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Brazilian retail giant Companhia Brasileira de Distribuicao (CBD - Analyst Report) or Grupo Pão de Açúcar (GPA) has started the year 2014 on a strong note with double-digit increases in earnings and sales, despite tough macroeconomic conditions.

In the first quarter, CBD delivered profits of R$338 million (*$143 million), which increased 22.9% (in local currency) from the year-ago quarter. The year-over-year increase in profits reflects sales growth in the period, driven by organic expansion and lower selling, general and administrative expenses.

Results in Detail

In the first quarter of 2014, consolidated gross sales, comprising GPA Food and Viavarejo, increased 10.8% year over year (in local currency) to R$16.597 billion ($7.04 billion), driven by accelerated organic expansion. Sales beat the Zacks Consensus Estimate of $6.68 billion. Consolidated net sales climbed 11.9% during the first quarter.

The company posted same store sales growth of 6.3% in the reported quarter, driven by same store sales growth of 2.6% in GPA Food, 54.1% in Viavarejo and 3.6% in Nova Pontocom. The company opened 21 new stores in the quarter, which fueled growth.

Gross profit increased 6.9% but margin contracted 110 basis points from the prior-year quarter to 24.9% due to higher share of Assaí and Nova Pontocom in the sales mix and the ongoing investments made to boost sales competitiveness in the Multivarejo operation (which consists of Pão de Açúcar and Extra banners).

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) increased 23.0%, driven by strong performance at Via Varejo and Nova Pontocom. However, it was negatively impacted by the Easter effect at GPA Food. Adjusted EBITDA margin increased 70 basis points to 7.2% in the first quarter of 2014.

Category Details

The company operates through the food retail, cash and carry, electronics and home appliances retail (bricks and mortar),and e-commerce business segments. These segments are grouped into two large categories, namely GPA Food, Nova Pontocom 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.

GPA Food: GPA Food’s gross sales increased 9.1% in the quarter, with same store sales growth of 2.6%. This was driven by accelerated growth across all Food Retail banners, especially Cash and Carry (Assaí), up 38.2% in the quarter driven by solid same-store sales growth and store expansions. The company opened 6 Minimercados Extra, 2 Assaí, 3 Extra Hiper and 2 drugstores, totaling 13 stores in the quarter.  Net sales increased 11.4% in the quarter.

Sales in this category were driven by extraordinary performance at Assaí, driven by solid same-store sales growth and expansion in the store network. In addition, Pão de Açúcar and Extra banners continued to capture market share in the reported quarter.

Nova Pontocom: The category’s gross sales surged 54.1%, driven by same store sales growth of 54.1% on the back of higher customer traffic, better conversion rates and higher sales owing to the marketplace business. Increased sales of smartphones and air conditioners and fans drove sales in the category. Net sales increased 52.6% in the quarter.

Viavarejo: Viavarejo’s gross sales increased 6% in the quarter, driven by same-store sales of 3.6% and 8 new stores openings under the Casas Bahia banner. Net sales increased 5.8% in the reported quarter.

Overall, we are encouraged with the performance of Pão de Açúcar, which is gearing up to expand its stores and market share. The company 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, Pão de Açúcar plans to open 210 stores by 2016 under the ViaVarejo unit.

Companhia Brasileira de Distribuicao currently holds a Zacks Rank #2 (Buy).

Other Stocks to Consider

Other stocks worth considering in the retail sector include Spartan Stores, Inc. (SPTN - Snapshot Report), J. C. Penney Company, Inc. (JCP - Analyst Report) and The Kroger Co. (KR - Analyst Report). While Spartan Stores sports a Zacks Rank #1 (Strong Buy), JC Penny and Kroger carry a Zacks Rank #2.

*1R$=$0.42408 for the quarter ending Mar 31, 2014.

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