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Brazilian retail giant Companhia Brasileira de Distribuicao (CBD - Analyst Report) or Grupo Pão de Açúcar (GPA) managed to accelerate its sales in 2013, despite tough macroeconomic conditions. The company recently reported its fourth quarter and 2013 results. In the fourth quarter, CBD delivered profits of R$864 million ($403 million) compared with R$503 million ($259 million) in the year-ago quarter. The year-over-year increase in profits reflects growth in all its 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.

Results in Detail

In the fourth quarter of 2013, consolidated gross sales, comprising GPA Food and Viavarejo, increased 14.9% year over year (in local currency), benefiting from higher sales in both GPA Food and Via Varejo and Nova Pontocom. Consolidated net sales climbed 16.2% during the fourth quarter.

The company posted same store sales growth of 10.8% in the reported quarter, driven by same store sales growth of 8.8% in GPA Food and 13.1% growth in both Viavarejo and Nova Pontocom. The company opened 50 new stores in the quarter, which fueled growth.

Gross profit increased 9% but margin contracted 170 basis points to 26.1% from the prior-year quarter, due to increased investments in the Food Retail segment and higher promotional spending for the Black Friday campaign, especially at Via Varejo and Nova Pontocom.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) increased 23.8%. Adjusted EBITDA margin increased 60 basis points to 9.5% in the fourth quarter of 2013, owing to a significant decline in the selling, general and administrative expense ratio from 19.0% in the year-ago quarter to 16.8% in the fourth quarter of 2013.

Category Details

GPA Food: GPA Food’s gross sales increased 14.8% in the quarter, driven by accelerated growth across all Food Retail banners, especially Minimercado Extra, which reported sales growth of 35.6%. The company opened 12 Minimercado, 6 Assaí, 4 Extra Super and 2 Pão de Açúcar, totaling 24 stores in the quarter. Net sales increased 17.2% in the quarter.

Sales in this category were also benefited by the Black Friday promotional campaign. While the company saw strong performances in perishables and beverages in the food category, non-food sales also increased on the back of strong sales of electronics.

Viavarejo: Viavarejo’s gross sales increased 15.1% in the quarter, driven by accelerated sales growth in its businesses (bricks and mortar and Nova Pontocom), which was benefited by Black Friday sales. Net sales increased 15.1% in the quarter.

2013 Results

In 2013, consolidated gross sales increased 12.8% on the back of same store sales growth of 9%. Consolidated net sales grew 13.7% in 2013. The company ended the year 2013 with 128 new stores, of which 87 were GPA Food and 41 were ViaVarejo stores.

The company also reported its 2013 earnings of R$3.75 ($1.75 per share), way behind the year-ago earnings of R$3.78 per share ($1.95 per share) due to a challenging macroeconomic environment marked by modest growth and interest rate hikes in order to control inflation. The earnings results also lagged the Zacks Consensus Estimate of $1.98 per share.

During the year, the company focused on implementing a competitive pricing strategy in the Food Retail segment, especially in the Extra banner segment, which helped it to gain market share and increase customer traffic.

ViaVarejo sales improved as did its operating efficiency. The segment also strengthened its presence in the capital markets by carrying out an IPO at the end of the year. The IPO also strengthened the financial structure of GPA, helping it to reduce its net debt position. The company launched Extra Marketplace, a new sales model at Nova Pontocom in 2013 that brings together in a single website offers from multiple stores in a variety of segments thus offering a better product assortment.

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

Other better-ranked companies in the retail sector include Haverty Furniture Companies Inc (HVT - Snapshot Report), Etablissements Delhaize Fr (DEG - Snapshot Report), and Foot Locker Inc (FL - Snapshot Report). All of them hold a Zacks Rank #2 (Buy).

*1R$=$0.46614 for the year ending Dec 31, 2013

**1R$=$0.51480 for the year ending Dec 31, 2012

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