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Companhia Brasileira (CBD) Q4 Earnings Benefit From Assai

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Companhia Brasileira de Distribuicao (CBD - Free Report) or Grupo Pao de Acucar reported fourth-quarter 2018 results, wherein the company continued to witness solid performance in Multivarejo and Assai units. Further, the company is on track with store expansion and renovation plans. Thanks to such efforts, this Zacks Rank #2 (Buy) stock has gained 31.1% in the past six months compared with the industry’s 6.3% growth.

During the quarter, net income from continuing operations of the food business came in at R$471 million ($123.6 million), which increased significantly (in local currency) year over year. We believe that increased sales and higher adjusted EBITDA led to the upside.



Results in Detail

Gross sales in the quarter came in at R$15,237 million ($3,999.6 million). The Zacks Consensus Estimate was pegged at $3,694 million. Gross sales increased 12.1% year over year in local currency, backed by growth in the Assai and Multivarejo units.

Gross profit inched up 0.1% in local currency to R$3,195 million ($838.7 million), whereas gross margin contracted 270 basis points (bps) to 22.8%. Adjusted EBITDA for the food business advanced 29.4% to R$801 million ($210.3 million), with the adjusted EBITDA margin expanding 70 bps to 5.7%, courtesy of higher margins in the segments.

Segment Details

Multivarejo gross sales rose 3.2% in local currency to R$7,937 million ($ million), while same-store sales grew 4.5%. Considerable growth in Extra Super and Proximity format sales were major drivers. Also, the segment benefited from digital transformation efforts and private-label brand repositioning. Talking of digital transformation, the company’s My Discount app, My Rewards initiative, food e-commerce sales growth, and focus on alliances and buyouts are yielding.

Gross margin contracted 420 bps to 27%, owing to competitive pricing. SG&A expenses declined on lower personnel costs and stringent cost control. Higher sales and solid expense control led the adjusted EBITDA margin to expand 50 bps to 5.5%.
 
In September 2018, the company renovated 15 Pao de Acucar stores under Generation 7 concept. In 2019, the company intends to renovate 10-15 Pao de Acucar stores.

Gross sales in the Assai unit remained strong, surging 23.6% in local currency to R$7,300 million, backed by higher sales volume, enhanced traffic and market share gains. Further, Assai’s same-store sales jumped 9.9%, courtesy of new commercial activities, solid marketing and enhanced product assortments.

Gross margin remained almost flat at 16%. SG&A expenses as a percentage of sales improved, due to productivity gains, solid same-store and new-store sales, and various operational enhancement plans. Also, adjusted EBITDA margin grew 70 bps to 6% on account of higher sales.

During the quarter, the company opened 10 stores, thereby concluding 2018 with 18 new stores (including 16 organic openings and 2 conversions from Extra Hiper). The company is on track to open 15-20 Assai stores in 2019.

Financial Details

Companhia Brasileira ended the quarter with cash and marketable securities of R$4,369 million ($1,125.5 million) and total shareholders’ equity of R$13,939 million ($3,591 million).

During the year, the company spent R$1.7 billion ($0.4 billion) as capital expenditure on the food segment. This was allocated toward store expansions, renovations and conversions. Also, Companhia Brasileira is on track with its pilot projects (Compre Bem and Mercado Extra) for the Extra Super banner, to increase presence in its targeted customer base. During 2018, the company revitalized 23 Extra Super stores, converting them to Mercado Extra. Moreover, management converted 13 stores into the Compre Bem, including 12 Extra Super stores and 1 Extra Hiper store.

Outlook

Companhia Brasileira’s performance in the quarter was solid, owing to continued strength at Assai and improved trends at Multivarejo. The company is on track with its digital transformation efforts, which include focus on innovation and implementation of omni-channel strategies to enhance customers’ experience.

For 2019, management expects same-store sales at Multivarejo to rise nearly 100 bps above IPCA inflation. Further, Assai is anticipated to continue with its robust expansion, with same-store sales expected to rise 200 bps above inflation level and total sales expected to advance more than 20%.

Further, EBITDA margins for Multivarejo and Assai are projected to increase 30 bps and 30-40 bps, respectively. Multivarejo is expected to gain from optimization projects, improved operating efficiency and portfolio repositioning. Assai is anticipated to benefit from the recent store openings.

Capital expenditure is envisioned to be R$1.7-R$1.8 billion.

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