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Portuguese Retail Retail BPI EQUITY RESEARCH Portuguese Retail Retail Consolidated in promotions 23rd October 2014 4 The Portuguese retail market is one of the most concentrated in Europe but also highly competitive which has been preventing returns similar to those in other regions. Portugal 4 We have attended several meetings with top management of some of the most important food retailers in Portugal. The main conclusions we have drawn from these are: (1) DIA vs. JMT vs. SON vs. A moderate but positive outlook; (2) Promotions to be continued but the intensity Eurostoxx Retail level should not increase. The main hurdle should come from deflation; (3) Low NRM profitability should be a cap for new promotions; (4) Players to be focused on plk quality vs. pricing; and (5) Online not a short term priority. NOR 4 The market has been highly promotion oriented, particularly since 2012 when Pingo bìêçëíçññ= Doce abandoned its every-day-low-price strategy. This new trend in the market led NMM oÉí~áä national brands to regain weight in household wallets. Recently, we started to witness that promotion efficacy has reached a cap and volumes have not been af^ reacting to promotions. JM and Sonae continue to be the clear winners with 230bps TR and 90bps market share gains respectively since YE11. gj RM 4 In terms of outlook we share the moderate but positive view for the industry. Short lÅíJNP cÉÄJNQ gìåJNQ lÅíJNQ term should still be ruled by deflation pressure which however should ease Source: Bloomberg. throughout 2015 (+0.6% of inflation forecasted vs. -0.3% in FY14). Volumes should also pick up on the back of improving disposable income (employment) while trade-up should also benefit sales. Pingo Doce should not push for additional promotions and instead focus on profitability, Sonae should remain a price-follower while Lidl has not been cutting prices and should not deviate from its strategy. DIA could be tempted to be more aggressive but more than promotions, the company needs to invest in its stores and "quality" perception of its offer in the market. 4 Implications on Sonae, JM and DIA: Sonae is the retailer most exposed to Portugal (70% of sales) and this slightly positive outlook should be reassuring for the IC. JM is a strong player and benefits from a its price image and proximity/locations. We expect JM to focus on profitability and extract the potential from its network. DIA is in a difficult situation, facing competition in its natural market: proximity (Meu Super), price (Pingo Doce) and perceived quality to other hard-discounters (Lidl). DIA could revert the short term headwinds but we can not rule out a potential mid- term exit from Portugal (not over the next 12-18 months) if trends do not revert. We maintain our CoRe Buy recommendation and preference for SON and DIA. Summary of Recommendations Market YE15 LfL Recommendation Multiple EPS EBITDA Chg (E/share) Price(1) PT chg. New Old PE14 14-17F 14-17F DIA 4.81 7.20 0% CoRe Buy CoRe Buy 12.9 6% 0% JMT 8.38 9.80 -5% Neutral Neutral 15.4 5% 0% SON 0.97 1.75 0% CoRe Buy CoRe Buy 10.5 12% 0% (1) Prices as of October 17th 2014. Source: BPI Equity Research. Analysts Available on our website: José Rito Bruno Bessa www.bpiequity.bpi.pt, BPI Online, [email protected] [email protected] Phone 351 22 607 3142 Phone 351 22 607 3183 and Bloomberg at NH BPD Equity Research 4 Portuguese Retail 4 October 2014 INDEX 3 PORTUGUESE FOOD RETAIL SNAPSHOT 3 GDP, consumer confidence and retail sales 3 PPI, CPI and food retail sales 4 Food retail format evolution: the promotion era 7 Market share evolution by company 10 COMPANIES MEETING HIGHLIGHTS 11 OUTLOOK 15 Main risks to our outlook COMPANIES 17 DIA 21 Jeronimo Martins 25 Sonae 2 Equity Research 4 Portuguese Retail 4 October 2014 PORTUGUESE FOOD RETAIL SNAPSHOT GDP, CONSUMER CONFIDENCE AND RETAIL SALES The last decade has been particularly difficult for the Portuguese economy with a mere 0.4% average quarterly growth since 2000 and with extremely difficult times lived in 2003, 2009 and 2013. Consumer confidence reflects this reality as despite the improvements registered since YE12, the level stands below Jan'00 levels. Is this a mid-term opportunity? Portuguese Retail vs GDP (% yoy) Consumer confidence NOB JR UB JNR QB dam JOR MB JPR JQB oÉí~áä JQR JUB JRR JNOB JSR lÅíJNN lÅíJNQ ^éêJMT ^éêJNM ^éêJNP pÉéJMO pÉéJMR pÉéJMU j~êJMN j~êJMQ Source: Bloomberg. Source: Bloomberg. The improvements registered at the macro front since Q2 last year justify the relative recovery of retail sales witnessed in 2013 (-2.2% vs. -5.4% in FY12). It seems that the sales momentum has been easing and despite the better relative figures (-1.6% YTD), it remains on negative ground and without a major defined trend. We link this gloomy sales backdrop to an increased deflationary trend in the industry (adjusted by prices, sales have increased 0.9% YTD). PPI, CPI AND FOOD RETAIL SALES Food retail sales have been more resilient during the market downturns and 2013 was a particularly positive year for the industry with a 1.2% yoy gain. The situation has been changing and declining prices have been driving sales down YTD (flat, excluding the deflation factor). PPI evolution also indicates that producer prices have been on a descending trend which represents a relief to some extent for the retailers' operational performance. Against this backdrop, we should still expect some operational deleverage but rising PPI with declining CPI would be dreadful for earnings evolution, which seems not to be the case. 3 Equity Research 4 Portuguese Retail 4 October 2014 Food Retail sales (QoQ) CPI vs PPI (% YoY) NRB NOB NMB UB `mf QB RB MB MB JQB JRB mmf JUB JNMB lÅíJNQ g~åJMN cÉÄJMQ pÉéJMU pÉéJNN j~êJMN ^ìÖJMQ g~åJMU j~óJNN lÅíJNQ ^ìÖJMO ^ìÖJMR j~êJMT j~êJNM j~êJNP Source: INE. Source: Bloomberg. FOOD RETAIL FORMAT EVOLUTION: THE PROMOTION ERA We have been witnessing important changes in the Portuguese retail space: 1) Promotions have been intense; 2) Private labels have been losing weight; and the 3) Shopping frequency is declining. 1. Promotions have skyrocketed Pingo Doce/Jeronimo Martins has joined the industry promotion trend in mid-2012 with its famous 50% price cut in all products. Sonae and other hypers were already applying a "high & lows" price strategy but we believe the new Pingo Doce policy ("every-day-low-price" previously) has definitely reshaped the market. The traditional promotional oriented food retailers (hypers) had to intensify their marketing campaigns while others, such as the hard-discounters (DIA, Lidl), were forced to follow these steps in order to prevent an even more pronounced drag on market share evolution. Since mid-2013, promotion intensity has once again increased as a response to Lidl's greater aggressiveness in the market. Lidl proclaimed plans to invest cE 60mn (E 45mn in FY13) in store refurbishments and an improved “fresh” offer as well as new and premium products (Deluxe brand). This led Pingo Doce to advance and intensify its promotion campaigns, which once again had to be accommodated by the key players in the market. 4 Equity Research 4 Portuguese Retail 4 October 2014 % of sales under promotion Active leaflets for Sonae and Jeronimo Martins 33.8% OU 27.8% 27.9% gÉêçåáãç j~êíáåë 24.1% 23.7% NM 21.4% 16.5% 16.1% 15.9% NO pçå~É V OMNN OMNO OMNP cj`d j~åìÑ~ÅíìêÉêë OMNO OMNP mêáî~íÉ=i~ÄÉäë Source: Nielsen Source: Companies 2. Private labels have been losing market share Market share of Private This promotion intensity has been supported by national brands which have reverted Labels the long term declining trend to private labels. Consequently, in some of the key 36.3% players, particularly Pingo Doce, the weight of private labels has declined as a 34.1% 34.7% 31.8% consequence of the more competitive price positioning from the national brands. 30.2% Market share of private labels TNB TOB SVB RUB RQB RSB QOB QNB PQB POB PPB OMMV OMNM OMNN OMNO OMNP PPB PNB OTB PNB OQB OTB OTB Source: Nielsen. ^ìÅÜ~å `çåíáåÉåíÉ fqj iáÇä jáåáéêÉ´ç máåÖç=açÅÉ Private labels weighted by OMNN OMNO OMNP geography in FY13 Source: Nielsen. fq ONKQB ^q OVKRB _b PQKPB This trend is in fact somewhat different from what we have seen in other European mq PQKTB markets where private labels continue to win market share. We think this is explained by some cultural differences (the Portuguese are more sensitive to promotions) co PQKUB and the fact that the promotion intensity reached levels never seen in the country, bro PRKTB even when compared to other markets. rh PTKQB ab PVKQB Initial impact from promotions was positive on sales… bp QMKMB This promotion effort and rising weight from national brands in the retailers' baskets ki QPKPB had an initial positive impact on sales as despite the rebates on prices, prices for national brand products stand on average higher and therefore for the same volumes, Source: Nielsen. 5 Equity Research 4 Portuguese Retail 4 October 2014 sales were positively affected by a different mix. FMCG sales increased by 4.3% in FMCG sales evolution in 2013, o.w. +0.2p.p was volumes and the remainder price. Portugal …but its efficacy has been declining QKNB The problem arises if volumes do not increase, particularly when promotions continue to increase. In this scenario, national brands would need to continue gaining 0.5% PKSB 4.3% weight in order to continue to propel sales growth.
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