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We reiterate our Neutral recommendation on Companhia Brasileira de Distribuicao (CBD - Analyst Report) following an appraisal of its second quarter 2012 results.

The company reported second quarter 2012 earnings per share of 31 cents, up 40.9% from 22 cents in the second quarter of 2011. The results also surpassed the Zacks Consensus Estimate of 24 cents per share by 29.2%. The increase reflected the continuing operational improvements in GPA Food and Viavarejo. In the second quarter of 2012, gross sales, comprising GPA Food and Viavarejo, increased 7.2% (in local currency). Consolidated net sales climbed 6.8% during the quarter. Gross margin also expanded 40 bps to 26.9% from the prior-year quarter, on the back of robust sales growth.

We are optimistic about the company’s position in the retail sector. Companhia Brasileira is a leading player in the global food retail sector based on both gross sales and number of stores in 2011, with market share of approximately 23.5% in the Brazilian food retail sector. In addition, CBD is the second biggest retail company in Latin America in terms of 2011 revenue and the second largest online retailer in Brazil.

The company has also strengthened its portfolio with acquisitions. It has acquired many supermarket chains since 1981 in order to increase its market share. The acquisitions include Coopercitrus, Lourenção, Barateiro, Peralta, Paes Mendonça, ABC Supermercados, Sé Supermercados, Sendas, São Luiz, Nagumo and Rosado. The acquisition of Assaí chain stores (2009) helped the company enter into cash-and-carry operations. The company forayed into the home appliances retail sector with the acquisition of PontoFrio chain (2009) and Casas Bahia (2010) and became the largest home appliance retailer in Brazil. Since 2009, the company has acquired 983 stores in the home appliances retail sector. We expect the company to enhance its portfolio with more acquisitions in the long term.

Further, the company has expanded its e-commerce business with the acquisition of Nova Casa Bahia, and by concentrating all e-commerce assets of the Pão de Açúcar Group and Casa Bahia Comercial Ltda. into Nova Pontocom. The acquisition of E-Hub, a service company in the e-commerce segment, further enhanced the company’s e-commerce business.

However, the retail sector has experienced economic slowdown in 2012 that has led to a decline in consumer spending. The continued weakness in consumer expenditure may impact the company’s home appliances sector. Further the company faces intense competition from its rivals, such as Wal-Mart Stores, Inc. (WMT - Analyst Report) and Carrefour SA as well as from local and regional players in the respective countries. In addition, the sour relationship between the holding groups of the company will remain a significant overhang.

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