
Other better-ranked retail companies include Kirkland’s Inc (KIRK - Analyst Report), Harris Teeter Supermarkets Inc and Best Buy Inc (BBY - Analyst Report). While Kirkland’s holds a Zacks Rank #1 (Strong Buy), Harris Teeter and Best Buy carry a Zacks Rank #2 (Buy).