company independent report - bryan, · pdf fileindependent research carrefour 20th november...
TRANSCRIPT
r r
INDEPENDENT RESEARCH Carrefour 20th November 2014 Hypermarkets are dead, long live hypermarkets
Food retailing Fair Value EUR30 (price EUR24.55) BUY Coverage initiated
Bloomberg CA FP
Reuters CARR.PA
12-month High / Low (EUR) 29.2 / 22.1
Market capitalisation (EURm) 18,038
Enterprise Value (BG estimates EURm) 26,652
Avg. 6m daily volume ('000 shares) 2,627
Free Float 83.4%
3y EPS CAGR 16.6%
Gearing (12/13) 48%
Dividend yields (12/14e) 3.91%
ROCE (3) = operating margin (1) x asset turnover (2). Carrefour led a margin-centric (1) Stop & Go pricing policy for years, with negative repercussions on prices and hence its customers. With a new-found ecosystem (Carmila), the retail group has switched to a cash margin approach with permanent price cuts that are galvanising customer flows and loyalty (2). Ultimately, this should help Carrefour achieve its full value creation potential (3). Based on an FV of EUR30 (DCF+SOP), we have decided to initiate coverage of Carrefour with a Buy rating.
While sometimes underestimated and even ignored, the repercussions of the French law to modernize the economy (Loi de Modernisation de l’Economie – LME – January 2009) have helped fuel a solid turnaround. By making it possible for hypermarkets to start investing again in National Brand (NB) prices, the LME firmly tilted the balance of power back towards major brands and away from private labels (PLs), i.e. giving hypermarkets a new edge over Hard Discounters (HDs). This is illustrated by upselling within product assortments, which offsets the impact of price deflation on sales.
Concerns, while legitimate... 1/ in France, the deflation is notably being orchestrated by listed retailers and suffered by discounters (unlike in the UK where it is organised by discounters and endured by listed retailers). It is therefore not an irrational strategy (current operating profit guidance of EUR2.38bn does not appear to be in jeopardy), but primarily reflects the democratisation of a cash margin approach to the business. What’s more, 2/ while investors are circumspect regarding the new balance of power brought about by consolidation, there is no certainty, in our view, that pooled procurement agreements will have the desired effect.
… should not overshadow the extra leverage. In what is a tough context, Georges Plassat (CEO) has delivered results in all of the areas he has been tackling. 1/ He is the most qualified person to see through the overhaul of logistics (EUR245m in savings, which should help bring French margin up to an estimated 4.0% in 2016), a feat he already accomplished at Casino. 2/ Carrefour has also trimmed its cost base in Europe, which should give it considerable leeway to expand margins (+60bp of margin between 2013 and 2016) once it has turned around sales (particularly in Spain).
Upside (22%) is not adequately priced in. 1/ In our view, added potential for growth in group margin (+60bp between 2013 and 2016) is far from depleted. 2/ Given projected earnings growth (CAGR of 15% for 2014/17), valuation considerations (PEG of 1.1x vs. 1.4x for the closest peers) should not be a hindrance. 3/ Furthermore, from a sector standpoint, amid the polarisation of the offer in European markets, we award a premium to retailers that, like Carrefour and in contrast to Tesco, have experience in handling competition from independents and discounters.
YE December 12/13 12/14e 12/15e 12/16e
Revenue (EURm) 74,888 74,760 79,333 82,311
EBIT(EURm) 2,382 2,647 2,656 2,999
Basic EPS (EUR) 1.82 1.75 1.81 2.13
Diluted EPS (EUR) 1.35 1.51 1.81 2.13
EV/Sales 0.4x 0.4x 0.3x 0.3x
EV/EBITDA 7.3x 7.0x 6.5x 5.9x
EV/EBIT 11.2x 10.1x 10.2x 8.9x
P/E 18.2x 16.2x 13.5x 11.5x
ROCE 9.8 9.7 10.1 11.0
Price and data as at close of 19th November
78
83
88
93
98
103
108
CARREFOUR STOXX EUROPE 600
19/11/14
Source Thomson Reuters
Analyst: Sector Analyst Team:
Antoine Parison Loïc Morvan
33(0) 1 70 36 57 03 Cédric Rossi
[email protected] Virginie Roumage
Carrefour
2
Simplified Profit & Loss Account (EURm) 2011 2012 2013 2014e 2015e 2016e 2017e
Revenues 81,272 76,788 74,888 74,760 79,333 82,311 85,573
Change (%) -9.8% -5.5% -2.5% -0.2% 6.1% 3.8% 4.0%
EBITDA 3,883 3,688 3,670 3,805 4,164 4,564 4,795
Current operating income 2,182 2,140 2,238 2,383 2,656 2,999 3,168
Exceptionals (2,662) (707) 144 264 0.0 0.0 0.0
EBIT (480) 1,433 2,382 2,647 2,656 2,999 3,168
Change (%) -126% -% 66.2% 11.1% 0.3% 12.9% 5.6%
Financial results (757) (882) (722) (560) (510) (501) (469)
PBT (1,237) 551 1,660 2,087 2,146 2,498 2,699
Tax (1,002) (388) (631) (756) (777) (905) (978)
Profits from associates 64.0 72.0 30.0 24.0 30.0 30.0 30.0
Income from discontinued activities 2,580 1,081 306 0.0 0.0 0.0 0.0
Minority interests (34.0) (83.0) (102) (120) (120) (120) (120)
Net profit / group share 371 1,233 1,263 1,235 1,278 1,503 1,631
Restated net profit 992 793 936 1,067 1,278 1,503 1,631
Change (%) -31.7% -20.1% 18.0% 14.0% 19.8% 17.6% 8.5%
Cash Flow Statement (EURm)
Operating cash flows 2,154 2,448 2,347 2,518 2,907 3,188 3,378
Capex, net (2,330) (1,547) (2,159) (2,467) (2,479) (2,429) (2,375)
Change in working capital (1,515) (609) (220) (8.4) 299 195 214
FCF (1,691) 292 (32.0) 42.9 727 954 1,216
Financial investments (41.0) (175) (33.0) (255) (600) 0.0 0.0
Dividends (811) (258) (209) (316) (581) (676) (777)
Capital increase (126) 0.0 0.0 (20.0) 0.0 0.0 0.0
Assets disposal 1,852 2,226 1,121 155 0.0 0.0 0.0
Other 1,902 506 (643) 18.0 0.0 0.0 0.0
Increase in net debt 1,085 2,591 204 (376) (454) 278 439
Net debt 6,912 4,321 4,117 4,493 4,947 4,669 4,230
Balance Sheet (EURm)
Tangible fixed assets 14,826 12,310 11,876 13,022 14,593 15,456 16,204
Intangibles assets 8,651 8,608 8,277 8,277 8,277 8,277 8,277
Cash & equivalents 3,893 7,038 5,058 4,525 3,914 4,035 4,317
Other assets 20,563 17,889 18,354 18,521 19,194 19,697 20,230
Total assets 47,933 45,845 43,565 44,346 45,978 47,466 49,029
Shareholders' funds 7,628 8,361 8,597 9,646 10,493 11,470 12,473
L & ST Debt 11,672 11,246 9,233 9,233 9,233 9,233 9,233
Provisions 3,680 4,000 3,618 3,721 3,721 3,721 3,721
Others liabilities 24,953 22,238 22,117 21,746 22,531 23,042 23,602
Total Liabilities 47,933 45,845 43,565 44,346 45,978 47,466 49,029
WCR (5,732) (5,123) (4,903) (4,895) (5,194) (5,389) (5,603)
Capital employed 17,745 15,795 15,250 16,404 17,676 18,344 18,879
Ratios
Operating margin 2.68 2.79 2.99 3.19 3.35 3.64 3.70
Tax rate (81.00) 70.42 38.01 36.23 36.23 36.23 36.23
Normative tax rate 33.00 33.00 33.00 33.00 33.00 33.00 33.00
Net margin 1.22 1.03 1.25 1.43 1.61 1.83 1.91
ROCE (after tax) 8.24 9.08 9.83 9.73 10.07 10.95 11.24
WACC 8.50 8.00 7.80 8.50 8.50 8.50 8.50
Gearing 90.61 51.68 47.89 46.58 47.15 40.70 33.91
Net debt / EBITDA 1.78 1.17 1.12 1.18 1.19 1.02 0.88
Pay out ratio 110 37.61 44.91 54.77 57.41 53.22 53.76
Number of shares, diluted 658 681 695 705 705 705 705
Data per Share (EUR)
EPS 0.56 1.81 1.82 1.75 1.81 2.13 2.31
Restated EPS 1.51 1.16 1.35 1.51 1.81 2.13 2.31
% change -29.5% -22.8% 15.6% 12.4% 19.8% 17.6% 8.5%
Operating cash flows 3.28 3.60 3.38 3.57 4.12 4.52 4.79
FCF (2.57) 0.43 (0.05) 0.06 1.03 1.35 1.73
Net dividend 0.62 0.68 0.82 0.96 1.04 1.14 1.24
Source: Company Data; Bryan, Garnier & Co ests.
Company description
Carrefour is a multi-local (France,
Europe, Latam and Asia) and multi-
format (mainly hypermarkets but also
supermarkets, C&C and proximity)
operator. It was the pioneer in many
countries such as Brazil (1975) and
China in (1995). It is the leading
retailer in Europe (and the second-
largest retailer in the world),
employing nearly 365,000 people.
With more than 10,600 stores under
banner, it generated net revenues of
€75 bn in 2013.
Carrefour
3
Table of contents
1. Investment Case ........................................................................................................................................... 4
2. We are confident in a solid recovery! ....................................................................................................... 5
2.1. LME and upselling have kick-started the recovery ...................................................................... 5
2.1.1. LME has restored hypermarkets’ pricing edge over hard discounters ....................... 5
2.1.2. The benefits of deploying PLs are waning, with a renewed push behind NBs ......... 7
2.1.3. Intense upselling is helping to dilute the effects of price deflation on sales .............. 9
2.2. Carrefour has shifted its focus from operating margin to cash margin ................................. 10
2.2.1. 2000 - 2011: Focusing on operating margin (PL-friendly) ......................................... 11
2.2.2. 2012 - 2014: Deploying an cash margin strategy (NB-friendly) ................................ 11
2.2.3. 2014: Carmila breathes new life into Carrefour’s commercial ecosystem ............... 13
3. Some concerns, while legitimate… ....................................................................................................... 15
3.1. Price war: a concern of the past, present and future ................................................................. 15
3.1.1. How Casino rocked the boat ........................................................................................... 15
3.1.2. How does the problem translate into figures? ............................................................. 16
3.1.3. A risk that needs to be put into perspective ................................................................. 17
3.2. Our thoughts on the consolidation underway in the French market ..................................... 18
3.2.1. A move that was to be expected ..................................................................................... 18
3.2.2. What did Casino have to gain from upsetting the applecart? .................................... 20
3.2.3. Not easy for integrated retailers and independents to find common ground ........ 21
3.2.4. Size is not everything ........................................................................................................ 21
4. … should not overshadow the additional margin growth potential................................................ 23
4.1. Caravelle should fuel margin, irrespective of the competitive context .................................. 23
4.1.1. EUR245m in potential savings (adding 60bp to French operating margin) ........... 23
4.1.2. Normative margin of 4.0% in France by 2016 ............................................................. 24
4.2. Carrefour needs to tap into operating leverage in international markets .............................. 26
4.2.1. Italy (6% of sales) should continue to weigh on 2014 current operating profit… 26
4.2.2. …but Spain (10% of sales) and Belgium (5%) are headed in the right direction! . 27
4.2.3. Emerging markets (28% of sales in Latam and Asia) should continue to fuel growth
28
5. Ultimately, upside (+22%) is not fully priced in ................................................................................. 31
5.1. PEG of 1.1x and an FV of EUR30 (average of a DCF and an SOP) ................................... 31
5.1.1. Very attractive earnings growth potential within the sector ...................................... 31
5.1.2. Our DCF values the share at EUR27 ............................................................................ 32
5.1.3. Refocusing on key assets calls for an SOP approach (EUR33) ................................ 34
5.2. The SOP contains an added source of value .............................................................................. 37
5.2.1. Atacadao IPO will be a big focus…............................................................................... 37
5.2.2. … as will Carmila............................................................................................................... 38
Bryan Garnier stock rating system............................................................................................................... 39
Carrefour
4
1. Investment Case
The reason for writing now The retail sector is undergoing unprecedented change. This is evident in both the UK (as hard
discounters take centre stage and Tesco flails) and France (price war and consolidation). Investors are
being turned off by price deflation. However, they should be drawn to Carrefour as it: 1/ still has
leeway to shrink costs, which should help drive earnings growth; and 2/ is buoyed by conditions in its
domestic market that lend themselves well to hypermarkets.
Valuation Carrefour is trading at a discount of 20% on the basis of EV/Sales and 5% based on EV/EBIT.
Going by earnings growth (CAGR of 14% for 2014/16 according to consensus figures), we would not
expect valuation aspects (PEG of 1.1x vs. 1.4x for its peers) to be a hindrance. In actual fact, we award
a premium to retailers that are used to handling competition from independents and discounters.
Carrefour fits this profile whereas Tesco does not.
Catalysts 1/ With each publication, we see Carrefour providing further evidence of its capacity to generate
savings with Caravelle (EUR245m in potential savings earmarked by 2016). 2/ It can still create value
on a number of assets (we are not ruling out an IPO in Brazil and, looking even further ahead, a
similar move with Carmila).
Difference from consensus Without minimising the persistent question marks regarding their future (i.e. socio-demographic
trends, the non-food segment… essentially concerning the largest stores), we expect French
hypermarkets retailers to be buoyed, at least in the medium term, by a very favourable regulatory
context (LME – law to modernize the economy).
Risks to our investment case 1/ A sharp slowdown in Brazilian operations (est. 24%e of 2015 EBIT excl. global functions) could
have negative repercussions, although Carrefour is not at all envisaging such a scenario. 2/ Based on
past experience, investors may be wary of the execution risk tied to a large-scale acquisition in France
and/or a detrimental competition scenario.
Carrefour
5
Before we go any further, it is important to stress that trends in the food retail market develop over
long-term periods and that experts’ views have always been somewhat erratic. For instance, on some
occasions, one may have blindly gone along with common arguments that: 1/ hypermarkets were a
thing of the past; 2/ hard discounters would control 30% of the market in 2020; and 3/ the drive-
through concept would be the game-changer. At the height of the Internet bubble, there was even
talk that the web could account for 20% of FMCG (Fast-Moving Consumer Goods) sales in 2020 (it
currently makes up less than 1% of the market and just over 4.8% if we factor in drive-through sales).
2. We are confident in a solid recovery!
2.1. LME and upselling have kick-started the recovery
2.1.1. LME has restored hypermarkets’ pricing edge over hard discounters
With the introduction of the Galland law (1996), and up until 2009 (LME), retailers were prohibited
from negotiating supplier prices (i.e. no price discrimination linked to market share). 1/ They offset
this opportunity cost by charging back-margins (i.e. commercial cooperation services) to their
suppliers. These back-margins were not deductible from the BCS price (Below-Cost Selling threshold,
below which retailers are prohibited from selling goods).
Fig. 1: Back-margins as a percentage of net invoiced price
Source: ILEC; Bryan, Garnier & Co ests.
2/ In a bid to offset ever-mounting back-margins (40% of the net invoiced price in 2007 vs. 12% in
1995), manufacturers increased their supplier rates, which were used to calculate the BCS threshold.
3/ The steady increase in back-margins sent prices careering upwards and widened operating margins.
4/ Carrefour used this distorted mechanism to finance unbridled international expansion.
Meanwhile, in France, competitive NB price positioning disintegrated.
12
% 16
%
17
%
22
% 24
% 27
% 29
% 31
%
32
%
34
% 35
% 37
% 40
%
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
The Galland law prevented hypermarket retailers from lowering NB prices (ergo, avoiding a price war)
Carrefour used this distorted mechanism to finance unbridled international expansion
Carrefour
6
Fig. 2: Simulated theoretical and simplified impact of the Galland law and the LME on retailers’ margins
Before Galland law During Galland law During Dutreil law LME
Purchase price billed by supplier 100 100 100 100
Back-margin (assumption) 33 33 33 33
Cost price for retailer 67 67 67 67
Below-cost selling threshold 67 100 82 67
Minimum retail price 67 100 82 67
Retailer’s gross margin 0 33 15 0
Source: ILEC, Company Data; Bryan, Garnier & Co ests.
Fig. 3: Number of countries in Carrefour’s portfolio and operating margin
Source: Company Data; Bryan, Garnier & Co ests.
By authorising retailers to negotiate supplier prices and deduct all back-margins from the BCS
threshold (a measure partly introduced by the Dutreil directive) using the “triple net” principle (i.e. the
price calculated net of 1/ rebates, 2/ discounts and 3/ allowances), the LME (January 2009) made it
possible for hypermarket retailers to invest again in NB prices (it is now easy to see why Michel-
Edouard Leclerc was such a fervent backer of the LME). Today we see two main consequences 1/ a
marked decrease in NB prices; and 2/ the collapse of hard discounters (80bp loss of market share on
average in 2013), in stark contrast to the situation under the Galland and Raffarin laws. Lidl’s
decision to withdraw from the segment and Carrefour’s acquisition of Dia France are perfect
illustrations of this turn of events.
Galland law
IFRS
Dutreil Circular LME
0%
1%
2%
3%
4%
5%
6%
7%
0
5
10
15
20
25
30
35
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
Nu
mb
er
of
cou
ntr
ies
Operating margin in France
The LME authorised hypermarket retailers to invest in NBs again
Carrefour
7
Fig. 4: Inflation in demand (HM+SM) by product category
Source: IRI; Bryan, Garnier & Co ests.
Fig. 5: Market share trends for e-commerce, hard discounters and HM+SM
Source: IRI; Bryan, Garnier & Co ests.
A number of leading names in the sector, e.g. Système U’s chairman Serge Papin, are calling for the
LME to be amended. They want to see 1/ the back-margin mechanism restored and/or 2/ the BCS
threshold, ergo retail prices, raised (Serge Papin’s preferred option). However, given the current
strain on consumers’ purse strings, we think that neither of these options would sit well with
the politicians. Therefore, for the medium term at least, conditions should remain good for
hypermarkets, and hence Carrefour.
2.1.2. The benefits of deploying PLs are waning, with a renewed push behind NBs
The Galland law made it impossible for retailers to set themselves apart with NB pricing up until
2009. They therefore sought to distinguish themselves by massively deploying their own
private labels (particularly themed labels). Between 2005 and 2010, the offer share for private labels
rose steadily and firmly. Demand drove performance in product ranges.
-5,0
-3,0
-1,0
1,0
3,0
5,0
7,0
Oct-
03
Oct-
04
Oct-
05
Oct-
06
Oct-
07
Oct-
08
Oct-
09
Oct-
10
Oct-
11
Oct-
12
Oct-
13
Oct-
14
National brands Entry prices Private labels
Average = +70 pb
Average = - 80 pb
Average = +10 bp
-1,5
-1,0
-0,5
0,0
0,5
1,0
13
P0
2
13
P0
3
13
P0
4
13
P0
5
13
P0
6
13
P0
7
13
P0
8
13
P0
9
13
P1
0
13
P1
1
13
P1
2
14
P0
1
14
P0
2
14
P0
3
14
P0
4
14
P0
5
14
P0
6
14
P0
7
14
P0
8
14
P0
9
E-commerce HD HM+SM
A drastic reform of the LME is unlikely in our opinion, due to political considerations
Carrefour
8
Fig. 6: Private labels’ offer share and market share (HM+SM)
Source: IRI; Bryan, Garnier & Co ests.
However, as time went on, performance charts started to point downwards on a “comparable
assortment” basis (from 2008, offer share was growing faster than market share / see Fig. 6).
Alongside the fact that private label themes had become cluttered and poorly-structured, we believe
that it became less interesting for retailers to develop private labels because of 1/ the
implementation of the LME (which helped expand cash margins on NBs); and 2/ greater
awareness of the impact of promotions (with NB suppliers partly bearing the cost). Promotions
accounted for 19.9% of sales in 2013 (FMCG-Fresh goods) versus 13.1% in 2000.
Fig. 7: Promotional pressure and sales under promotion (FMCG-Fresh / HM+SM), rebased to 100
Source: Nielsen Scantrack; Olivier Dauvers; Bryan, Garnier & Co ests.
We can also think of two sociological explanations: 1/ Carrefour introduced private labels in 1976.
Until very recently, its PL range was regularly drawing new customers. Once the switch was made, the
marginal gain on the capture of new customers probably lessened somewhat; and 2/ consumers have
been put off by a string of food scares, so much so that the value-for-money equation is now
leaning in favour of NBs, and hence the hypermarkets, who are the natural defenders of such
brands.
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
Private labels offer share Private labels trafic share
Private labels market share
Switch to the LME
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
Promotional pressure (rebased to 100)
Weight of sales under promotion (FMCG-Fresh) HM-SM
It has become less interesting for retailers to develop their own private labels
The value-for-money equation is now tilting in favour of NBs (away from PLs) and hence hypermarket retailers (vs. HDs)
Carrefour
9
Fig. 8: Dispersion in the price of NB relative to that of PL
Source:INSEE; Bryan, Garnier & Co ests.
Fig. 9: NB and PL sales (HM+SM), six-month rolling average
Source: IRI; Bryan, Garnier & Co ests.
2.1.3. Intense upselling is helping to dilute the effects of price deflation on sales
In concrete terms, the switch in the balance of power between PLs and NBs is evidenced
today by a trading-up effect within product assortments and this is clearly working in favour of
NBs, ergo the hypermarkets (there is an obvious premiumisation within PL assortments themselves,
with the more discount products being pushed to the sidelines). This movement, counterintuitive in
times of crisis, is well illustrated by the IRI market research. It thus appears that inflation in check-out
prices is outweighing demand inflation (i.e. price increase on a comparable basket basis, which
differs from the offer inflation useful to assess price inflation on a product-by-product basis).
This makes for a favourable mix/innovation effect (i.e. upselling).
14%
16%
18%
20%
22%
24%
26%
28%
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
Confidence interval Dutreil II
-4%
-2%
0%
2%
4%
6%
8%
10%
08
P0
6
08
P1
0
09
P0
2
09
P0
6
09
P1
0
10
P0
2
10
P0
6
10
P1
0
11
P0
2
11
P0
6
11
P1
0
12
P0
2
12
P0
6
12
P1
0
13
P0
2
13
P0
6
13
P1
0
14
P0
2
14
P0
6National brands Private Labels
A very favourable mix-innovation effect is offsetting the impact of price deflation on sales
Carrefour
10
Fig. 10: Demand inflation, check-out prices and mix/innovation effect (HM + SM)
Source: IRI; Bryan, Garnier & Co ests.
On this basis, we estimate that the valuation of the offer (i.e. the price of the offer deflated by offer
inflation) is rising. If this valuation increases but the price of each product remains constant (i.e. zero
offer inflation), this signifies that the Offer Share (OS) on more expensive products is rising within
the assortments (in which close to 25% e of products are renewed every year). This offsets the
impact of deflation on FMCG sales.
Naturally, retailers cannot rely on such a commercial ruse to drive up their performance ad infinitum
as they run the risk of being sanctioned by consumers, who may take their custom elsewhere. In fact,
the launch of more expensive products pushes up the valuation of the offer and raises
consumers’ perception of inflation on a constant product line basis (this is probably why
consumers are not feeling the deflationist pressure now). It is also imperative that retailers rapidly
expand sales volumes in order to fuel their cash margins, bearing in mind that the mix effect is not as
favourable in NBs (gross margin of 27% e) as it is in PLs (31% e).
Fig. 11: Sales growth breakdown (HM+SM)
Source: IRI; Bryan, Garnier & Co ests.
2.2. Carrefour has shifted its focus from operating margin to cash margin
-2,0%
-1,0%
0,0%
1,0%
2,0%
3,0%
4,0%
5,0%
6,0%
Feb-0
8
Aug
-08
Feb-0
9
Aug
-09
Feb-1
0
Aug
-10
Feb-1
1
Aug
-11
Feb-1
2
Aug
-12
Feb-1
3
Aug
-13
Feb-1
4
Aug
-14
Mix + Innovation Demand inflation Check-out prices
-4%
-2%
0%
2%
4%
6%
13P0
8
13P0
9
13P1
2
13P1
1
14P0
1
14P0
2
14P0
3
14P0
4
14P0
5
14P0
6
14P0
7
14P0
8
14P0
9
Demand inflation Mix + Innovation Volumes Sales
The valuation of the offer is most certainly increasing and raising the perception of inflation at constant product lines
Carrefour
11
2.2.1. 2000 - 2011: Focusing on operating margin (PL-friendly)
Any half-decent retailer knows how important it is to safeguard their cash margin potential by
keeping their prices permanently low, at the risk of sacrificing their near-term margins rate.
However, with the introduction of the Galland law, Carrefour deployed a Stop & Go pricing
policy over the past decade that was centred instead on protecting near-term operating
margin. This ill-suited commercial strategy caused 1/ inevitable damage in terms of positioning and
price perception; and led to 2/ a string of profit warnings.
In order to fuel operating margin, and in response to the Galland law, Carrefour was probably too
heavy-handed in delisting National Brands (NBs) and replacing them with less expensive and
structurally more lucrative Private Labels (PLs). With Lars Olofsson (former CEO) at the helm, the
group streamlined its product segmentation (premium PLs, core range and discount products),
probably in a bid to echo Tesco’s past success story in the UK.
Fig. 12: Market share for PLs in value (HM+SM)
Source: Nielsen Scantrack; Olivier Dauvers; Company Data; Bryan, Garnier & Co ests.
Consumers gradually moved away from NBs (trading down), which saw their sales volumes in this
segment plunge, notably in 2008 (when both Carrefour and Danone issued profit warnings). The
value-for-money equation tilted in favour of PLs, which were unaffected by the Galland law
directives. Therefore, in the past decade, Carrefour’s price competitiveness was eroded in NBs
(primary attribute) and its product assortment (secondary attribute) thinned.
2.2.2. 2012 - 2014: Deploying an cash margin strategy (NB-friendly)
Coming on top of the LME (January 2009), Georges Plassat’s arrival (April 2012) saw Carrefour
return to the ABC’s of retailing: in a fixed cost industry, the creation of sustainable growth is
absolutely imperative in order to absorb operating costs and generate cash profits. We believe that
this helped Carrefour remember its vocation: 1/ competitive prices across 2/ a comprehensive and
exhaustive assortment of national brands.
Two key measures:
in the year prior to Plassat’s arrival, Noël Prioux (executive director of Carrefour France)
embarked on a repositioning of prices that paid off. Alongside this, Carrefour gradually
started giving more linear shelf space back to major brand suppliers;
LME
15%
17%
19%
21%
23%
25%
27%
29%
31%
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
e
With its Stop & Go policy, Carrefour’s objective was to safeguard short-term operating margin
With Georges Plassat, Carrefour switched from a “push” strategy to a “pull” model
Carrefour
12
Carrefour made the transition from a “push” policy (in which hypermarkets have no say in
the make-up of the product assortments that they stock, with no regard for the catchment area
in which they are located) over to a “pull” strategy (store managers chose quantities
depending on local needs).
This created a virtuous circle in which:
supplier volumes climbed back up, i.e. pumping up Carrefour’s trade debtors account with
FCF optimisation via WCR:
=> we are looking for an FCF yield of 5.7% in 2016 vs. 0.2% in 2014, which is bound to
appeal to investors;
… there were better purchasing conditions and less waste for Carrefour…:
=> the exact waste/markdown rate is unknown but, on our estimates, after climbing to as
much as 6%-7% in some stores, we believe that it should be averaging around 4% now (vs.
an estimated 2% for the best in class retailers);
… consumers were able to avail of interesting prices in their day-to-day shopping:
=> Carrefour’s price index dropped from 98.1 in H1 2011 to 93.6 in H1 2012 and its price
image has been steadily improving since Q3 2012.
Market share growth is the real telling factor when it comes to assessing a retailer’s commercial
performance. By October 2013, Carrefour had started to gain ground back from its rivals (40bp
increase in market share). A year later, it had managed to keep its market share stable in spite of a very
tough comparison basis. We welcome this and believe that Carrefour has entered a new cycle of
market share growth in France.
Fig. 13: Carrefour’s market share gains in France
-90
-60
-10
0
-80
-13
0
-80
-14
0
-11
0
-12
0
-17
0 -15
0
-12
0
-11
0
-13
0
-13
0
-10
0
-40
-11
0
-70
-70
-40
-70
-80
-50
-20
-20
-40
40
30 4
0
10
0
40
-20
30
80
20 3
0
20
0
Jul-
11
Au
g-1
1
Sep
-11
Oct
-11
No
v-1
1
De
c-1
1
Jan
-12
Feb
-12
Mar
-12
Ap
r-1
2
May
-12
Jun
-12
Jul-
12
Au
g-1
2
Sep
-12
Oct
-12
No
v-1
2
De
c-1
2
Jan
-13
Feb
-13
Mar
-13
Ap
r-1
3
May
-13
Jun
-13
Jul-
13
Au
g-1
3
Sep
-13
Oct
-13
No
v-1
3
De
c-1
3
Jan
-14
Feb
-14
Mar
-14
Ap
r-1
4
May
-14
Jun
-14
Jul-
14
Au
g-1
4
Sep
-14
Oct
-14
We believe that Carrefour has entered a new cycle of market share growth
Carrefour
13
Source: Company Data; Kantar; LSA; Linéaires; Bryan, Garnier & Co ests.
On the whole, our feeling is that Carrefour is employing a commercial strategy more and more
on par with that of independent retailers, which, for decades, have been governed by a patrimonial
logic (as opposed to a shareholder-friendly approach). Ultimately, this consists in maximising the
value of the business through strong asset turnover (i.e. optimising sales density), even if this
means sacrificing operating margin over the short term (sticking with this logic, it is hardly surprising
that independents have embarked on a furious drive-through opening campaign, which 1/ draws in
traffic and, to all intents and purposes, 2/ helps generate (?) tax loss carryforwards).
Fig. 14: Sales density at Carrefour’s hypermarkets (Sales incl. VAT / sq. m.)
Source: Company Data; PricewaterhouseCoopers; LSA; Bryan, Garnier & Co ests.
More recently, Carrefour’s acquisition of a portfolio of shopping malls from Klépierre is the cherry on
the cake. Not only will the group have a full say in how trading space at some of its hypermarkets is
allocated to outlets at these shopping malls (already the case at Casino with Mercialys and at Auchan
with Immochan), it should also be in a position to recreate a commercial ecosystem, in which
it can remap consumers’ shopping experience and give its hypermarkets added appeal (in
keeping with the idea of asset turnover).
2.2.3. 2014: Carmila breathes new life into Carrefour’s commercial ecosystem
The old opco/propco debate (or how to enhance the value of the whole by separating the parts) has
always been a regular feature in the financial community although no sure conclusion has ever been
drawn. Citing Albert Einstein, Georges Plassat said: “Not everything that counts can be counted, and not
everything that can be counted counts”. In other words, a retailer is at its strongest when it owns and
controls its real estate/shopping malls and the impact is often intangible.
With this in mind, in late 2013 Carrefour purchased back its shopping malls from Klépierre. This
undid what had long been perceived as a fundamental mistake on Carrefour’s part, i.e. the
sale of 160 shopping malls to the commercial real estate firm in the early noughties. The deal
results in the creation of an ad-hoc vehicle bringing together 172 shopping centres stemming from: 1/
the acquisition from Klépierre of 127 sites in France, Spain and Italy, with a value of EUR2bn (with
annual rents of around EUR135m); 2/ the contribution by Carrefour of 45 sites in France for a value
of €0.7bn (with gross annual rents of around EUR45m). Key aspects:
9 000
9 500
10 000
10 500
11 000
11 500
12 000
12 500
13 000
20
07
20
08
20
09
20
10
20
11
20
12
20
13
Au
chan
Carrefour today appears to be moving away from its initial approach (shareholder-centric) towards a more patrimonial one
Carmila: “Not everything that counts can be counted, and not everything that can be counted counts”
Carrefour
14
the consolidation method used for the ad hoc structure (equity method) makes for a
governance set-up in which Carrefour does not control the Board but is responsible for
managing the rental portfolio (as the retailer is not the main leaseholder);
one of the benefits of this solution is that Carrefour does not have to consolidate the
structure’s net debt (EUR900m at the time of the transaction) and will be able to contain
the impact on its French operating margin (management fees will partly offset the shortfall in
rental income on the shopping arcades that it has transferred);
had Carrefour not been comfortable with the prospects for margin growth, it would
likely have opted for full consolidation of the vehicle (this would have added an estimated
30bp to French margin). We therefore find the decision to use the equity method reassuring
from an operational standpoint and optimal for the balance sheet.
Now that it owns the shopping centres in which it operates 1/ Carrefour has a full say in the
extension of its stores. 2/ Carmila also plans to tap into the group’s vast real estate reserves to expand
trading space. These reserves include car parks, which Carmila’s chairman Jacques Ehrmann is keen to
extend vertically. What’s more 3/ Carrefour can now regain control over the renovation of its
shopping centres, an area in which it is currently outdistanced by Leclerc.
This bold venture naturally bears Jacques Ehrmann’s signature (former Mercialys CEO and
current chairman of Carmila and executive director of assets, development and new ventures at
Carrefour), a key figure with a bright future [...] in the making at Carrefour.
Jacques Ehrmann, a key figure in the making at Carrefour
Carrefour
15
3. Some concerns, while legitimate…
3.1. Price war: a concern of the past, present and future
3.1.1. How Casino rocked the boat
Géant Casino’s spectacular shift in pricing policy was the standout event of 2013. Its price
index stood at 105.9 in January 2013, making it the most expensive hypermarket retailer in France. By
November, it had propelled itself to second place with an index of 94, in what was by far one of the
most drastic shifts in pricing policy of the past two decades.
Fig. 15: Pricing at Géant Casino in 2013/2014
Source: Company Data; Bryan, Garnier & Co ests.
2014 signalled the start of the counter-attack by Hard Discounters (with added impetus from
Leader Price). This has yet to translate into market share gains but could have repercussions over
the longer run, if not on hypermarket retailers’ momentum, at least on investors’ perception (this
scenario is borne out by Nielsen data).
Fig. 16: Supply side inflation trends by product type
Source: Nielsen; LSA; Bryan, Garnier & Co ests.
93
95
97
99
101
103
105
107
109
111
113
115
117
Ja
n-1
3F
eb
-13
Ma
r-1
3A
pr-
13
Ma
y-1
3Ju
n-1
3Ju
l-1
3A
ug
-13
Se
p-1
3O
ct-
13
No
v-1
3D
ec-1
3Ja
n-1
4F
eb
-14
Ma
r-1
4A
pr-
14
Ma
y-1
4Ju
n-1
4Ju
l-1
4A
ug
-14
Se
p-1
4O
ct-
14
No
v-1
4
Auchan
Simply marketCarrefour
Carrefour marketCasino
Géant Casino
Monoprix
Super U
Hyper U
E.Leclerc
The LME comes into force
G. Plassat takes the helm
HD launch a counterattack
Strong inflation in raw materials
Strong inflation in raw materials
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Sep
-06
Sep
-07
Sep
-08
Sep
-09
Sep
-10
Sep
-11
Sep
-12
Sep
-13
Sep
-14
All products Private labels Entry prices National brands HD private labels
Géant Casino’s spectacular shift in price policy was the standout event of 2013
Carrefour
16
Fig. 17: Supply side inflation trends by format
Source: Nielsen; LSA; Bryan, Garnier & Co ests.
In response to the reawakening of HDs, and in order to safeguard its long-standing status as the
cheapest retailer in France, 1/ Leclerc has reacted so aggressively that it moved several times the
centre of gravity in the price index (sending most of its rivals into the red in May). What’s more, 2/
Auchan slowly but surely re-entered the race.
3.1.2. How does the problem translate into figures?
After long being penalised by a devastating Stop & Go pricing policy, Carrefour will not be
making any more compromises (according to Georges Plassat). This means that it may need to re-
invest in prices at any time in order to keep its price index at decent levels in relation to Leclerc. The
situation can be summed up as follows:
Leclerc uses a centralised pricing policy, which means that its retaliation to Géant’s attack is
nationwide, with a significant impact on the index;
Carrefour needs to be resolute if it wants to catch up with Leclerc and is not helped by a strong
overlap with Auchan. This puts it in the front line in a price war;
Casino’s geographical overlap with Leclerc and Auchan is not as pronounced. We therefore
doubt that it would be hit as hard by a tougher pricing context.
In terms of the figures, and while there is no confirmed link, our observations suggest that when
Leclerc holds a lead of more than three points over Carrefour in terms of price difference,
Carrefour tends to lose market share. Using a simple calculation, we can gauge how much
Carrefour needs to invest every time it seeks to narrow the gap with Leclerc:
we are working on the assumption that any price investments that Carrefour needs to make
primarily concern NBs at its hypermarkets;
the hypermarkets present sales of EUR19.7bn excluding VAT. We have subtracted fuel
(EUR4.3bn e), non-food (EUR3.8bn e) and PL sales (EUR2.5bn e) from this amount;
our estimates therefore suggest that Carrefour generates sales excluding VAT of EUR8.9bn on
NBs. Hence, in order to lower its prices by 1.5% for instance, it would need to invest
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
Sep
-06
Sep
-07
Sep
-08
Sep
-09
Sep
-10
Sep
-11
Sep
-12
Sep
-13
Sep
-14
MLS Supers HD Hypers
Long penalised by its Stop & Go policy, Carrefour will make no more compromises
Carrefour
17
EUR130m in its prices (i.e. 1.5% x EUR8.9bn), bearing in mind that 2014 current operating
profit is expected to come to EUR2.38bn.
3.1.3. A risk that needs to be put into perspective
While the threat cannot be ignored, nor should it be blown up out of all proportion. On top of the
fact that the mix offsets the impact of price deflation on sales (i.e. organised price deflation),
we consider that:
Carrefour has proven its resilience for several months now (it kept its market share stable in
October, as did Leclerc);
the price difference relative to Leclerc has also stabilised (over four straight periods now
according to data compiled by Olivier Dauvers) and both retailers are satisfied with this;
Casino may need to water down its pricing ambitions amid the pressure it is currently
facing in Brazil (particularly in non-food hypermarket sales);
Auchan is still in the process of digesting the Real acquisition in eastern Europe and is
in no real position to cause any major trouble for Carrefour in France (according to
leblogmulliez.com, Auchan France was even behind its EUR500m 9M EBITDA target by
EUR100m for the period to end-September);
In the past, Carrefour suffered the price war; today it is able to win this war. This is rather
positive development in our view.
Similarly, while we understand investors’ gut reaction to recent consolidation in the industry (strength
in numbers!), we expect the newly-formed structures to come up against a number of hurdles, which
could jeopardise the success of their ventures.
Carrefour
18
3.2. Our thoughts on the consolidation underway in the French market
3.2.1. A move that was to be expected
The repercussions of the LME and measures introduced more recently (i.e. CICE, a tax credit to
encourage competitiveness and job creation) made the sale of Dia France inevitable in our opinion.
Carrefour ultimately agreed to pay EUR300m and take on EUR300m in debt (i.e. an EV/Sales of
0.32x) to get its hands back on an asset that it had originally spun off in 2011.
Incidentally, Dia’s EV (EUR600m vs. a consensus of EUR350m at the time of the deal)
illustrates an essential change in the valuation of retail business, something that had gone
unnoticed until now. New restrictions on retail space planning (notably in the relation between trading
space and car parks) will make it even more difficult and costly to create new space. The value of the
business is thus bound to rise as a knock-on effect of this (which should be borne in mind
when putting together an SOP valuation). Dia was therefore a unique opportunity that Carrefour
was not afraid to seize.
Fig. 18: 2013 market shares in food retail
FMCG – Fresh Market share
Carrefour 20,3%
Leclerc 19,6%
Mousquetaires-Intermarché 14,2%
Casino 11,7%
Auchan 11,3%
Système U 10,3%
Lidl 4,6%
Cora / Louis Delhaize 3,4%
Aldi 2,3%
Dia 1,6%
Other 5,2%
Source: Kantar; Distribook; Bryan, Garnier & Co ests.
The Dia deal was a unique opportunity that Carrefour was not afraid to seize
Carrefour
19
Fig. 19: Regional market shares for leading retailers in 2010*
Source: Kantar, LSA; Bryan, Garnier & Co ests
*The purpose of this map is simply to give an idea of the regional influence of each retailer
Serge Papin has already openly referred to the consolidation issue (quoted in issue 2326 of the
LSA retail trade magazine, 26 June 2014). The Système U chairman said at the time that if
Carrefour were to absorb Dia and Cora and push its market share up to 25%, Système U would need
to look at its options. The Papin-led group did not wait around for Cora (talking to “everybody”) to
fly the Carrefour banner to pool its purchases with Auchan (except in PLs and fresh produce). In the
month that followed, Casino and Intermarché also agreed on a common strategy, although differing
from the Système U/Auchan set-up in that neither group will mandate the other to negotiate its
purchases (whereas U has given Auchan’s buyers a mandate in NB procurement).
This has triggered a radical change in the French food retail landscape with a shift in the balance of
power that has left investors scratching their heads. Recent data (compiled by Kantar, cumulative
annual moving average as at 7 September 2014) suggest that procurement partners
Intermarché and Casino boast the largest market share (25.8%), followed by Carrefour
(21.9%) after the integration of Dia, with newly-weds Système U and Auchan coming very
close behind (21.6%). Leclerc is now believed to be in “mere” fourth place (19.9%). These are
market share statistics for the FMCG-Fresh segment (bearing in mind that the procurement
agreements concern NBs); Carrefour should hold onto the top spot in the French NB segment
(where the money is at the moment).
North 2010 Paris Area 2010
Auchan 20,5 Carrefour 19,4
Intermarché 13,9 Leclerc 10,9
Leclerc 11,5 Auchan 10,4
Carrefour Market 11,1 Carrefour Market 9,7
Carrefour 10,3 Monoprix 8,8
West 2010 East 2010
Leclerc 25,1 Leclerc 22,8
Système U 21,8 Cora 11,2
Intermarché 12,9 Système U 9,5
Carrefour 9,9 Intermarché 8,9
Carrefour Market 7,9 Auchan 7,1
Center-West 2010 Center-East 2010
Leclerc 21,8 Leclerc 13,8
Intermarché 13,1 Carrefour 13,7
Carrefour Market 11 Intermarché 13,4
Carrefour 10,5 Carrefour Market 10,2
Système U 9,6 Système U 8,5
South-West 2010 South-East 2010
Leclerc 22,3 Carrefour 22,8
Intermarché 17,5 Intermarché 11,2
Carrefour 10,9 Leclerc 9,5
Carrefour Market 7,7 Auchan 8,9
Auchan 6,7 Système U 7,1
Carrefour will hold onto the top spot in French NB sales (where the money is)
Carrefour
20
Fig. 20: Ex-post market share
Source: Kantar, LSA; Bryan, Garnier & Co ests.
3.2.2. What did Casino have to gain from upsetting the applecart?
Our initial reaction to Géant’s drastic pricing shift was that the retailer was looking to play a
shrewd game that would ultimately prompt Carrefour to absorb Cora, leaving the likes of
Système U with no option but to team up with another retailer in order to maintain critical
mass. In other words, we felt that Casino was fanning the consolidation flame in order to push a
secondary player (Système U?) 1/ to pool its purchases with Casino or 2/ to acquire a banner that
Casino might consider to no longer have a place in its portfolio.
Recent events put paid to this scenario. We are now thinking along the following lines:
1/ After rekindling a price war and seeming well-placed to use it to its advantage, Casino may in
fact simply be a collateral victim of Système A’s strategy (i.e. Auchan + Système U), after already
misfiring with Dia;
=> this would imply that the decision to team up with Intermarché was simply a
defensive move on Casino’s part. This would fit in with a recent report by Olivier
Dauvers (in edition 134 of his Tribune Grande Conso / September 2014) that Casino held talks
with Système U but that the two groups were unable to find common ground.
2/ Or it may be a matter of timing. Now that its international expansion drive has settled down,
Casino may have decided to take advantage of the CICE tax credit scheme and knuckle down to
a much-needed price shift across its French stores;
=> in other words, all of the hype surrounding Géant’s pricing policy would simply
boil down to a shift from a traditional hypermarket format over to a discount set-up.
Casino may even be reflecting the polarisation of the offer in its strategy, with a discount
format on one side (hypermarkets + supermarkets) and a premium one on the other
(Monoprix).
InterCasino
Système ACarrefour-Dia
Leclerc
Others
Our original sentiment was that Géant might be seeking to play a shrewd game that would ultimately lead Carrefour to snap up Cora
Carrefour
21
3.2.3. Not easy for integrated retailers and independents to find common ground
The LME has spawned hitherto unseen alliances. It has seen international integrated retailing groups
(Auchan and Casino) forge procurement arrangements, without capital ties, with independent
cooperatives that are essentially turned towards the French market (Système U and Intermarché).
While it is not hard to see the appeal of such alliances in terms of geography and format, the
potential for convergence in relation to organisation, strategy and corporate ethos is quite a
different matter.
There are also legal issues. The LME states that the considerations given in exchange for all rebates,
discounts and allowances granted by suppliers must be traceable (sales volumes generated with the
buyer, quality of the products or services provided by the seller, etc.). Yet, as pointed out by Richard
Panquiault (CEO of the French consumer goods industry federation ILEC), how could it be possible
for Système A and suppliers to agree on price aspects for instance when the considerations to be
given in exchange for such prices would need to be negotiated subsequently with each retailer?
Should better purchasing terms be obtained, each of the procurement partners would need to
prove that they had provided real and proportional considerations to the supplier.
3.2.4. Size is not everything
As things stand, given the obstacles we have cited, there is no guarantee that these
procurement arrangements will work or actually last. It is hard not to recall Casino and Cora’s
2002 decision to end their central procurement alliance (Opera) and an earlier similar move by
Système U and Leclerc in 1998 (Lucie).
What’s more, a ceasefire has not necessarily been declared and this might work to Carrefour’s
advantage. An alliance with Cora (3.3% market share) is still an appealing option. It would
make particular sense as Cora used to operate under the Carrefour franchise. In today’s market, it
could prove very difficult for Cora to hold onto its independence or refuse a marriage of convenience.
From a near-term standpoint, out of experience, investors are probably worried about execution risk
related to a large-scale acquisition and/or more intense competition. As we see it, the balance of
power is not just a question of size (for a long time, Carrefour was unable to seal the same
purchasing terms as Leclerc, even though it held a greater share of the market). It also depends on
momentum, an area in which Carrefour ticks all of the boxes (Georges Plassat has weathered
tough market conditions and delivered on each of the promises he made), as it still enjoys
considerable leeway to cut costs and grow margins.
Unexpected (and
uncertain) alliances,
fuelled by the LME
There is no guarantee
that the Système A /
InterCasino
arrangement will work
Carrefour
22
Fig. 21: Roadmap followed by Georges Plassat and his teams
Source: Company Data; Bryan, Garnier & Co ests.
What G. Plassat and his teams have already achieved
•G. Plassat combines the roles of CEO and Chairman, has a good deal of autonomy (unlike his predecessor) and is guiding Carrefour's future direction
(1) An efficient governance set-up
•Disposals worth EUR4.2bn in two years with EUR2,1bn in added potential
•Three flagship international markets remain (Spain, Brazil and China)(2) Non-strategic asset disposals
•G. Plassat gave hypermarket managers more responsibility...
• ...with leeway to adapt their product lines to suit their catchment areas(3) Remotivated teams
• Invigorated by the LME, Carrefour has rediscovered its vocation: 1/ offering competitive prices 2/ across a comprehensive and exhaustive product assortment of national brands
(4) Natural attributes restored to hypermarkets
•N. Prioux was already investing in prices one year before G. Plassat took up the reins
•Carrefour's price image has been steadily improving since the end of 2011 (5) Enhanced price image in France
•Regular market share growth kicking off in October 2013
•Carrefour's market share should climb to 21.9% after the acquisition of Dia(6) Climbing market share in France
•Switch from a "push" (assortment content imposed on hypermarkets) to a "pull" strategy (stores choose their quantities depending on local needs)
(7) Improved stock management
•Better stock and procurement management is enabling Carrefour to bite off market share in the non-food segment and shrink its losses
(8) Turn-around in non-food hypermarket sales
•Carrefour bought back the shopping centres that it had sold to Klépierre a decade ago
•Carmila embodies the renaissance of Carrefour's commercial ecosystem(9) Maximising real estate value
What is left to do or improve upon
•A tight rein on costs in Spain and Belgium should help fuel operating margin once these markets come out of the crisis. There is still a lot of work to do in Italy.
(10) Turn around European operations
•There has been no let-up in momentum in Latam but growth is still flagging in China as well as in Italy. This will be a major international programme for Carrefour
(11) Stimulate growth in emerging markets
•By 2016, G. Plassat wants to reintegrate logistics warehouses and pool platforms so that they can be used to cater for all store formats
(12) Overhaul logistics
Carrefour
23
4. … should not overshadow the additional margin growth potential
4.1. Caravelle should fuel margin, irrespective of the competitive context
4.1.1. EUR245m in potential savings (adding 60bp to French operating margin)
Carrefour has been outsourcing logistics for its hypermarkets to major logistics specialists (ID
Logistics and Nagel) since 2003, as a legacy of the Promodes era. It handles logistics in-house for its
supermarkets and convenience stores. With the Caravelle programme, launched in 2013,
Carrefour wants to reintegrate warehouses and pool logistics platforms so that, by 2016, they
can be used for all of its store formats. As part of the plan, some sites that are currently
overstretched will be extended or relocated.
This means that the assortments at some 4,800 stores are set to become a lot more varied. For
instance, depending on the profile of its customers, a Carrefour City store will be in a position to
order a product that had previously only been stocked by hypermarkets. In theory, Carrefour is
expecting the new set-up to: 1/ lower transportation and warehouse costs, 2/ reduce stocks and
improve their coordination, 3/ generate purchasing gains and 4/ bring warehouses closer to stores.
Fig. 22: Key aspects of ‘Project Caravelle’
Current format Targeted format Developments Schedule
Ploufragan HSCC* = - -
Salon de Provence SCC + Hypermarkets - 2014
St Vulbas SCC + Hypermarkets - 2014
Vendin SCC + Hypermarkets New location 2015
Luneville SCC + Hypermarkets New location 2015
Le Rhieu SPC + Hypermarkets - 2015
Le Mans SPC SCC + Hypermarkets - 2015
Bourges S + Hypermarkets New location 2015
Carpiquet SC + Hypermarkets New location 2015
Nimes HSCC = New location 2015
Cholet SCC + Hypermarkets New location 2015
St Germain les Arpajon SC + Hypermarkets - 2015-2016
Crepy en Valois S + Hypermarkets New location 2015-2016
Colomiers SCC + Hypermarkets New location 2015-2016
Source: CFDT (July 2013); Company Data; Bryan, Garnier & Co ests
HSPC: Hypers+Supers+Convenience+C&C.
This entirely new configuration is also a highly complex one. To give an idea of the scale involved
(and the potential gain), according to the unions, Carrefour France created 400,000 new articles in its
G. Plassat could well
manage to address the
logistics problems
inherited from the
Promodes era
Carrefour
24
databases in 2013 (in non-food, seasonal products and promotional offers… not to mention some
40,000 locally-sourced products) and made one million changes in its computerised system (prices,
packaging, EAN bar codes, etc.). Carrefour has called on the services of Patrice Zygband (who
spent 24 years as a consultant with A.T. Kearney and is close to G. Plassat) to assist it in this
task. Mr Zygband will be helped by Taha Husseini (former head of IT at Casino).
It is not easy to gauge the repercussions of this tricky overhaul on Carrefour’s cost base, bearing in
mind that the full impact is not expected to be felt before 2016. It is our understanding that potential
savings of around EUR245m are achievable (i.e. adding 60bp to operating margin). One thing we are
sure of is that, given what he accomplished at Casino in the late 1990s (when he merged logistics
for hypermarkets and supermarkets with the help of… Patrice Zygband), Georges Plassat could
very well succeed where others have failed (i.e. resolving the logistical headache that dates
back to the Carrefour-Promodes merger).
4.1.2. Normative margin of 4.0% in France by 2016
Normative operating margin in France is one of the biggest grey areas. It was eroded by 150bp
between 2007 (not long before Lars Olofsson’s arrival) and 2012 (before Plassat took up the reins). It
would be interesting to determine how much of this erosion stemmed from management error and
how much from worsening consumer spending conditions.
Furthermore, while the LME has helped Carrefour restore some balance to its sales equation
(returning to an cash margin policy in NBs and ending its Stop & Go approach), it also makes it
hard to bring today’s operating margin above pre-Olofsson levels (i.e. 4.0% in 2008 and 5.5%
in 2004).
Fig. 23: LFL growth (HM+SM) and operating margin (%) at Carrefour France
Source: Company Data; Bryan, Garnier & Co ests.
Our current projections see Carrefour achieving a normative operating margin (i.e. stripping out
losses on Dia France) of 4.0% in 2016 (i.e. a 60bp increase vs. 2013 and 130bp vs. 2012), on a par
with 2008 levels. Keeping the cash margin approach in mind, we think that Carrefour could
reinvest any extra basis point above this in prices.
1,5
-1,2
2,7
1,7 2
,2
3,8
1,6
0,3
0,1 0
,9
-3,5
0,0
1,7
0,9
-2,4
-2,9 -2
,1
-3,4
-3,5
0,2
5,5
4,8
4,6
4,1
4,0
3,0
2,5
2,5 2,6 3
,4
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
LFL excl. fuel (%) Supers LFL excl. fuel (%) Hypers Margin France (%)
Because of the LME, it
is hard to bring today’s
operating margin above
pre-Olofsson levels
Beyond the 4.0% mark,
we believe that
Carrefour could reinvest
every extra bp in prices
Carrefour
25
Fig. 24: Cumulative impact (2014-2015-2016) of various margin parameters on current operating margin
Source: Company Data; Bryan, Garnier & Co ests.
Impact on the topline:
we expect the price effect to be pronounced in 2014 (minus 1.3%), followed by near-
stabilisation in 2015 (minus 0.3%) and a token move back into positive territory in 2016 (plus
0.1%);
while the mix-innovation effect (hidden inflation) should continue to fuel sales growth, we
expect is to gradually decrease between now and 2016 (0.7% vs. 1.3% in 2014);
we see NB products biting off 200bp of the offer share held by PL products between 2014 and
2016, bringing the NB offer share up to 72%;
with its new-look commercial ecosystem, we expect Carrefour to register an average increase in
traffic of 1.3% between 2014 and 2016.
Impact on the bottom line:
following on from the EUR16m operating loss incurred in 2013, we see Dia France
registering further current operating losses of EUR40m in 2014 and EUR25m in 2015
before moving back into positive territory in 2016;
we are anticipating natural cost inflation of 1.5% and average growth of 31bp in gross margin
between 2014 and 2016;
we foresee the full effect of the Caravelle project coming into play in 2016 (EUR245m)
with a third of the savings being generated in 2014, another third in 2015 and the remainder in
2016.
3,4%4,0%
-100 bp+120bp
+40 bp -70 bp +60 bp+25 bp -15bp
EBIT 2013 Price cuts (ow CICE +10 bp)
LFL mix and operating leverage
Gross margin (FMCG+Fresh) improvement
Natural costs inflation
Caravelle project
Non food improvment
Net impact of Carmila
EBIT 2016
Carrefour
26
4.2. Carrefour needs to tap into operating leverage in international markets
4.2.1. Italy (6% of sales) should continue to weigh on 2014 current operating profit…
Speaking at the time of the 2013 annual earnings presentation, Georges Plassat said that, by and large,
operating losses in Italy were linked to a period of irrational market behaviour. He assured investors
that it would not take long to return to breakeven. However, when it came around to the Q1 2014
publication, Plassat said that he was expecting the situation to remain tough for a number of quarters
(no turnaround for two years). The indecisiveness is having harmful repercussions.
Carrefour has been registering negative LFL growth rates in Italy for years, in what is a
highly-fragmented and versatile market. 1/ The presence of powerful independent retailers
(Coop, Conad, Esselunga, etc.), combined with 2/ a lack of critical mass (Carrefour is ranked 6th) and
3/ a strong preference among Italian consumers for convenience store formats (Carrefour operates
45 hypermarkets, 439 supermarkets and 720 convenience stores in the country) will not make things
easy for Eric Uzan (new CEO).
Fig. 25: Market shares for the main retailers in Italy
Source: Company Data; Kantar; LSA; Bryan, Garnier & Co ests.
For the turnaround to happen, Carrefour needs to strike a better balance between EDLP
(Everyday Low Price Products) and articles on promotion. It also needs to ramp up
decentralisation (local pricing and sourcing of regional produce). In the meantime, IRI data (H1
2014) paint a mixed picture (0.5% fall in FMCG volumes). Carrefour will not be able to cover its fixed
costs in 2015, bearing in mind that inflation in costs is higher than the consumer price index. We are
therefore anticipating an operating loss of EUR28m, factoring in negative LFL growth of
2.0%.
Autres26%
Coop Italia15,0%
Conad11,4%
Selex8,4%
Esselunga8,2%
Auchan7,3%
Carrefour5,9%
Eurospin4,7%
Despar3,7%
Sigma3,6%
Gruppo PAM3,2%
Finiper2,8%
Indecisiveness is
harming Italian
operations
Carrefour
27
Fig. 26: Sales on promotions (FMCG - Fresh / Hypermarkets – Supermarkets)
Source: Nielsen Scantrack; Olivier Dauvers; Bryan, Garnier & Co ests.
4.2.2. …but Spain (10% of sales) and Belgium (5%) are headed in the right direction!
There can be no doubt that Carrefour’s Spanish unit has pulled off an impressive feat in
horrendous market conditions. It has managed to trim its fixed cost base and should be able to tap
into strong operating leverage once the Iberian market is back on the road to recovery. With this in
mind, we are anticipating operating margin of 4.4% in 2015, based on like-for-like growth of
1.5%.
Similarly, in a very competitive Belgian market (aggressive strategies employed by discounters and
Ahold), Carrefour has repositioned its stores and cleaned up its operating cost base (through store
closures/renovations and wage talks within the framework of parity commissions). This should
enable it to continue to deliver a decent performance (LFL growth of 2.0% and estimated
margin of 2%).
Fig. 27: LFL growth (Spain + Italy) and operating margin (%) in Europe
Source: Company Data; Bryan, Garnier & Co ests.
27
,3%
22
,5%
20
,2%
20
,9%
19
,6%
19
,9%
18
,5%
28
,4%
26
,6%
21
,9%
21
,4%
20
,2%
19
,9%
18
,3%
Ital
y
Po
rtu
gal
Ne
the
rlan
ds
Be
lgiu
m
Ge
rman
y
Fran
ce
Spai
n
2012 2013
4,9
2,7
2,3
3,8
1,3
-7,0
-2,6
-2,8
-4,8
-2,4 -1
,7
-1,7
-2,6 -1
,7
-1,9
-4,2
-1,8
-3,6
-4,9
-6,6
3,9 4,1
4,1
3,9
3,6
3,2
2,9
2,1 2,4
2,0
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
LFL (%) Spain LFL (%) Italy Margin Europe (%)
Carrefour has
accomplished a great
deal in Spain
Carrefour
28
4.2.3. Emerging markets (28% of sales in Latam and Asia) should continue to fuel growth
Carrefour initially centred its international strategy on establishing a foothold in as many countries as
possible. This led it to scatter its financial resources and find itself unable to achieve critical
mass in many markets. In an effort to redress this problem, successive management teams sought
to refocus on countries in which Carrefour already held market leadership or was hopeful that it could
achieve this status. Although the group has drastically cut the number of markets in which it operates,
the pace of store openings has been steadily slowing since 2008. Hence, a fresh expansion drive is
bound to fuel organic growth over the coming years.
Looking at Brazil, and contradicting fears among investors, Carrefour has not observed any
slowdown in consumer sales (LFL growth of 7.5% – volume growth of 2.5% e – in Q3, helped
by a favourable format effect relative to Casino). We would expect 1/ inflation (4.0% e for 2015),
2/ population momentum (natural increase in population of 0.81%) and 3/ market share growth in
traditional retailing (which still accounts for upwards of 50% of the market) to continue to drive LFL
growth in 2015 (4.0% e) and thereafter (we will stay optimistic as long as these three essential growth
engines remain in place). A faster-paced store opening drive should also spur on growth. What’s
more, Carrefour could bring operating margin (5.5% e) even higher by streamlining logistics and
improving supply chain management for fresh produce.
Moving on to Asia, it is worth remembering that Carrefour was a pioneer of the expansion into the
Chinese market (1996). It boasts the best possible locations in China’s major urban centres
(incidentally, we would be interested to know whether there are plans to renegotiate
commercial leases signed almost twenty years ago) and draws on the expertise of a multitude of
local partners. For the time being, helped by its first-come-first-served status, and contrary to
Tesco, Carrefour is profitable in China and should remain so in spite of a slowdown in sales
performance.
Brazil is not giving
Carrefour any cause for
concern at the moment
Carrefour
29
Fig. 28: Our estimates for sales incl. VAT (EURm)
2013 Q1 Q2 Q3 Q4 2014 2015 2016
(A) FRANCE (€ m) 39 726 9 227 9 846 10 040 10 603 39 714 42 384 43 246
(1) LFL excl. Fuel 0,8% 0,4% 3,2% -0,2% 0,9% 1,1% 1,4% 1,8%
(2) Fuel effect -0,5% -1,1% -1,4% -1,3% -1,3% -1,3% 0,0% 0,0%
(1)+(2) LFL 0,3% -0,7% 1,8% -1,5% -0,4% -0,2% 1,4% 1,8%
(3) Expansion 0,1% -0,2% 0,2% 0,1% 0,4% 0,1% 0,2% 0,2%
(1)+(2)+(3) Organic growth 0,4% -0,9% 2,0% -1,4% 0,0% -0,1% 1,6% 2,0%
(4) Acquisitions -0,2% 0,0% 0,0% 0,0% 0,0% 0,0% 5,1% 0,0%
(1)+(2)+(3)+(4) total var. 0,2% -0,9% 2,0% -1,4% 0,0% -0,1% 6,7% 2,0%
2013 Q1 Q2 Q3 Q4 2014 2015 2016
(B) EUROPE EXCL. FRANCE 21 789 5 039 5 331 5 311 6 037 21 718 22 032 22 473
(1) LFL excl. Fuel -2,8% -2,1% 2,2% -1,7% 1,0% -0,1% 1,5% 2,0%
(2) Fuel effect -0,1% -0,3% -0,2% -0,1% -0,2% -0,2% 0,0% 0,0%
(1)+(2) LFL -2,9% -2,4% 2,0% -1,8% 0,8% -0,3% 1,5% 2,0%
(3) Expansion 0,1% 0,2% -0,3% -0,3% -0,1% -0,1% 0,0% 0,0%
(1)+(2)+(3) Organic growth -2,8% -2,2% 1,7% -2,1% 0,7% -0,5% 1,5% 2,0%
(4) Acquisitions 0,2% 0,0% 0,1% 0,1% 0,1% 0,1% 0,0% 0,0%
(1)+(2)+(3)+(4) Var. (cc) -2,6% -2,2% 1,8% -2,0% 0,7% -0,4% 1,5% 2,0%
(5) Forex 0,0% 0,2% 0,0% 0,2% 0,0% 0,1% -0,1% 0,0%
(1)+(2)+(3)+(4)+(5) total var. -2,6% -2,0% 1,8% -1,8% 0,8% -0,3% 1,4% 2,0%
2013 Q1 Q2 Q3 Q4 2014 2015 2016
(C) LATAM 15 536 3 428 3 793 3 966 4 411 15 598 16 982 18 596
(1) LFL excl. Fuel 10,9% 10,2% 18,4% 13,5% 14,0% 14,0% 6,5% 6,0%
(2) Fuel effect 0,3% 0,1% -0,6% -0,8% -0,4% -0,4% 0,0% 0,0%
(1)+(2) LFL 11,2% 10,3% 17,8% 12,7% 13,6% 13,6% 6,5% 6,0%
(3) Expansion 1,2% 2,4% 2,9% 4,8% 3,3% 3,3% 3,5% 3,5%
(1)+(2)+(3) Organic growth 12,4% 12,7% 20,7% 17,5% 16,9% 16,9% 10,0% 9,5%
(4) Acquisitions -0,2% -0,1% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0%
(1)+(2)+(3)+(4) Var. (cc) 12,2% 12,6% 20,7% 17,5% 16,9% 16,9% 10,0% 9,5%
(5) Forex -15,9% -26% -23% -11% -6% -16,5% -1,1% 0,0%
(1)+(2)+(3)+(4)+(5) total var. -3,7% -13,6% -2,3% 6,9% 11,0% 0,4% 8,9% 9,5%
2013 Q1 Q2 Q3 Q4 2014 2015 2016
(D) ASIA 7 272 2 092 1 545 1 760 1 707 7 104 7 874 8 307
(1) LFL excl. Fuel -1,9% -3,5% -6,1% -6,2% -5,2% -5,2% 0,0% 1,5%
(2) Fuel effect 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0%
(1)+(2) LFL -1,9% -3,5% -6,1% -6,2% -5,2% -5,2% 0,0% 1,5%
(3) Expansion 4,1% 4,6% 4,2% 3,3% 4,1% 4,1% 4,0% 4,0%
(1)+(2)+(3) Organic growth 2,2% 1,1% -1,9% -2,9% -1,1% -1,1% 4,0% 5,5%
(4) Acquisitions 0,0% 0,0% -0,1% -0,2% -0,1% -0,1% 0,0% 0,0%
(1)+(2)+(3)+(4) Var. (cc) 2,2% 1,1% -2,0% -3,1% -1,2% -1,2% 4,0% 5,5%
(5) Forex -1,4% -2,1% -5,7% -0,5% 6,0% -0,7% 6,8% 0,0%
(1)+(2)+(3)+(4)+(5) total var. 0,8% -1,0% -7,7% -3,6% 4,8% -1,9% 10,8% 5,5%
Source: Company Data; Bryan, Garnier & Co ests.
Carrefour
30
2013 Q1 Q2 Q3 Q4 2014 2015 2016
(A)+(B)+(C)+(D) TOTAL GROUP 84 323 19 786 20 515 21 077 22 758 84 134 89 272 92 621
(1) LFL excl. Fuel 1,6% 1,4% 5,2% 1,5% 2,8% 2,6% 2,2% 2,6%
(2) Fuel effect -0,3% -0,7% -1,0% -1,0% -0,7% -0,7% 0,0% 0,0%
(1)+(2) LFL 1,3% 0,7% 4,2% 0,5% 2,1% 1,9% 2,2% 2,6%
(3) Expansion 0,6% 0,9% 0,9% 1,1% 1,0% 1,0% 1,1% 1,1%
(1)+(2)+(3) Organic growth 1,9% 1,6% 5,2% 1,6% 3,1% 2,9% 3,3% 3,8%
(4) Acquistion (from 2008) 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 2,4% 0,0%
(1)+(2)+(3)+(4) Var. (cc) 1,9% 1,6% 5,2% 1,6% 3,1% 2,9% 5,8% 3,8%
(5) Change -3,1% -5,3% -4,9% -1,7% -0,6% -3,1% 0,4% 0,0%
(1)+(2)+(3)+(4)+(5) total var. -1,2% -3,7% 0,3% -0,1% 2,5% -0,2% 6,1% 3,8%
Source: Company Data; Bryan, Garnier & Co ests.
Fig. 29: Operating margin assumptions by region
Source: Company Data; Bryan, Garnier & Co ests.
Fig. 30: Breakdown of 2014 sales and current operating profit (excl. global functions) by region
Source: Company Data; Bryan, Garnier & Co ests.
4,0
%3
,8%
3,2
%2
,7%
2,7
%2
,8%
3,0
%3
,2%
3,3
%3
,6% 4
,1%
4,0
%3
,0%
2,5
%2
,5%
2,6
%3
,4%
3,5
%3
,6% 4,0
%
3,9
%3
,6%
3,1
%2
,1%
2,1
%2
,4%
2,0
%2
,2%
2,4
%2
,6%
3,7
%3
,8% 4,1
%4
,0%
3,7
% 4,3
%4
,5% 5,0
%5
,1%
5,2
%
4,0
%4
,0%
3,5
%3
,7%
3,5
%2
,6%
2,0
%1
,9%
2,1
%2
,3%
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
e2
01
5 e
20
16
e
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
e2
01
5 e
20
16
e
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
e2
01
5 e
20
16
e
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
e2
01
5 e
20
16
e
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
e2
01
5 e
20
16
e
Total group France Other Europe Latam Asia
France47%
Other Europe26%
Latam19%
Asia8%
Sales
France50%
Other Europe17%
Latam28%
Asia5%
Activity contribution
Carrefour
31
5. Ultimately, upside (+22%) is not fully priced in
5.1. PEG of 1.1x and an FV of EUR30 (average of a DCF and an SOP)
5.1.1. Very attractive earnings growth potential within the sector
1/ According to the consensus, Carrefour is trading at an EV/Sales for 2015 of 0.32x, i.e. a
discount of 20% to the sector average. We do not feel that this discount is warranted considering
the quality of Carrefour’s momentum and its potential to turn around sales.
Fig. 31: Peers multiples (consensus)
EV/Sales
(N)
EV/Sales
(N+1)
EV/Ebitda
(N)
EV/Ebitda
(N+1)
EV/Ebit
(N)
EV/Ebit
(N+1)
PER
(N)
PER
(N+1)
PEG ND / Ebitda
Carrefour 32% 31% 6,3 x 5,9 x 10,1 x 9,3 x 15,9 13,8 1,1 1,3 x
Ahold 40% 36% 6,2 x 5,6 x 10,4 x 9,3 x 15,4 14,2 1,7 0,7 x
Casino 48% 43% 7,0 x 6,2 x 10,0 x 8,7 x 16,7 14,2 1,2 1,6 x
Colruyt 59% 57% 7,6 x 7,3 x 10,8 x 10,4 x 17,1 16,6 4,4 0,0 x
Delhaize 33% 31% 5,5 x 5,0 x 10,5 x 9,1 x 15,2 13,0 1,3 1,2 x
Dia 48% 40% 6,6 x 6,2 x 10,1 x 9,9 x 12,7 13,0 1,8 0,9 x
Jeronimo Martins 43% 40% 7,3 x 6,9 x 11,4 x 10,9 x 15,5 14,8 1,7 0,5 x
Metro 24% 22% 5,3 x 4,8 x 9,0 x 8,0 x 15,2 11,8 0,7 1,8 x
Morrison 40% 30% 7,2 x 6,5 x 13,1 x 11,3 x 14,4 13,0 1,3 2,9 x
Sainsbury 30% 30% 5,7 x 5,9 x 9,9 x 10,8 x 9,9 11,2 na 1,8 x
Tesco 40% 30% 6,3 x 6,4 x 10,7 x 10,7 x 11,2 12,1 9,4 2,1 x
Average (excl. Carrefour) 41% 36% 6,5 x 6,1 x 10,6 x 9,9 x 14,3 x 13,4 x 2,1 1,5 x
Source: Company Data; Bryan, Garnier & Co ests.
2/ Furthermore, we are not sure that a P/E 2015 of 13.8x truly reflects the earnings growth
potential (EPS CAGR of 15.5% e for 2014/17) tied to a recovery in margins and the shedding of
debt. Ultimately, this makes for a PEG of 1.2x (vs. a sector average of 2.1x).
Fig. 32: Carrefour’s 12m FW P/E
Source: Company Data; Bryan, Garnier & Co ests.
7
9
11
13
15
17
19
21
No
v-0
4
No
v-0
5
No
v-0
6
No
v-0
7
No
v-0
8
No
v-0
9
No
v-1
0
No
v-1
1
No
v-1
2
No
v-1
3
No
v-1
4
12 m FW PE Average
Needless to say, we
prefer the French
market to the UK
Carrefour
32
Fig. 33: 2014/16 EPS CAGR for food retailers
Source: Consensus Datastream; Bryan, Garnier & Co ests.
3/ Needless to say, we would advise investors to incline towards the French market (as
opposed to the UK) as France’s listed retailers (Carrefour and Casino) have been facing competition
from discounters and independents for decades… In the UK, the discounters are calling the shots
and the listed retailers have to bear the brunt of price deflation, whereas in France the opposite is
true.
Fig. 34: PEGs for Europe’s leading retailers
Source: Datastream; Bryan, Garnier & Co ests.
5.1.2. Our DCF values the share at EUR27
We have applied the following main assumptions in our DCF model:
a WACC of 8.4% (risk-free rate of 2.8%, a 6% risk premium and a beta of 1.2x);
growth to infinity of 1.5% and normative operating margin of 3.5%;
on a normative basis, capex and depreciation/amortisation charges are equal and correspond to
1.9% of sales.
Our DCF valuation is sensitive to currency trends:
depreciation of 10% in the BRL would slice EUR0.9 off our DCF valuation;
21,0%
14,1% 14,0%11,3% 11,3%
9,1% 8,9%7,0%
3,9%1,2%
-4,1%
Me
tro
Cas
ino
Car
refo
ur
Mo
rris
on
De
lhai
ze JM
Ah
old
Dia
Co
lru
yt
Tesc
o
Sain
sbu
ry
Average
0,7x
1,1x 1,2 x 1,3x
1,7x
1,3x
1,7x1,8x
Me
tro
Car
refo
ur
Cas
ino
Mo
rris
on
JM
De
lhai
ze
Ah
old
Dia
Average
Carrefour
33
depreciation of 10% in the Argentinian peso would lower our valuation by EUR0.4;
depreciation of 10% in the Chinese yuan would remove EUR0.6.
Carrefour
34
Fig. 35: DCF valuation for Carrefour (EUR27)
€ m 2014 2015 2016 2017 2018 2019 2020 2021 Normative
Sales 74 760 79 333 82 311 85 573 88 976 92 519 96 201 100 133 101 635
Variation (%) -0,2% 6,1% 3,8% 4,0% 4,0% 4,0% 4,0% 4,1% 1,5%
EBIT 2 647 2 656 2 999 3 168 3 347 3 536 3 735 3 952 3 557
Margin 3,5% 3,3% 3,6% 3,7% 3,8% 3,8% 3,9% 3,9% 3,5%
Tax (756) (777) (905) (978) (1 061) (1 158) (1 270) (1 396) (1 256)
Tax rate (%) 29% 29% 30% 31% 32% 33% 34% 35% 35%
EBIT after tax 1 891 1 878 2 094 2 190 2 286 2 378 2 465 2 556 2 301
D&A 1 421 1 508 1 565 1 627 1 692 1 759 1 829 1 904 1 932
As a % of sales 1,9% 1,9% 1,9% 1,9% 1,9% 1,9% 1,9% 1,9% 1,9%
WCR variation (8) 299 195 214 223 232 241 257 0
Capex (2 467) (2 479) (2 429) (2 375) (2 314) (2 244) (2 166) (2 079) (1 932)
As a % of sales 3,3% 3,1% 3,0% 2,8% 2,6% 2,4% 2,3% 2,1% 1,9%
Operational cash-flow 837 1 207 1 425 1 656 1 886 2 124 2 370 2 639 2 301
Discounted Cash-flow 829 1 102 1 201 1 286 1 351 1 403 1 444 1 482 1 192
Sum of discounted cash flows 10 098
Terminal value 17 432
Total 27 529
2013 net debt (4 117)
Provisions & Minorities & Associates (4 241)
Value of group equity capital 19 171
Number of shares 705
Equity per share EUR27
Source: Company Data; Bryan, Garnier & Co ests.
5.1.3. Refocusing on key assets calls for an SOP approach (EUR33)
The sum-of-the-parts (SOP) method is not ideal to determine a target price over a 12-month horizon.
Nonetheless, we have decided to use it in tandem with a DCF approach given that Carrefour is now
in a mindset of rationalisation in its portfolio. Its strategy is to focus on the G4 countries (France,
Spain, Italy and Belgium) as well as on its three flagship international markets (Brazil, Argentina and
China).
Following the wave of disposals that littered 2012 and 2013 (Colombia, Greece, Singapore, Malaysia,
Indonesia and Turkey), Carrefour could be interested in making forays into new markets:
Poland, Romania and Taiwan. We estimate that these three BU represent sales of around
EUR4.2bn excluding VAT and roughly EUR150m in EBIT. On average, such activities are valued at
an EV/Sales of 0.5x in our SOP, i.e. an enterprise value of EUR2.1bn.
SOP to remain on the
menu with Atacadao
and Carmila for desert!
Carrefour
35
Fig. 36: Main international disposals and Carrefour’s price positioning in France relative to Leclerc
Source: Company Data; Bryan, Garnier & Co ests.
NB: the chart does not contain the disposals made in Greece and Singapore (ns EV), which wiped out a
EUR100m operating loss (mainly on Greece)
Given the sheer diversity of the formats that Carrefour operates in France (hypermarkets,
supermarkets, convenience stores) and abroad, as well as its wide range of businesses (e.g. traditional
retail, e-commerce and real estate), it is certainly worthwhile considering this method. We are doing
just that, albeit with some ground rules:
using EV/Sales multiples: food retailing is a fixed cost industry and it is absolutely imperative
that the retailer generates commercial growth in sales in order to cover these operating costs
and create a cash margin;
in our valuation, we make no distinction between the real estate activity and core operations. We
estimate that Carrefour’s real estate assets carry a worth of approximately EUR15bn (we arrived
at this figure based on the figure of EUR17bn that the group communicated in 2007, not taking
into account the assets housed within Carmila nor the Columbian assets sold to Cencosud), i.e.
90% of its current market capitalisation and 45% of its enterprise value.
Disposal ofThailand (€870m EV / 0,9 x sales)
Disposal of Colombia (€2 bn EV / 1,3x sales)
Disposal of Malaysia (€250m EV/ 0,6x sales)
Disposal of Indonésia (€525m EV / 0,9x sales)
Disposal of a 12% stake in Turkey (€60m EV /
0,45x sales)
Disposal of a 25% stake in the JV with
MAF (€530m EV / 0,7x sales)
92,0
93,0
94,0
95,0
96,0
97,0
98,0
99,0
0
500
1000
1500
2000
2500
H2 08 H1 09 H2 09 H1 10 H2 10 H1 11 H2 11 H1 12 H2 12 H1 13 H2 13 H1 14
(1) Deterioration of the price positionning under the direction of L. Olofsson
(2) In France, N. Prioux starts investing in prices
(3) G. Plassat takes the helm at the right timing / optimization of the asset portfolio
Leclerc price index
Carrefour price index
Carrefour
36
Fig. 37: 2015 SOP estimates for Carrefour (EUR32)
2015 Sales EBITDA Margin e EBIT Margin e EV/SALES EV/EBITDA EV/EBIT EV
TOTAL GROUP 79 333 4 164 5,2% 2 724 3,4% 42% 8,0X 12,2X 33 332
FRANCE 37 771 2 064 5,5% 1 344 3,6% 32% 5,8X 8,9X 11 951
Hypers 19 719 922 4,7% 562 2,9% 30% 6,4X 10,5X 5 916
Supers 11 854 771 6,5% 533 4,5% 30% 4,6X 6,7X 3 556
Others 6 197 372 6,0% 248 4,0% 40% 6,7X 10,0X 2 479
OTHER EUROPE 19 449 834 4,3% 458 2,4% 33% 7,7X 14,0X 6 438
Spain 7 974 510 6,4% 350 4,4% 40% 6,3X 9,1X 3 190
Italy 4 668 65 1,4% (28) -0,6% 20% 14,3X na 934
Belgium 4 084 163 4,0% 82 2,0% 30% 7,5X 15,0X 1 225
European growth markets 2 723 95 3,5% 54 2,0% 40% 11,4X 20,0X 1 089
LATAM 15 137 1 018 6,7% 778 5,1% 76% 11,3X 14,7X 11 455
Brazil 11 958 853 7,1% 661 5,5% 83% 11,6X 14,9X 9 866
ow Atacadao 6 936 590 8,5% 486 7,0% 100% 11,8X 14,3X 6 936
ow Hypers 5 860 264 4,5% 176 3,0% 50% 11,1X 16,7X 2 930
Argentina 3 179 165 5,2% 117 3,7% 50% 9,7X 13,6X 1 589
ASIA 6 976 248 3,6% 144 2,1% 50% 14,1X 24,3X 3 488
China 5 441 190 3,5% 109 2,0% 50% 14,3X 25,0X 2 721
Others 1 535 58 3,8% 35 2,3% 50% 13,3X 22,1X 767
RESTATEMENT TO EV (10 536)
Associates 1 160
Central Costs (340)
Average net Debt (5 955)
Minorities (1 680)
Provisions (3 721)
EQUITY VALUE PER SHARE EUR32
Source: Company Data; Bryan, Garnier & Co ests.
* excl. global functions
We are bearing in mind that Carrefour was a pioneer in its expansion into many of the most
promising markets, which meant that it was able to pick the most attractive locations and
assets. We are therefore convinced that the SOP harbours a lot of hidden value that we have yet to
discover.
Carrefour was a pioneer
in most markets; the
SOP still harbours a lot
of hidden value!
Carrefour
37
Fig. 38: Carrefour’s international expansion over the years
Entry date
Spain 1973
Turkey 1973
Brazil 1975
Argentina 1982
Taiwan 1989
Greece 1991
Portugal 1992
Italy 1993
Malaysia 1994
China 1995
Thailand 1996
Poland 1997
Singapore 1997
Colombia 1998
Indonesia 1998
Belgium 2000
Romania 2001
Source: Company Data; Bryan, Garnier & Co ests.
5.2. The SOP contains an added source of value
5.2.1. Atacadao IPO will be a big focus…
Besides “non-priority” international disposals (i.e. markets where Carrefour has failed to achieve
critical mass), an IPO for Atacadao (Cash & Carry) in Brazil is still an option. Speaking in March
this year, Georges Plassat said he was on the look-out for solutions to open up Atacadao’s share
capital to local partners or simply to list it. While current tensions in Brazil prevent Carrefour from
envisaging such an option in the near future, we think it a likely medium-term move.
Carrefour acquired Atacadao in 2007 (Atacadao has since expanded its network twofold to 80 stores
for an EV of EUR6.9bn). At an Investor Day held the following year, management cited a sales
CAGR of 23% for 1996-2008; this pace has likely slowed since then but is nonetheless very high.
Speaking in an interview given to Brazilian magazine ‘Exame’ in August 2011, Lars Olofsson
confirmed that Atacadao was registering growth of 20%. He also indicated that the subsidiary
accounted for 50% of Carrefour’s Brazilian sales and 75% of EBIT.
We are fully aware that Atacadao is a quality asset and we have valued it at an EV/Sales of 1x in our
SOP model (Latam retailers average a multiple of 0.65x). That said, if Carrefour were able to float
the subsidiary at an EV/Sales on a par with the multiple observed in Columbia (i.e. 1.3x), this
would considerably inflate our SOP valuation (i.e. EUR2.9 per share).
Carrefour
38
5.2.2. … as will Carmila
Some may take the creation of Carmila (Carrefour’s real estate management vehicle) to mean that
Carrefour is planning a subsequent operation on a much grander scale that would see it transferring
the walls of its stores to the vehicle (both entities already “share” a head office). We agree that a
retailer cannot allow itself to lose control over its property, which is an essential component in its
strategy. However, Carrefour may prefer instead to call on new investors in order to outsource some
of its network and finance growth at a lower cost.
On this basis, going forward, we see Carrefour opting for a similar strategy with Carmila as Casino did
with Mercialys, ultimately ending in an IPO. We think it is no coincidence that Carrefour has chosen
Jacques Ehrmann (former Mercialys CEO) to head up Carmila. However, the conditions are not
yet ideal for such a move in the short term:
from the outset, the CEO clearly mapped out his value creation strategy. This is to involve the
purchase of 25 shopping centres housing hypermarkets across France, Italy and Spain
(EUR1bn), as well as the extension of 40 centres (EUR500m) and the renovation of shopping
arcades (EUR250m);
Carmila already announced in July that it was purchasing properties from Unibail (EUR931m),
making it necessary for Carrefour to re-inject funds into the vehicle in order to hold onto an
economic interest of 40% (vs. 42% beforehand);
The new real estate entity is currently overcapitalised (a large number of funds have taken
up an interest – including Colony, Axa and BNP – totalling 60% e, leaving Carrefour with an
economic interest of just 40%). It is therefore not imperative for the vehicle to open up its
capital and the current shareholders are bound to be happy to share the value that it is
creating among themselves.
We estimate Carmila’s NAV at EUR2.9bn (EUR3.8bn in assets and EUR0.9bn in debt). Based on an
economic interest of 40%, the equity affiliates line in our SOP valuation stands at EUR1.2bn,
which we believe is a good deal higher than the consensus. The consensus figure may be based
on the book value of Carrefour’s equity affiliates in the 2013 accounts (EUR496m was taken to the
balance sheet) which, naturally, will have increased considerably as at the end of 2014.
Carrefour
39
Bryan Garnier stock rating system For the purposes of this Report, the Bryan Garnier stock rating system is defined as follows:
Stock rating
BUY Positive opinion for a stock where we expect a favourable performance in absolute terms over a period of 6 months from the publication of a
recommendation. This opinion is based not only on the FV (the potential upside based on valuation), but also takes into account a number of
elements including a SWOT analysis, positive momentum, technical aspects and the sector backdrop. Every subsequent published update on the stock
will feature an introduction outlining the key reasons behind the opinion.
NEUTRAL Opinion recommending not to trade in a stock short-term, neither as a BUYER or a SELLER, due to a specific set of factors. This view is intended to
be temporary. It may reflect different situations, but in particular those where a fair value shows no significant potential or where an upcoming binary
event constitutes a high-risk that is difficult to quantify. Every subsequent published update on the stock will feature an introduction outlining the key
reasons behind the opinion.
SELL Negative opinion for a stock where we expect an unfavourable performance in absolute terms over a period of 6 months from the publication of a
recommendation. This opinion is based not only on the FV (the potential downside based on valuation), but also takes into account a number of
elements including a SWOT analysis, positive momentum, technical aspects and the sector backdrop. Every subsequent published update on the stock
will feature an introduction outlining the key reasons behind the opinion.
Distribution of stock ratings
BUY ratings 56.2% NEUTRAL ratings 38.1% SELL ratings 5.7%
Research Disclosure Legend
1 Bryan Garnier shareholding in Issuer
Bryan Garnier & Co Limited or another company in its group (together, the “Bryan Garnier Group”) has a shareholding that, individually or combined, exceeds 5% of the paid up and issued share capital of a company that is the subject of this Report (the “Issuer”).
No
2 Issuer shareholding in Bryan Garnier
The Issuer has a shareholding that exceeds 5% of the paid up and issued share capital of one or more members of the Bryan Garnier Group.
No
3 Financial interest A member of the Bryan Garnier Group holds one or more financial interests in relation to the Issuer which are significant in relation to this report
No
4 Market maker or liquidity provider
A member of the Bryan Garnier Group is a market maker or liquidity provider in the securities of the Issuer or in any related derivatives.
No
5 Lead/co-lead manager In the past twelve months, a member of the Bryan Garnier Group has been lead manager or co-lead manager of one or more publicly disclosed offers of securities of the Issuer or in any related derivatives.
No
6 Investment banking agreement
A member of the Bryan Garnier Group is or has in the past twelve months been party to an agreement with the Issuer relating to the provision of investment banking services, or has in that period received payment or been promised payment in respect of such services.
No
7 Research agreement A member of the Bryan Garnier Group is party to an agreement with the Issuer relating to the production of this Report.
No
8 Analyst receipt or purchase of shares in Issuer
The investment analyst or another person involved in the preparation of this Report has received or purchased shares of the Issuer prior to a public offering of those shares.
No
9 Remuneration of analyst The remuneration of the investment analyst or other persons involved in the preparation of this Report is tied to investment banking transactions performed by the Bryan Garnier Group.
No
10 Corporate finance client In the past twelve months a member of the Bryan Garnier Group has been remunerated for providing corporate finance services to the issuer or may expect to receive or intend to seek remuneration for corporate finance services from the Issuer in the next six months.
No
11 Analyst has short position The investment analyst or another person involved in the preparation of this Report has a short position in the securities or derivatives of the Issuer.
No
12 Analyst has long position The investment analyst or another person involved in the preparation of this Report has a long position in the securities or derivatives of the Issuer.
No
13 Bryan Garnier executive is an officer
A partner, director, officer, employee or agent of the Bryan Garnier Group, or a member of such person’s household, is a partner, director, officer or an employee of, or adviser to, the Issuer or one of its parents or subsidiaries. The name of such person or persons is disclosed above.
No
14 Analyst disclosure The analyst hereby certifies that neither the views expressed in the research, nor the timing of the publication of the research has been influenced by any knowledge of clients positions and that the views expressed in the report accurately reflect his/her personal views about the investment and issuer to which the report relates and that no part of his/her remuneration was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.
Yes
15 Other disclosures Other specific disclosures: Report sent to Issuer to verify factual accuracy (with the recommendation/rating, price target/spread and summary of conclusions removed).
No
A copy of the Bryan Garnier & Co Limited conflicts policy in relation to the production of research is available at www.bryangarnier.com
London
Heron Tower
110 Bishopsgate
London EC2N 4AY
Tel: +44 (0) 207 332 2500
Fax: +44 (0) 207 332 2559
Authorised and regulated by
the Financial Conduct
Authority (FCA)
Paris
26 Avenue des Champs Elysées
75008 Paris
Tel: +33 (0) 1 56 68 75 00
Fax: +33 (0) 1 56 68 75 01
Regulated by the
Financial Conduct Authority (FCA)
and the Autorité de Contrôle
prudential et de resolution (ACPR)
New York
750 Lexington Avenue
New York, NY 10022
Tel: +1 (0) 212 337 7000
Fax: +1 (0) 212 337 7002
FINRA and SIPC member
Geneva
rue de Grenus 7
CP 2113
Genève 1, CH 1211
Tel +4122 731 3263
Fax+4122731 3243
Regulated by the
FINMA
New Delhi
The Imperial Hotel
Janpath
New Delhi 110 001
Tel +91 11 4132 6062
+91 98 1111 5119
Fax +91 11 2621 9062
Important information
This report is prepared by Bryan Garnier & Co Limited, registered in England no 3034095 and is being distributed only to clients of Bryan Garnier & Co Limited (the "Firm"). Bryan Garnier & Co Limited is authorised and regulated by the Financial Conduct Authority (the "FCA") and is a member of the London Stock Exchange. Registered address : 110 Bishopsgate, London EC2N 4AY.
This Report is provided for information purposes only and does not constitute an offer, or a solicitation of an offer, to buy or sell relevant securities, including securities mentioned in this Report and options, warrants or rights to or interests in any such securities. This Report is for general circulation to clients of the Firm and as such is not, and should not be construed as, investment advice or a personal recommendation. No account is taken of the investment objectives, financial situation or particular needs of any person.
The information and opinions contained in this Report have been compiled from and are based upon generally available information which the Firm believes to be reliable but the accuracy of which cannot be guaranteed. All components and estimates given are statements of the Firm, or an associated company’s, opinion only and no express representation or warranty is given or should be implied from such statements. All opinions expressed in this Report are subject to change without notice. To the fullest extent permitted by law neither the Firm nor any associated company accept any liability whatsoever for any direct or consequential loss arising from the use of this Report. Information may be available to the Firm and/or associated companies which are not reflected in this Report. The Firm or an associated company may have a consulting relationship with a company which is the subject of this Report.
This Report may not be reproduced, distributed or published by you for any purpose except with the Firms’ prior written permission. The Firm reserves all rights in relation to this Report.
Past performance information contained in this Report is not an indication of future performance. The information in this report has not been audited or verified by an independent party and should not be seen as an indication of returns which might be received by investors. Similarly, where projections, forecasts, targeted or illustrative returns or related statements or expressions of opinion are given (“Forward Looking Information”) they should not be regarded as a guarantee, prediction or definitive statement of fact or probability. Actual events and circumstances are difficult or impossible to predict and will differ from assumptions. A number of factors, in addition to the risk factors stated in this Report, could cause actual results to differ materially from those in any Forward Looking Information.
Disclosures specific to clients in the United Kingdom This Report has not been approved by Bryan Garnier & Co Limited for the purposes of section 21 of the Financial Services and Markets Act 2000 because it is being distributed in the United Kingdom only to persons who have been classified by Bryan Garnier & Co Limited as professional clients or eligible counterparties. Any recipient who is not such a person should return the Report to Bryan Garnier & Co Limited immediately and should not rely on it for any purposes whatsoever.
Notice to US investors
This research report (the “Report”) was prepared by Bryan Garnier & Co. Ltd. for information purposes only. The Report is intended for distribution in the United States to “Major US Institutional Investors” as defined in SEC Rule 15a-6 and may not be furnished to any other person in the United States. Each Major US Institutional Investor which receives a copy of this Report by its acceptance hereof represents and agrees that it shall not distribute or provide this Report to any other person. Any US person that desires to effect transactions in any security discussed in this Report should call or write to our US affiliated broker, Bryan Garnier Securities, LLC. 750 Lexington Avenue, New York NY 10022. Telephone: 1-212-337-7000.
This Report is based on information obtained from sources that Bryan Garnier & Co. Ltd. believes to be reliable and, to the best of its knowledge, contains no misleading, untrue or false statements but which it has not independently verified. Neither Bryan Garnier & Co. Ltd. and/or Bryan Garnier Securities LLC make no guarantee, representation or warranty as to its accuracy or completeness. Expressions of opinion herein are subject to change without notice. This Report is not an offer to buy or sell any security.
Bryan Garnier Securities, LLC and/or its affiliate, Bryan Garnier & Co. Ltd. may own more than 1% of the securities of the company(ies) which is (are) the subject matter of this Report, may act as a market maker in the securities of the company(ies) discussed herein, may manage or co-manage a public offering of securities for the subject company(ies), may sell such securities to or buy them from customers on a principal basis and may also perform or seek to perform investment banking services for the company(ies).
Bryan Garnier Securities, LLC and/or Bryan Garnier & Co. Ltd. are unaware of any actual, material conflict of interest of the research analyst who prepared this Report and are also
not aware that the research analyst knew or had reason to know of any actual, material conflict of interest at the time this Report is distributed or made available.