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Brazilian retailer Companhia Brasileira de Distribuicao (CBD - Analyst Report) reported first quarter 2013 earnings of R$ 0.90 (45 cents per share) compared with R$0.64 per share (36 cents per share) in the year-ago quarter. The increase reflected sales growth, efficient control of expenses and reduction in financial expenses despite slow wage growth and eroding consumer confidence.

The continuing operational improvements in the four business segments of food retail; cash and carry; electronics and home appliances retail (bricks and mortar); and e-commerce also added to growth. 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. Viavarejo includes household appliances and e-commerce operations through Nova Pontocom.

Quarter in Detail

In the first quarter of 2013, consolidated gross sales, comprising GPA Food and Viavarejo, increased 9.7% year over year (in local currency) driven by improved food retail performance. The electronics and home appliance brick-and-mortar stores, led by Pontofrio, drove same-store sales growth of 6.6%. Consolidated net sales climbed 10.2% during the quarter.

The company opened 25 new stores in the quarter which fueled growth. For 2013, the company plans to open more than 150 stores, targeting northeast and mid-west regions.

Though gross profit climbed 8.9%, gross margin contracted 30 basis points to 26.4% from the prior-year quarter, pressured by increased competition in cash-and-carry stores.

Earnings before interest, tax, depreciation and amortization (EBITDA) increased 11.2% benefiting from lower operating expenses at Viavarejo. EBITDA margin remained flat at 6.4% in the first quarter of 2013.

Category Details

GPA Food’s gross sales increased 10.6% in the quarter, driven by 6.4% growth in gross same store sales. The growth in same store sales was driven by both retail and cash and carry sales growth. The 19 new stores added in the quarter also boosted segment sales.  Net sales increased 10.9% in the quarter.

Viavarejo’s gross sales increased 8.7% in the quarter, driven by growth in gross same store sales. Net sales increased 9.3% in the quarter.

Other Details

The company launched ‘Extra Marketplace’ – the first online shopping mall in Brazil in early Mar 2013. It will be operated through the Extra.com.br website. This initiative has increased the number of products in the e-commerce platform from 120,000 items in March to 200,000 items in April. CBD expects to reach 600,000 items by Dec 2013, which indicates the growth potential of the platform.

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 has also remained encouraging.

The company has been focusing on its food business, instead of other categories of appliances and electronics, as consumers find it difficult to purchase these items in the current economic scenario. 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 #3 (Hold). Other retail companies that warrant a look are Kroger Inc (KR - Analyst Report), Green Mountain Coffee Roasters, Inc (GMCR - Analyst Report) and Safeway Inc (SWY - Analyst Report). While Kroger and Green Mountain hold a Zacks Rank #1 (Strong Buy), Safeway holds a Zacks Rank #2 (Buy).

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