Companhia Brasileira In Rough Water, Assai Unit A Respite

Companhia Brasileira de Distribuicao (NYSE:CBD) appears to be in hot water, as it is battling macroeconomic headwinds and hurdles related to high investment costs. These factors adversely impacted this Zacks Rank #4 (Sell) company in second-quarter 2019, especially the Multivarejo unit.

Shares of the company have declined 16.1% in the past six months against the industry’s growth of 14.2%.

Nonetheless, Assai continued to stand strong, which along with the company’s digital transformation efforts and focus on core strategies should help it offset these barriers. Let’s delve deeper.

Factors Pulling Companhia Brasileira Down

Companhia Brasileira’s Multivarejo unit sales were affected by slower-than-expected economic recovery in the second quarter of 2019. Additionally, the non-food category was hurt by tough year-over-year comparisons, primarily accountable to the World Cup. Both factors also weighed on the gross margin.

Apart from these, gross margin was dented by unfavorable promotions, reduced share of Paco de Acucar in sales mix and seasonal impacts from Easter. Also, the company’s increased investments in the Hiper format played spoilsport, as Hiper was most affected by a conservative consumption landscape. These downsides were a drag on the EBITDA margin of the Multivarejo segment as well.

This apart, Companhia Brasileira focuses on expanding its business in terms of stores and digital transformation. In fact, the company earlier stated that it plans to invest about BRL1.8 billion in the food business in 2019. Though these investments are aimed at fueling growth, costs related to the same may affect margins. In second-quarter 2019, gross margin (after IFRS) contracted 140 bps in local currency. Also, SG&A expenses grew 6.3% year over year.

We believe that the persistence of such trends will be a threat to the company’s performance. However, it is likely to get respite from the strong Assai segment and its growth initiatives.

Growth Efforts to Offer Respite

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

Additionally, the company’s core growth plans involve continued organic expansion and stores optimization, enhancing retail format offerings and extending offerings of financial services (particularly at Assai). Talking of Assai, the segment continued with its stellar show in the second quarter of 2019, backed by store expansions, favorable rollout of commercial policy and robust same-store sales. In fact, Assai’s gross revenues rose nearly four times between 2013 and 2019, gaining about 60% market share during the same time frame.

Management’s focus on making constant investments in this segment clearly reflects its robust prospects. Let’s see if these upsides can aid the revival of Companhia Brasileira.

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