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Companhia Brasileira Up 6.2% in a Month: Growth to Sustain?

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Companhia Brasileira de Distribuicao (CBD - Free Report) has seen its shares rally 6.2% over the past month against the industry’s fall of 2.6%. The company, which recently reported solid first-quarter 2018 results, has been gaining from continued strength at Assai among other factors. Let’s see if these factors can keep propelling the Zacks Rank #3 (Hold) stock that continues to battle food deflation.

What’s Driving Companhia Brasileira?

The company remains focused on its strategy for 2018-2020 which aims at delivering solid food segment performance. The company plans to achieve this by utilizing its multi-network and multi-format existence to offer consumers the innovative services and products. Apart from this, the company also remains on track with digital transformation, as highlighted by the launch of My Discount platform at Multivarejo, which garnered considerable success over the last seven months.

Management stated that focus on digital development will remain a major priority in 2018, given consumers’ evolving shopping patterns. Apart from this, the company’s core growth plans involve continued organic expansion and stores optimization along with enhancing retail format offerings and extending offerings of financial services (particularly at Assai). Moreover, the company targets generating synergies of more than $85 million from Latin America.

Also, Companhia Brasileira is gearing up to expand stores and consequently its market share. The company has been putting greater emphasis on renovating Extra banners, as it has been performing better than the non-renovated stores over the last three years. Store modernizations were carried out at all banners in the Food segment, most intensively at Extra. These renovations include not only the layout but also new assortments and improvements in customer service, which will in turn drive higher sales. The company operated 127 Assai stores by the end of the first quarter of 2018.

Focus on such growth efforts drove Companhia Brasileira’s performance in first-quarter 2018, wherein Assai continued to stand out. During the quarter, overall net income from continuing operations surged 40.1% (in local currency) year over year. Increased sales and higher adjusted EBITDA led to the upside. Further, net revenues increased 7.5% year over year in local currency. Also, EBITDA margin expanded 30 bps, courtesy of higher margins at both segments. At Multivarejo, the margin expansion was backed by reduced selling costs and productivity gains while Assai’s margins gained from favorable taxation and store expansion efforts.

Hurdles to be Offset?

However, Companhia Brasileira continues to battle food deflation. Evidently, food deflation had a negative impact on Assai’s gross margin in the first quarter of 2018 while it also led to an increase in Assai’s SG&A expenses. Also, food deflation dampened gross sales at Multivarejo. Prior to this, deflation was a major drag on Companhia Brasileira’s fourth-quarter results, wherein net income declined 18.4% year over year — hit by contraction in EBITDA margin largely stemming from acute food price deflation. Unfortunately, management had earlier stated that it expects food deflation to persist in 2018 which remains a threat.

Nonetheless, Companhia Brasileira regained its leading position in the Brazilian food space during the last reported quarter, courtesy of its strategic plan to focus on the cash-and-carry segment. Going forward, the company remains confident of strengthening this position, courtesy of continued strength in Assai and expected enhancements at Multivarejo.

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