MASTERS IN FINANCE
CARREFOUR COMPANY REPORT
GROCERY RETAILING 3 JANUARY 2018
STUDENT: CATARINA FERNANDES [email protected]
Date: 03/01/2018 Ticker: CA FP Equity Current price Jan 3rd 2018: EUR18.18
Recommendation: HOLD (Total Shareholders expected return:7.72%) Target price 2018: EUR 19.21
Table 1. Carrefour market data 35,00 Closing price €18.18
30,00 52-week price 25,00 range €16.30-€24.08
20,00 Shares 774.68M outstanding
15,00 Market cap €14.103B
10,00 P/E 19.35
5,00 Source: Bloomberg
0,00 02-12-2014 02-12-2015 02-12-2016 02-12-2017 Table 2. Carrefour target price
Closing Price Target price (2018) Current price (Jan 3rd 2018) Valuation 2018 target price
DCF €19.21
1. Expansion in convenience formats and e-commerce Multiples (average) €28.22
Some years ago, Carrefour´s main format was hypermarkets, however due to the Source: Analyst estimates change in consumer spending patterns, the Company has recently started to expand its Figure 1. Relative Price performance multi-format model through smaller formats such as the convenience ones and since 2012 E-commerce offer. Just in e-commerce, the company expects to achieve sales of 3000 40 2500 30 EUR4 billion until 2020, compared with EUR1.2 billion in 2016. 2000 1500 20 2. Increasing Gross margins and EBITDA margins 1000 10 The increase in sales associated with a slightly decline in costs, due mainly to 500 0 0 economies of scale, will contribute to a boost in Gross margins – from 20.69% in 2016 S&P 500 MSCI world to 21.64% in 2021 – and in EBITDA margins – 2.94% in 2016 vs. 3.90% in 2021. Carrefour 3. Lower capital intensity of growth will help return on capital Source: Bloomberg The expansion in smaller formats and e-commerce has inherent a lower necessity of (millions) 2016A 2017F 2018F capital investment. This will help the company to increase its low ROIC of 0.81% in Sales 76.645 77.904 78.573 2016 to 2.76% in 2021. High competitive sectors as retailing tend to have low ROICs. Net income 894 1.351 1.624 Total assets 48.302 44.122 44.568 4. Macroeconomic improvement especially in France and Latin America Net debt 5.154 6.230 5.081 Gross The difficult economic situation of Carrefour´s integrated countries has not been helping margins 21% 21% 21% the company to grow. However, it is expected a recovery: France, the most mature EBITDA margins 2,94% 3,14% 3,33% market for Carrefour, will face a modest improvement, and Latin America region will Net debt/EBITDA 2,3 2,5 1,9 finally emerge from an austere and lengthened recession. In Brazil and Argentina, GDP ROIC 0,81% 1,31% 1,87% growth was around -3% in 2016 and it is expected to achieve about 3% until 2021. Source: Analyst analysis
THIS REPORT WAS PREPARED EXCLUSIVELY FOR ACADEMIC PURPOSES BY CATARINA GOMES FERNANDES A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND ECONOMICS. THE REPORT WAS SUPERVISED BY A NOVA SBE FACULTY MEMBER, ACTING IN A MERE ACADEMIC CAPACITY, WHO REVIEWED THE VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (PLEASE REFER TO THE DISCLOSURES AND DISCLAIMERS AT END OF THE DOCUMENT)
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CARREFOUR COMPANY REPORT
Table of Contents
COMPANY OVERVIEW ...... 3
COMPANY DESCRIPTION ...... 3 SHAREHOLDER STRUCTURE ...... 5 THE SECTOR ...... 5
COMPARABLES ...... 14 . Valuation ...... 17 VALUATION ...... 17
FINANCIALS ...... 24
APPENDIX ...... 27
DISCLOSURES AND DISCLAIMER ...... 30
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CARREFOUR COMPANY REPORT
Figure 2. Multi-local Company Company overview
Company description
Carrefour S.A is a French multinational company focused on retail operations with a small business in financial services, insurance and real state, which
accounted to 4% of its 2016 sales. The company offers not only food but non-food Source: Investor´s presentation products, such as fresh produce, local specialties, consumer goods, clothing, among others. And it provides services, including ticket booking, home delivery, Figure 3. Number of stores per format track rental services. It was founded in 1959 by two entrepreneurs who settled a 12 new idea of French-style and self-service, and nowadays it is a reference in the 10 8 food retail sector.
6 Thousands 4 Carrefour operates multi-format and omni-channel retail platforms. It has a vast 2 0 network of almost 12000 stores in a variety of formats: hypermarkets, 2012 2013 2014 2015 2016 supermarkets, convenience stores and Cash & Carry, whose mission is different Hypermarkets Supermarkets accordingly the customer´s needs. Currently, the company is investing in this Convenience Cash & carry multi-format strategy, but it is shifting its centre of gravity towards convenience Source: Annual Reports formats. Carrefour also provides products through several e-commerce websites. Besides of developing its own online offer, launching new e-commerce websites in Figure 4. % of 2016 sales several countries such as Argentina and Poland, it has also been acquiring 13% 1% businesses in e-commerce, for food and non-food offer. 10% 51% 25% The group is managing a geographically diversified portfolio with stores in more than 30 countries around the world and its operations are divided into four Hypermarkets Supermarkets Convenience Cash & carry essential segments: France, Europe (excluding France), Latin America and Asia. E-commerce
Source: 2016 Annual Report France is the domestic market where the company has a leading position in grocery retail with a market share of 17.5% in 2016. Being the country´s leading
Figure 5. Sales per region 2012-2016 mass grocer, Carrefour has 5558 stores witch contribute to 47% of 2016 sales. In the same year, sales in France decreased 1.1%, compared with an increase in 100 2015 of 2.6%. In this market, Carrefour is undertaking an ongoing change from its 80 core hypermarket positioning towards a solider convenience store and digital 60 Millions position. The company is progressively renovating the Dia stores, which were 40 acquired in 2014 for EUR600 million, into its own supermarket and convenience 20 store formats. The competition in e-commerce is high so in order to face that, the 0 2012 2013 2014 2015 2016 company has recently made a strategic move with the acquisition of Rue du France Europe Latin America Asia Commerce, a leading non-food online retailer, and Greenweez, the leading
Source: Annual Reports
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CARREFOUR COMPANY REPORT
Figure 6. Comparison of average price/kg in organic products e-commerce business. In line with consumer trends, Carrefour is €: Carrefour vs Lidl in France also developing its click & collect business which allows its customers to shop Bread online and collect the products from the nearest Carrefour store. In this new Poisson service, customers can order especially home appliance, multimedia, toys and Meat baby products. At the same time, the Company is also testing a one-hour express Vegetables
Fruit delivery service in Paris. In other hand, the French grocery market has suffering
0 10 20 30 from a price pressure created by German discounters as Aldi and Lidl. This made Lidl Carrefour the company adopts pricing strategies, including the expansion of budget ranges, * Baskets of similar and specific products price cuts on private label and long-lasting promotions on brands. Source: Carrefour and Lidl websites
Figure 7. Operating investment per With respect to the European business, Carrefour is facing a challenging retail region: 2014-2016 environment in terms of price conditions created by discounters, especially in 1400 1200 Western Europe, where the company was the second largest retail in 2016. In 1000 800 order to face that, Carrefour has been implementing aggressive price cuts and has 600 been investing in this region, being the operating investment equal to EUR625 Million 400 200 million in 2016 compared with EUR579 million in 2015. This is one of the regions 0 France Europe Latin Asia where the operating investment has been increasing over the years (figure 7). America 2014 2015 2016 Sales as a whole increased 1.8% in this segment, but this percentage is lower than the year before - 2.8%. In 2016, the countries with a higher improvement in Source: Annual Reports sales were Romania and Spain, with a respective increase of 23.54% (13.66% in
Table 3. Market share of integrated 2015) and 1.6% (1.7% in 2015). In Romania, Carrefour purchased 86 Billa countries in Europe supermarkets at locations around the country. In Spain, in the beginning of the
Integrated Market share countries in in grocery Rank year, the company agreed to acquire a substantial number of Eroski Group stores, Europe retailing 2016 giving it a presence in 27 new cities. At the end of the year, it started to integrate Spain 7.7% 2 the Eroski hypermarkets, with two stores rebranded. This region contributed to Italy 3.4% 7 26% of company sales in 2016, and the respective market shares in grocery Belgium 15.6% 2 retailing per country is presented in the table 3. Poland 3.3% 8
Romania 9.5% 2
Latin America has emerged as one of the company’s key regional markets
Source: Euromonitor and Statista contributing to 19% of 2016 sales. The increase in sales was 1.5% in 2016,
Figure 8. Number of stores per format in compared with 2.9% in 2015. In this region, Carrefour is expanding its offer in two Latin America: 2012-2016 growing markets: Argentina, where it was the leader grocery retailer in 2016 (6.4% 600 of market share) and in Brazil where it was ranked second (market share 6.5%). In 400 Argentina its dominance can be attributed to its continuous innovation and 200 investment, typified by the launch of its Carrefour Express convenience stores
0 chain. In Brazil has been verified a gradual expansion of the Express Brand and 2012A 2013A 2014A 2015A 2016A
Hypermarkets Atacadão (hypermarket chain bought by Carrefour in 2007), hypermarkets Supermarkets Convenience stores renovations and the inauguration of a non-food e-commerce website in 2016.
1 Source: Annual reports These improvements drove to growth, despite of the decrease in inflation .
PAGE 4/32 1 Inflation in Brazil: 9.03% (2015); 8.74% (2016); 3.66% (2017); 4.04% (2018F) – IMF Inflation in Argentina: N/A (2015); N/A (2016); 26.87% (2017); 17.83% (2018F) - IMF
CARREFOUR COMPANY REPORT
Figure 9. Recurring Operating Income as % of 2016 sales However, the unemployment and political and macroeconomic uncertainty will 43,90 % continue to be a challenge. This topic will be developed in the macroeconomic
30,30 30,20 analysis. % %
Carrefour´s presence in Asia region is composed by operations in China and Taiwan, which correspond together to 8% of 2016 sales, and Indonesia through
-2,50% -1,90% franchise. Taiwan continues to deliver a strong performance, with an increase in France Europe Latin Asia Corporate America Services sales of 5.5% in 2016 (17.01% in 2015), while China is struggling with a decrease in sales of -11.4% in 2016 (2.7% in 2015). The slowdown in the economy and the Recurring Operating Income fast modification in consumer spending patterns in China led to this decline. 2016 2.351 2015 2.445 As can be seen in the figure 9, Asia is the only region that has a negative recurring
Source: 2016 Annual Reports operating income, -EUR58 million. To overcome this problem, Carrefour is closing inefficient stores in this region: 30 stores under banners, just in the first quarter of
Figure 10. Shareholder structure 2017, compared with 47 in the homologue period. However, it is opening new stores especially in the convenience format and is progressively deployed its 5,1% 5,0% online food offering in new areas. In 2016, the market share in grocery retailing 0,5% 3,4% was 0.7% for China (ranked 6th position) and 6% for Taiwan (ranked 3rd position).
11,6% 7,7% 64,5% Shareholder structure 1,0% 1,3% Carrefour is a French public limited company (anonymous society) with a share Blue Partners Cervinia Europe Other Institutional investors Bunt capital of EUR1890587885 in 2016. This capital corresponds to 756235154 Galfa S. International Trading Employees Shares owned shares, of which 487820770 free float (64.5% of capital). Two other major Public
Source: 2016 Annual Report institutional investors are Galfa and Stanhore International Trading, with a total ownership of 11.6% and 7.7%, respectively. In terms of total voting rights Galfa is the individual shareholder with higher percentage (16%) followed by Cervinia Table 4. Top global players in Retailing: Ranking by value in 2016 Europe with 8.2%.
Top 10 company 4-year % share Based on extrapolations performed using the identifiable bearer securities, the ranking Trend 2016 company estimated that the number of listed shareholders overtakes 250000 and Wal-Mart Stores Inc = 3.4 more than 2100 of which were recorded shareholders. Amazon.com Inc = 1.7
Alibaba Group Holding > 1.2 Ltd
CVS Health Corp > 0.9 The Sector Kroger Co > 0.8
Walgreens Boots > 0.8 Alliance Inc A retail company is a firm that is involved in the sale of products or services. Sales
Schwarz Beteiligungs < 0.7 GmbH can be based on stores, online purchases or by mail/catalog. Consumer
Carrefour SA < 0.7 confidence, personal income and interest rates of credit cards and loans are the
Seven & I Holdings Co < 0.6 Ltd main variables that affect retailers. Therefore, a depth knowledge of the
Costco Wholesale > 0.6 marketplace will help companies to succeed. Corp
Source: Euromonitor International
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CARREFOUR COMPANY REPORT
Figure 11. % of Food and Drink sold digitally The industry as a whole is going through some major changes. The progressive from Modern Grocery retailers 2002-2021F importance of online marketplaces is one of them. Nowadays, not only pure e- 4,00% 3,00% commerce players such as Amazon and eBay are exploring this business, but also 2,00% store-based retailers. Several companies are selling more than just products and 1,00% are starting to offer other services to shoppers. For the following years, it is 0,00% expected that online marketplaces will continue to growth. However, adapt the offer of food to the shift towards e-commerce is one of the main challenges.
….Source: Euromonitor International Another trend is the increase of demand for convenience stores that is expected to Table 5. Grocery Retailers by channel continue in the future (more information about this topic will be presented in the
Traditional Grocery Retailer section of industry overview). The aging population2, the size of the households3
4 - Food/Drink/Tobacco Specialists that is decreasing, and the increase in urbanization are the reasons that support - Independent Small Grocers - Other Grocery Retailers this shift of demand for convenience format. Retailers from all different channels
Modern Grocery Retailers are adapting theirs models to this reality. The ones that can include this pattern in - Convenience Stores - Discounters their daily offer at an adjusted price will be the ones with better conditions to - Forecourt Retailers ----- Chained Forecourts ----- Independent Forecourts success. - Hypermarkets - Supermarkets The final notable trend is the grow of off-price retailers that make use the excess
supply to sell reputable brands at a reduced price. Total off-price sales were Source: Euromonitor International around USD164 billion in 2011 compared with approximately USD228 billion in Figure 12. Worldwide sales of organic 2016, according with Euromonitor International. food
90, 80, Among the subcategories of retailers, Carrefour is considered a grocery retailer, 70, 60, specifically a modern grocery retailer (table 5). It primarily offers food but also 50, 40, drinks, clothing, household goods, among others. Because food represents the 30, 20, main percentage of sales for Carrefour (83% 2016 sales), it is important to specify
Billions, Billions, dollars US 10, 0, some trends and challenges. Consumer consumption patterns around the world are modifying due to increased
Source: IMF health consciousness. People are looking for healthy products instead of dieting food, in general terms. The demand for natural and organic products (figure 12) Figure 13. Market size for Grocery retailers in 2016: Integrated countries with less sugar and chemicals is a trend. According to the 2015 Nielsen global
health and wellness survey, around 90% of shoppers among 30000 online 700 respondents in 60 countries, are willing to pay more for the added quality and 600 benefits. Besides this, making products more convenient, like snacks, is
Billions 500 400 something that is gaining new clients: the global market for snack food is 300 estimated to reach USD630 billion until 2022, growing at a CAGR of 5.8%, 200 according with Mordor Intelligence. 100 0
China France Italy Carrefour has operations spread across France, Rest of Europe, Latin America Spain Brazil Poland Argentina Belgium Taiwan and Asia, in the markets presented in the figure 13. Each market has a specific
size and more important a specific industry dynamic influenced by macroeconomic Source: Euromonitor International
PAGE 6/32 2 Population ages 65 and above (% of total): 6.9% (2000); 7.6% (2010); 8.5% (2016) – World Bank
3 % of households with just 1 person vs 6 or more, respectively: 13%,15.7% (2000); 16%,14.3% (2010); 18%,11.4% (2020); 19%,10% (2030F) – Euromonitor International 4 Percentage of urbanization: 46% (2000); 52% (2010); 58% (2020); 60% (2030F) – Euromonitor International
CARREFOUR COMPANY REPORT
aspects, consumer patterns, trends and expansion opportunities. Taking this into account, a region analysis will be performed in order to get a better understanding
Figure 14. GDP Growth in France of each market.
% 2,5 2, FRANCE 1,5 MACROECONOMIC SCENARIO 1,
0,5 0, France is the most mature market for Carrefour and the one with the highest recurring operating income, EUR1031 million in 2016, followed by Rest of Europe
Source: IMF with EUR712 million. Despite being one of the biggest economies in Europe, it has been facing some economic problems. In the last years, the growth performance of France has not been remarkable. The constant reduction in production capacity and high levels of unemployment, in particular for young people, are a concern for politicians. With low private consumption, that is a key element of growth in this country, and weak business investment, real GDP grew poorly between 2012 and Figure 15. Consumer Confidence Index - Sept 16-Jun 17: long-term average=100 2014, recovering slightly in 2015 and 2016. The economy was constrained by
110 fiscal problems, poor weather conditions and terrorist attacks that affected tourism. 105
100 95 For the following years, it is expected that the economy will face a modest 90
improvement. If the fear caused by terrorist attracts persist and affect consumer
Oct '16 Oct '17 Apr
Jan '17 Jan Jun Jun '17
Mar Mar '17 Feb '17
Dec '16 Dec Nov '16 Nov May '17
Sept '16 confidence, this improvement will be weakened. According to IMF, GDP will
Source: Statista increase gradually between 2017 and 2020, with a little deceleration in 2021 and 2022. Both investment and consumption will gradually stop dragging on growth. Private consumption is projected to pick up at an average rate of 1.6% until 2018, according to the Banque de France. Consumer spending will be supported by tax cuts and by an increase in disposable income until 2030 (1.4% growth on Table 6. Inflation and unemployment rate in France 2015-2022F average). Over 2017-2030 period, consumer expenditure average annual growth
will be around 1.4%, for food and nonalcoholic beverages. Year Inflation Unemployment The government pledge to decrease the unemployment rate to 7% until 2022 and rate inflation rate will gradually increase until 2022. Besides that, it plans to gradually 2015 0.088% 10.392% reduce the corporate income tax rate from 33.3% (which is among the highest in 2016 0.305% 10.042% the world) to 25% in Paris. The schedule for application of the 2017F 1.161% 9.481% progressive reduction will be: in 2018, a 28% rate would be applied for taxable
2018F 1.293% 9.049% profit up to EUR500000 and 33.33% above that amount; in 2019, a 28% rate
2019F 1.592% 8.678% would be applied for taxable profit up to EUR500000 and 31% above that amount;
2020F 1.675% 8.321% in 2020, the 28% rate would be the new standard for all profits and in 2021 and 2021F 1.741% 8.022% 2022, the new rate would be 26.5% and 25% respectively. 2022F 1.822% 7.782%
Source: IMF
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CARREFOUR COMPANY REPORT
INDUSTRY OVERVIEW
Table 7. Internet retailing GBO Company shares in France: % value In 2014, retail in France had a bad performance caused by the effect of price wars
on the value of sales. In 2015 and 2016, the industry recovered. The increase in 2014 2015 2016 consumer confidence and the reduced competition between internet retailing and
Carrefour 1.4% 1.4% 2.2% store-based retailing contributed to this improvement: the uncertainty and
Leclerc 7.1% 7.5% 7.5% insecurity caused by terrorist attacks strengthened internet retailing sales. However, the growth rate reached only 1% in each year. The help from the warm
Casino Guichard- 9% 9.4% 9.9% weather, the continued increase in size of modern grocery retailer outlets and the Perrachon realization of games with worldwide visibility, were not enough to a big increase. In 2015 and 2016, modern grocery retails also grew around 1%. Top players such Source: Euromonitor International as Carrefour, Casino Guichard-Perrachon and Leclerc continued to be involved in a price war. With the purpose of develop their click-and-collect/drive stores and focus on grocery products, hypermarket and supermarket chains progressively decreased their focus on non-grocery products. This helped non-grocery Table 8. Internet retailing forecasts by category in France: % value growth specialists. In the case of Carrefour, food corresponded to 83% of Group sales in 2016-2021 2016, what represents a growth of 4% compared with the previous year. The
2016/17 2016-2021 development of Click & Collect businesses contributed to an increase in internet
market share for some players in this period (table 7). Among the channels of Internet 12% 9% retailing modern grocery retailing, the convenience format was the one with higher % value
growth in 2015/2016 with 2.9%, comparing with 1.1% for hypermarkets and 0.1%
Source: Euromonitor International in supermarkets.
For the following years, taking into account IMF statistic, the retail industry is expected to achieve a CAGR of 1%, at constant 2016 prices, until 2021. In Figure 16. % Value growth for each format of store in France: 2016-2021F respect to the modern grocery retailers, the forecasted CAGR between 2016 and
2021 is about 0.3%, compared with 0.6% in 2016/17. The main drivers of this
1 performance are predicted to be the improvement of the economy and the 0,9 0,8 continuous increase of internet retailing (table 8). Therefore, M&A activity in this 0,7 0,6 channel is a great way to gain size. The forecasted average % value growth 0,5 0,4 between 2016 and 2021F, for each channel is presented in figure 16. Despite the 0,3 0,2 prospects are positive, it is important to pay attention that an intensified price war 0,1 0 can continue among modern grocery retailers, taking into account that consumers are looking for price discounts and lower prices. Another highlight is the decline Convenience Hypermarkets Supermarkets importance of hypermarkets5 that once where the main drivers in grocery retailers Source: Euromonitor international and the negative growth of supermarkets6 in 2017/2018.
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5 CAGR for hypermarkets: 0.8% (2017); 0.4% (2018F); 0.2% (2019F); 0.3% (2020F); 0.1% (2021F) – Euromonitor International 6 CAGR for supermarkets: -0.1% (2017); -0.2% (2018F); 0.1% (2019F); 0.2% (2020F); 0.5% (2021F) – Euromonitor International
CARREFOUR COMPANY REPORT
Figure 17. European Countries´ GDP Growth in % EUROPA
6, MACROECONOMIC SCENARIO
5, The financial crises that began in 2007 strongly affected the economy of European 4, countries. Austerity measures implemented by each country, in order to restore 3, market confidence, were not enough. So an external entity, the so-called “Troika” 2, implemented strong structural reforms. These actions helped the economies to 1, recover through years. However, in 2016 an event caused a negative impact in 0, some countries: the Brexit – UK citizens voted to leave European Union. Spain Poland Italy Belgium Romania For 2017, it is predicted that 4 of 5 integrated countries of Carrefour will grow more Source: IMF than the year before. This improvement is driven by the recovery in domestic demand and stronger labour market with unemployment rates decreasing for all Figure 18. Consumer Confidence Index countries. For the following years, 2018 until 2022, GDP will grow but European Countries Sept 16-Jun 17: long- term average=100 progressively less, for the considered countries. The most accentuated declines
are expected for Romania and Spain. Overall, exports are stronger and 115, employment growth is predicted to keep picking up, taking into account that 110, companies want to hire new people. As a consequence, businesses and 105, consumer confidence are now at six-year highs. According with OECD outlook,
100, monetary policy should remain supportive until inflation is visibly and durably fluctuating towards the ECB target. IMF statistics estimate that inflation rate will 95, slightly increase from 2017 until 2022 for all considered countries, except for 90, Sept Oct Nov Dec Jan Feb Mar Apr May Jun Romania, where it is expected to slow down from 2018. In 2022, inflation rates for '16 '16 '16 '16 '17 '17 '17 '17 '17 '17 Italy Spain these countries will reach percentages between 1.5 and 2.5. Poland France
Source: Statista INDUSTRY OVERVIEW
Figure 19. % Value growth for convenience In Europe, consumers have shifted their habits. The demand for discounters and stores in European countries: 2016-2021F convenience stores is a trend considering the economic situation and busy life 9 8 styles. The number of stores for these formats has been increasing and will 7 continue. This means that modern grocery retailers are taking share from 6 7 5 traditional grocery retailers . However, the second ones are still important for this 4 group of countries, especially for Romania in which they still account for 46% of 3 2 total grocery shopping in 2016. In particular for Belgium and Italy, the impact has 1 0 been softer in the sense that traditional grocery retailers only lost 1% of total
Poland Romania Spain Italy Belgium Grocery sales between 2011 and 2016.
Source: Euromonitor International
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7 Modern Grocery Retailers sales as % of total Grocery Retailers sales, 2011 vs 2016 respectively: Poland- 68%,81%; Romania- 44%,54%; Belgium- 73%, 74%; Spain - 75%,78%; Italy- 72%,73% Euromonitor International
CARREFOUR COMPANY REPORT
In Western Europe, between 2008 and 2011, due to the financial crisis, consumers looked for cheaper products and cut down on the amount of food purchased. Statistics show that families cut back on meat and other expensive
Table 9. % CAGR for Grocery Retailers products. This led to a decline in growth for grocery retailing. Between 2011 and in integrated countries of Europe: 2016-2021 2016 the industry recovered. Nevertheless, taking into account that Western
CAGR Europe is one of the most mature markets for this industry and consumers were Country 2011- CAGR 2016- still looking for cheaper brands, private label good and higher discounts, this 2016 2021 region shown the lowest growth rate in the world. For the following years, it is
Spain 0.8% 2% expected that the improvement in economy and the boost in consumer confidence
Italy 0.3% 1% will help Grocery retailers to grow, for the considered countries of Western Europe
(table 9). However, it is important to highlight that not all formats will contribute to Belgium 1.2% 1% this increase, namely hypermarkets (table 10). In this region, grocery retailing is
Romania 7.3% 3% controlled by domestic players which are the leaders in almost every country,
Poland being the supermarkets the largest format. According with the Consumers’ 3.3% 1%
expectations, retailers will adjust the size of supermarkets. A size reduction of
Source: Euromonitor International 3.4% is predicted until 2021, comparing with 2016. Moreover, online grocery
shopping is predicted to rise in all markets.
For Eastern Europe, it has been verified the same tendencies overall. In Poland, the market for grocery retailers is saturated with about 3500 grocery retailers per million inhabitants. Uncompetitive and unprofitable outlets are being closed so the number of grocery retailers is declining. About 21137 outlets were closed since 2011. As it was mentioned before, modern grocery retailers are gaining market Table 10. % Value Growth for hypermarkets share, however it is important to highlight that traditional grocery retailers still have and supermarkets in European Countries: 2016-2021F 19% share of total grocery retailing. Between 2017 and 2021, not all modern
grocery formats will grow: convenience 1.8%, supermarkets 0.8% but Countries Hypermarkets Supermarkets hypermarkets -2%. Internet retailing is not very usual for groceries, but consumer
Spain -0.1 3.1 patterns are changing. Poles like to see groceries and compare them with others
Italy 1 0.5 products, according with Euromonitor International.
Belgium -1.1 0.5 In Romania, convenience stores had the most powerful performance in 2016, but hypermarkets and supermarkets continued to face a robust performance (CAGR Poland -2 0.8 of 15% and 18% respectively). Between 2017 and 2021, the convenience format Romania 4.5 4.7
will grow at a CAGR of 8.1%, while hypermarkets and supermarkets will grow at
Source: Euromonitor International 4.5% and 4.7% respectively. Internet retailing is progressing but only Carrefour, Cora and Mega are adapting to this reality.
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CARREFOUR COMPANY REPORT
LATIN AMERICA MACROECONOMIC SCENARIO
The economy of Brazil has become much more diverse in the past years. The country depends on exports but less than before and it has been verified Figure 20. Latin America GDP Growth substantial improvements in poverty aspects. Nevertheless, it still has high levels 4 of inequality for a country with middle income. In 2010, Brazil showed the fastest 3 annual growth rate in 25 years. The significant rise in credit and robust domestic 2
1 demand were the main drivers. However, in recent years, a decline was faced. In 0 2013, the growth rate picked up markedly to 3.01% comparing with 2012, but the -1 economy stagnated in 2014 and contracted over 2015 and 2016. Several -2
-3 problems were the origin of this recession, including the increase in -4 unemployment rates, rigid credit conditions and political uncertainty. This -5 accentuated slowdown resulted in the worst economic recession for Brazil in Brazil Argentina decades. As a consequence, two main credit agencies have downgraded the debt Source: IMF status of Brazil to junk.
For the following years, IMF estimates that the economy will finally emerge from an austere and lengthened recession. Although, the recovery is expected to be weak and slow. In 2022, the prospects for GDP growth are around 2.03%. Private consumption will provide support on the back of progressively rising in real incomes and lower inflation. Per capita gross income is predicted to be USD7500 Figure 21. CCI Brazil: Sep 16 - Sept 17: base year 2001=100 at constant 2016 prices in 2022, comparing with almost USD7000 in 2016. The
inflation rate reached 8.74% in 2016, but it is expected to slow down and keep 105, 104, constant between 3% and 4% until 2022. A recent decision to extend the scope for 103, 102, withdrawals from individual accounts in the unemployment insurance scheme will 101, also increase household disposable incomes and support private consumption. 100, 99, Consumer expenditure average annual growth will be around 0.4% until 2030, for 98, 97, food and nonalcoholic beverages. 96, A more fast recovery will be affected by unemployment rates, which will continue 95, to be high. In addition to the difficult economic environment, Brazil handles political
Source: Statista tensions. A recent event was the removal of the president Dilma Rousseff from the cargo, for violation of fiscal responsibility rules in an impeachment trial. Michel Temer, her vice-president assumed the position amid great polemic. Corruption is still a major issue for the economic and political environment of the country, since Brazil ranks as the 79th most corrupt country in the world out of 176 countries.
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CARREFOUR COMPANY REPORT
INDUSTRY OVERVIEW
Taking into account the contraction in Brazil´s economy, in 2016 consumers focused on products with cheap prices. In a Mckinsey survey, 55% of 1000 Brazilian consumers were looking for sales and promotions and 62% are paying more attention to prices. To adapt to this trend, grocery retailers entered in a price Table 11. Internet retailing forecasts by category: % value growth 2016-2021F war through promotions and everyday low prices. Grocery retailers also faced
competition from other players such as atacarejos and warehouse clubs. Another Argentina Brazil trend was the increase socialization at home. Brazilians are more willing to order
food than visit consumer foodservices outlets. Accordingly, the size of packages Internet 29 15 Retailing offered and sales of alcoholic drinks increased.
The intensification of urban crime8, the decrease of household sizes9 and the rise Source: Euromonitor International of traffic congestion10 in the main cities lead to a boost in the demand for convenience stores. In that sense, this was the channel with the fastest growth in 2016: 20.6% compared with 10.9% in supermarkets and 4% in hypermarkets. The growth rate for grocery retailers was 7.5%. However, this percentage was not enough to compensate the impact of high inflation – 8.7%. As in other markets, modern grocery retailers are getting stronger, with a slightly higher growth rate in 2016 of 7.6% compared with 7.5% for traditional grocery retailers. However, the second ones still accounted for 48% of value sales. Finally, it is important to mention that the offer from grocery retailing though internet is becoming even Figure 22. % Value growth for each format of more common between large and small players, being the CAGR for this channel store Latin America: 2016-2021F equal to 19% between 2012 and 2016. With the companies´ investment, internet 14,00 retailing will continue to grow in the future (table 11). 12,00
10,00
8,00 Until 2021, grocery retailers will grow at 2.2% at constant 2016 prices and
6,00 specifically modern grocery retailers will grow 3.1%. This performance will be 4,00 better compared with the review period since the economy will progressively 2,00 recover. However, the prices war will somehow limit the grow. The focus on this 0,00 Convenience Hypermarkets Supermarkets period will be the expansion of convenience stores (figure 22) to meet the change Brazil Argentina in consumer patters. Source: Euromonitor International ASIA MACROECONOMIC SCENARIO
In the Asia region, Carrefour operates in three countries: China, Taiwan and Indonesia through franchisees. In this segment Taiwan delivers a strong
PAGE 12/32 8 In 2016, the number of Brazilians injured by stray bullets and other violent crimes raised 6% - Forbes
9 Size of household: 3.8 (2000); 3.2 (2012) – Databank
10 Congestion level (extra travel time) in São Paulo: 29% (2015); 30% (2016) – TomTom traffic index
CARREFOUR COMPANY REPORT
performance while sales in China continue to decline reflecting the slowdown in the economy and the change in consumer spending patterns. Figure 23. GDP Growth in Asia
8 For almost three decades, China was one of the World´s biggest economies. It 7 6 experienced a fast and continuous growth, supported by economic and free 5 market reforms, and foreign investment. Nevertheless, in the last years, the 4 growth in real GDP started to progressively decrease, falling to 6.7% in 2016. One 3 2 of the main reasons why the economy remains sustained is the cheap credit 1 granted by state-run banks, at the government´ request. Moreover, the driver of 0 the economy continues to shift from exports to consumption that has contributed
China Taiwan to 70% of growth in the last years.
Source: IMF IMF latest China’s economic outlook project a growth in GDP, between 2017 and 2022 about 6.25%, on average, what means that is expected to maintain its downward trend. China needs structural reforms to overcome debt problems and Figure 24. CCI China: Sep 16- Sep 17 100=neutral prevent a potential financial and economic crisis. Public debt corresponded to
44.3% of GDP in 2016, and it will rise, in real terms, by 14.9% in 2017. In the past 120, decade, corporate debt has doubled. Besides that, immediate measures are 115, required to its pension system because population is aging very fast. Another
110, concern is the management of the new protectionist measures. According with IMF statistics, inflation rate will be 1.73% in 2017, compared with 105, 2% in 2016. An increase trend is expected until 2020 and after that, rates will be 100, constant until 2022. Tax cuts for small firms and entrepreneurs will allow new jobs
95, and consequently an increase in consumption. Until 2030, consumer expenditure
Jul '17Jul
Oct '16 Oct '17 Apr Jun '17 Jun
Jan '17 Jan average annual growth is estimated to be almost 6%, for food and nonalcoholic
Feb '17 Feb Mar '17
Sep Sep '16 Dec '16 Aug '17 Nov '16
May May '17 Sept '17
Source: Statista beverages. The consumer confidence index is projected to increase. The unemployment rate is predicted to be constant between 2017 and 2022 at 4.02%, compared with a rate of 4.05% in 2016. However, if the social safety net and
Figure 25. % Value growth in Grocery retailing public services remain the same, these improvements will advance steadily. Real for Asia region: 2016/17 and 2016-2021F wages continue to pick until 2022 but at a low pace. 3,5 3 INDUSTRY OVERVIEW 2,5
2 In 2016, consumption in China was somehow diversified. According with 1,5
1 Euromonitor International, some Chinese consumers looked for cheaper prices
0,5 considering the decline in the economy, while others, particularly the ones that live 0 in first-tier areas, focused more on the convenience and quality of products 2016/17 2016-2021F associated with a high shopping experience. The increase in disposable incomes China Taiwan and the exhausting work routine11 were the main drivers for the second segment Source: Euromonitor International
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11 According with the 2015 “51.job.com” survey, 40% of 6000 respondents said they were holding down more than one job.
CARREFOUR COMPANY REPORT
of consumers. Taking into consideration these patterns, several big players started to expand the number of convenience stores and boutique hypermarkets and supermarkets, offering high-quality products and good-looking environments.
Since 2011 and 2016, the number of convenience outlets increased from 25000 to
Table 12. Internet retailing forecasts by 41300. Therefore, formats with a small size and premiumization became the main category in Asia region: % value growth 2016-2021 developments in grocery retailing. In 2016, grocery retailers had a growth rate of
2.1%, which represented a decline comparing with 2015. As in other markets, China Taiwan traditional grocery retailers have been losing market share for modern grocery retailers, despite still being an essential channel for Chinese people. Since 2011 Internet 19 5 retailing and 2016, the percentage of traditional grocery retailers on total grocery retailers
decreased from 38% to 33%. An aspect that is important to mention was the Source: Euromonitor International progress of online grocery retailing that will continue in the future (table 12). In line with this trend, grocery retailers are investing in developing their own platforms or collaborating with leaders in this market. In the meantime, more international grocery retailers will invest in this market, and can initiate their offer through internet.
Between 2017 and 2021, it is estimated that the market for grocery retailers will face a stationary performance (CAGR of 0.5% at constant 2016 prices). The continue increase of online grocery retailing, the rise in costs, the higher consumer density and the closure of poor performance stores will contribute to this decline in growth. Only the demand for healthy and high-quality products and the upward Figure 26. % Value growth for each format of store Asia region: 2016-2021F tendency in wages will support the positive percentage. Traditional grocery
retailers will face a growth of -1.8%, while modern grocery retailers will grow at 10,00 1.6%. The respective growth for each format is present in figure 26. 8,00
6,00 Comparables 4,00
2,00 Carrefour´s competition is diverse and its competitors vary according to the 0,00 market. Some of them are specific to a country or region and thus they affect the -2,00 Convenience Hypermarkets Supermarkets Company sales in a regional way but not globally. Moreover, some of them are not China Taiwan listed. For instance, Auchan Group SA that is a strong competitor, present in Source: Euromonitor International almost all of the markets where Carrefour operates, is not publicly traded. Taking into account the business model and the compatibility of countries with operations, the truly competitors analyzed are the following:
Casino Guichard-Perrachon SA, is a retail group based in France with operations in Latin America, Middle East, Africa and Western Europe. It is mainly considered a modern grocery retailer because 72% of 2016 sales are from this
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CARREFOUR COMPANY REPORT
channel. In global terms, it has a market share of 1% for this channel. It recently made an important acquisition that changed the percentage of sales mentioned Table 13. Important data for competitors in 2016 (EUR millions) above for modern grocery (93% in 2011): Brazil’s Grupo Pão de Açúcar whose
Company Market Sales Debt portfolio includes electronics and appliance specialists. Between 2011 and 2014, it cap over performed the retailing market with a CAGR of 8% compared with 5%. In Casino Guichard- 2011, it experienced a y-o-y growth of 20% in retailing, but in recent years, the Perrachon 5 055 36 030 4 428 SA sale of some international operations led to a negative growth of -5%. In terms of
Tesco Plc 17442 62 792 5 795 modern grocery retailing, the y-o-y growth decline from 3% to -8%, for the same
Koninklijke period. Nowadays, Casino is focusing more in convenience formats and shifting Ahold 25 483 49 695 2 822 Delhaize away from hypermarkets. In 2015, hypermarkets contributed to 31% of total sales, Nv while in 2016 the percentage decreased to 26%. Comparing with some modern
Sainsbury 592 2667 104 grocery retailers, Casino has a very strong online offer, with 11% of 2016 sales Plc generated by this channel (5% in 2011). The main objective of Casino is to adjust
Wal-Mart 178459 408 30122 its offer and formats to costumer changing needs. Its major strength is its Stores Inc 230 developed market segmentation. It offers specific brands and formats according
with each market. In other hand, maintain share in its competitive domestic market
Source: Bloomberg has been a challenging.
Sainsbury Plc, is a UK grocery retailer company with operations in UK and Ireland. It has around 2200 stores in these markets. Besides it is the second largest modern grocery retailer in UK with a market share of 14% in 2016, it also has a business in consumer finance, consumer foodservice and it offers Figure 27. Global Market share for Grocery Retailing: 2011-2017 downloadable media through its entertainment website. The formats which 8,00 account for the highest percentage of sales are hypermarkets, with a market share % of 23% in 2016 (ranked 3rd). It has been increasing its sales from online offer, and 6,00 recently acquired GBP which gave it a solid position in internet retailing. The percentage of sales generated by internet retailing increased from 5.1% to 6.1% 4,00 between 2014 and 2016. In 2016, the company increased sales in convenience stores (9% growth) but it closed a few number of underperforming hypermarket 2,00 outlets. One of the Sainsbury´s goals is to satisfy the consumers’ needs of all income ranges, since its offer is more expensive than discounters but cheaper 0,00 2011 2012 2013 2014 2015 2016 2017 than overall grocery retailers.
Casino Guichard-Perrachon SA Carrefour SA J Sainsbury Plc Wal-Mart Stores Inc Koninklijke Ahold Delhaize NV, is a grocery conglomeration based in Europa Tesco Plc Ahold Delhaize which surged from the merger between Royal Ahold NV (12th largest grocer) and
*Until 2016, Ahold Delhaize´s market share was zero Delhaize Group SA (21st largest grocer) in 2016. Ahold Delhaize is nowadays the because it did not existed yet. Respective market shares: Delhaize Group – 0.5% (2011-15); Royal Ahold – 1% (2011/12); 0.7% (2013-15) seventh biggest modern grocery retailer worldwide with a market share of 1.9%. It
Source: Euromonitor International manages a diversified portfolio with stores in North America, Europe and Asia
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CARREFOUR COMPANY REPORT
Pacific and its focus is on supermarkets that accounted for 71% of 2016 sales. The main objectives of the company with the fusion was to achieve cost synergies and gain power to obtain lower prices from suppliers and in that way compete in Figure 28. Global Market share for Internet Retailing: 2011-2017 prices. Its gross margin of 27% is higher than the overall industry: 21% for 1,80 Carrefour, 25% for Wal-Mart, 24% for Casino, among others. The next steps are %1,60 incorporate e-commerce business, focus on core banners and channels, and try to 1,40 1,20 renovate old stores. 1,00 0,80 0,60 Tesco Plc, is a retail company with headquarter in UK and operations in Asia 0,40 Pacific and Europe. It is primarily a modern grocery retailer with a global market 0,20 share of 1.9% in 2016 (ranked 6th). However, it is important to mention that its 0,00 2011 2012 2013 2014 2015 2016 2017 position fell a lot between 2012 and 2016. This was mainly due to the war price in
Casino Guichard-Perrachon SA its domestic market, caused by discounters such as Lidl and Aldi. Consequently, J Sainsbury Plc Ahold Delhaize the company was forced to sell non-core assets and operations in other countries. Tesco Plc Wal-Mart Stores Inc In 2015, it started a strategy concentrated on cost reduction, brand differentiation
*Until 2016, Ahold Delhaize´s market share was zero and corporate governance. In 2015, the gross margin was equal to -3.9% and in because it did not existed yet. Respective market shares: Royal Ahold – 0.2% (2011-15) 2016 this percentage rise to 5.3%. In 2015, profit before taxation was negative,
**Carrefour: Insignificant percentage around -GBP6.5 billion and in 2016 this value increased to around GBP0.2 billion.
Source: Euromonitor International Despite recent events, Tesco is still one of the biggest grocery retail companies worldwide, with a large variety of formats and brands, which satisfy differentiated consumer needs and preferences. This is one of its main strengths in the sense that this produces greater sales and supports brand equity. For the forecasted period, it is predicted an increase in profits.
Figure 29. Total number of stores Wal-Mart Stores Inc, is the largest retailer in the world with a market share of 3.4% in 2016. In modern grocery retailing it is also the number one with a global 20 market share of 10.1%. It has a portfolio of 11700 stores in 28 countries, but its
15 domestic market, US, is very robust, corresponding to 76% of 2016 sales. Thousands Hypermarkets stores account to the major percentage of sales, 71%, and one of 10 the main drivers of growth is its outlet chain which allows economies of scale. In
5 the last year, the company faced a downtown in revenues, caused by the accelerated transformation in consumer patters. Sales decreased from USD486 0 2012 2013 2014 2015 2016 billion in 2015 to USD482 billion in 2016. For the future, it intends to continue to Wal-Mart Stores Inc Carrefour SA invest in the improvement of stores and e-commerce, trying to integrate its online Casino Guichard-Perrachon SA J Sainsbury Plc Ahold Delhaize offer with physical stores. The main competitive advantage of this company is its Tesco Plc huge store network that allows a powerful sourcing capacity and negotiating
Source: Statista and Annual Reports ability. Taking into consideration it offers lower prices it has been losing to dollar
stores and discounters.
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CARREFOUR COMPANY REPORT
Despite of its size, Carrefour has more difficulty to compete on prices in relation to its competitors. Consumer’s preferences are shifting towards cheaper products and convenience formats. So, it continues to lose market share essentially for discounters. Another challenge that it is facing is catching up online offer. During last years, it invested in the launching of new websites and acquired online retailers, however is lagging behind comparatively most of its competitors. The most competitive advantage is its global presence both in integrated countries and countries in partnership through different formats, especially in markets where the US giants arrived later.
. Valuation
Besides of the DCF analysis, a multiple valuation was also made, in order to measure how Carrefour is valued amongst its peers. For this valuation it was considered the five described companies above, which are considered the truly peers of Carrefour. The multiples used in this method were: Price/EBITDA, Table 14. ROIC and ROA for Carrefour and peers Price/Sales and Price/Book value. The multiple Price/Book value is probably the
most accurate because Carrefour has similar ROIC and ROA compared with its ROIC ROA peers. However, the three multiples used yield an average price for Carrefour of
Carrefour 0.81% 1.85% EUR21.860,91 million, which is higher than the one in the market. The market
Peers may be underestimating the company compared with the rest of its peers, or (average) 4.08% 2.52% Carrefour is actually losing value comparing with its peers.
Source: Analyst analysis and Financial Times Valuation Multiple Carrefour Valuation EBITDA 6,165 3.526,00 € 21.738,61 € Sales 0,318 78.774,00 € 25.055,76 € Book-value 1,565 12.008,00 € 18.788,37 €
Carrefour Value 21.860,91 €
Valuation
Discounted Cash Flow valuation
In the DCF approach, it was determined the Enterprise Value (EV) of the Company. This value was adjusted for non-operating items and Net Debt to arrive at a final equity value. Taking this into consideration, it was estimated the intrinsic value of Carrefour SA´s share. The base case for the model was
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CARREFOUR COMPANY REPORT
formulated using historical performance, industry outlooks, company´s projections and the comparable´ analysis.
Revenues
Revenue drivers
Around the world, Carrefour has a multiplicity of formats and channels which Table x. Multi-format and omni-channel model allow it to meet the diversified customers´ needs and expectations: hypermarkets - a general product offering is provided at the best possible price; supermarkets - the focus is on fresh and local products with good located selling points; convenience stores - the focus is on essential products at fair prices and with extended opening hours; cash & carry stores – not only food but non-food products at wholesale prices; and e-commerce websites and solutions. Therefore, Carrefour believes that its multi-format and omni-channel model are the main drivers of future growth. In this sense, it continues to invest in
Source: Investors presentation expanding through these models. According with this strategy, the structure developed to estimate sales were based on this. For each region, it was determined the sales provided by e-commerce and stores.
E-commerce sales
Table 15. E-commerce throughout the group Over the recent years, Carrefour has invested a lot in its e-commerce business,
not only food but non-food offer. It acquired targeted companies; it launched new Food Non-food Non-food (home (direct (marketpl websites around its countries and developed solutions focused on the client, deliver/click offer) ace) & collect) such as mobile payments, mobile apps, home delivery, in-store or Carrefour
France Drive pick-up, among others. In 2016, its online offer achieved all its integrated countries. Spain
Italy 2017 In France is the country where Carrefour has the stronger online offer until now. Progress Between 2011 and 2015, Carrefour´ sales followed the market´ sales increase. Belgium 2017 In Progress While in 2016, the Company over performed the segment with a growth rate of
Poland In Progress 77% compared with 12%. Between 2017 and 2021, internet retailing in France is
Romania In predicted to grow at an average rate equal to 9%. However, taking into Progress Under Argentina In Progress study consideration the 2016 strategic acquisitions that conferred a diversified offer,
and the estimations of the Company, it is predicted that Carrefour will grow three Brazil 2017 times more than the segment. The increase is not expected to be higher, In China Progress because of the competition that will continue to be strong, mainly from Casino Under Taiwan study Guichard-Perrachon and Leclerc that already have a robust online offer, with
respective market shares of 9.4% and 7.3% in 2016. The increase in sales will be Source: Investors presentation higher in the first years where the economy will face a greater improvement.
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CARREFOUR COMPANY REPORT
For the rest of the European countries, Carrefour has been increasing its offer through years. The food segment already exists in all the considered countries, but a non-food marketplace is in progress for all, except Spain (that already has).
Figure 30. Evolution of internet retailing for From 2017 to 2021, the internet retailing segment will grow at an average rate of country 16%, being Italy and Romania, the countries with a higher expected increase in 800 60 sales of 19%. Considering the investment that Carrefour is doing, it is projected 700
Billion 50 600 that sales will increase, on average, two times the growth rate predicted to the 40 500 market. The economy will continue to raise in all the considered countries
400 30 nevertheless the improvement will be lower through the years. The competition in
300 these countries is high, especially for Western Europe, from Tesco, Casino, and 20 200 Leclerc with the respective market shares of 2.2%, 1.5% and 1.2% in 2016. 10 100 Latin America is one of the regions where Carrefour´s online offer arrived later. 0 0 However, it already has non-food offer for both countries, and the food segment
China Taiwan Poland is by this time in progress. Between 2017 and 2021, both Argentina and Romania Argentina Brazil Belgium France Italy especially Brazil will recover from an economic recession. This will help the Spain segment to increase its sales, being Latin America the region with the higher
Source: Euromonitor International expected average growth rate, 22%. For Carrefour, it is projected that the company´s sales will increase more than the market, around 32%. Here, the competition is very high, especially from the giants MercadoLibre, Casino and Wal-Mart with a respective market share of 14.3%, 5.2% and 2.1% in 2016.
In relation to Asia region, Carrefour just started its offer two years ago. China is among all the countries where Carrefour has operations, the one with the highest internet retailing market. In 2016, its size was nine times the second considered Figure 31. Evolution of e-commerce sales market: France. Taking this into account, Carrefour has been developing its between 2012-2021F online offer, having launched websites in eleven new cities since 2016. In terms 202… of non-food marketplaces, the offer is in progress. Between 2017 and 2021, the 202… 201… internet retailing segment for the region will grow at an average rate of 12%. 201… Besides of the slowdown in the economy, China will grow much more than 201… Taiwan, with an average rate of 19%. Considering the investment in this channel 201… 201… for both counties, it is estimated that the company will grow two times the 201… expected rate for the market. In China especially, Carrefour has high competition 201… 201… from the giant Wal-Mart with a respective market share of 1.4% in 2016.
0 2 4 6 The company expects to achieve EUR4 billion in sales for e-commerce until EUR Billion
2020, compared with EUR1.2 billion in 2016. With these previsions, it is projected Source: Analyst estimates that the company will achieve 3.5 billion in 2020 and 4.3 billion in 2021.
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CARREFOUR COMPANY REPORT
Figure 32. Growth rate for each format since 2017F to 2021F in France Store-based sales
2,0% The structure for sales provided by stores was designed based on 3 pillars: 1,5% number of stores of each format, sales area in square meters for each format and 1,0%
0,5% sales per square meter, for each region.
0,0% 2017F 2018F 2019F 2020F 2021F France -0,5%
Convenience Hypermarkts The number of stores per format will reflect the change from hypermarkets to Supermarkets more convenience formats, according with the new consumer patterns. Between Source: Euromonitor International 2017 and 2021, sales for hypermarkets are expected to increase less than for convenience stores, on average 0.4% and 0.9% respectively. Supermarkets will Figure 33. Evolution of in-store sales in France: 2016-2021F in millions of euros face the lower increase, 0.1% on average. Taking into account that some customers will start to buy online instead of in stores, there will be some 2021F 2020F cannibalization. In this sense, it is predicted that the number of stores will grow 2019F 2018F less, on average each year, than the rates predicted for the market. For 2021, the 2017F number of hypermarkets is expected to be 231 compared with 229 in 2016. 2016A 0 20.000 40.000 Convenience stores in 2021 are expected to be equal to 4270 compared with
Hypermarkets Supermarkets 4156 in 2016. Supermarkets are forecasted to be 1037 in 2021 compared with Convenience stores Cash & Carry 1034 in 2016. Finally, the number of Cash & Carry will face a slight improvement,
Source: Analyst estimates from 139 to 141 for the forecasted period. In terms of the average sales area for
Figure 34. Average Growth rate for each hypermarkets and supermarkets, it is expected a decrease, considering the format since 2017F to 2021F in European countries renovation of stores to more convenience formats. For hypermarkets it is
5,0% estimated a decrease of 10% and for supermarkets of 3.4%. In terms of sales per 4,0% square meter, the inflation and the improvement of store layout contribute to an 3,0% 2,0% increase of the variable, however Carrefour will face a high competition 1,0% 0,0% especially from discounters. The balance is expected to be an increase from 7515€/sq.m to 7844€/sq.m.
Convenience Hypermarkts Europe Supermarkets
Source: Euromonitor International The boost in the economy, especially in 2017, with a deceleration until 2021, will lead to an increase in consumer confidence. In terms of market prospects, Figure 35. Evolution of in-store sales in Europe: 2016-2021F in millions of euros convenience stores, hypermarkets and supermarkets sales will grow respectively, at an average rate of 2.4%, 0.6%, 2.1%, for the considered 2021F 2020F countries as a whole, between 2017 and 2021. It is important to highlight that 2019F 2018F sales for hypermarkets will decrease for some years, for almost all countries, 2017F 2016A expect Romania and Italy. Carrefour has different number of stores per country, 0 10.000 20.000 30.000 so that was taken into consideration when applying the growth rates, for the
Hypermarkets Supermarkets forecasted period. Taking into account that some of Carrefour´s customers will Convenience stores Cash & Carry start to buy its products online, it is predicted that the growth rate for Carrefour
Source: Analyst estimates number of stores will be lower, on average each year, than the rates predicted for
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CARREFOUR COMPANY REPORT
Figure 36. Average Growth rate for each the market. The evolution of the number of stores will be for hypermarkets, from format since 2017F to 2021F in Latin America 395 to 376, for supermarkets, from 1355 to 1411, for convenience stores, from
10,0% 2110 to 2246 and for Cash & Carry, from 13 to 18. Carrefour will adjust the size
8,0% of its stores according with consumer´s expectations. In this sense, the average
6,0% sales area for hypermarkets it is estimated to decrease 10% and for
4,0% supermarkets 3.4%. The high competition from discounters will make sales per
2,0% square meter decrease, however the inflation rate will increase for all countries.
0,0% So, sales per square meter will increase from 3747€/sq.m to 3952€/sq.m. 2017F 2018F 2019F 2020F 2021F -2,0% Latin America
Convenience Hypermarktes
Supermarkets The economy in Brazil and Argentina will finally recover. This visible
Source: Euromonitor International improvement will help grocery retailers to grow. However it is important to highlight that consumer’s patterns are changing, especially in Brazil, where the demand for convenience formats will strongly rise. In terms of market prospects, convenience stores, hypermarkets and supermarkets sales will grow Figure 37. Evolution of in-store sales in respectively, at an average rate of 6.5%, 1.7% and 1.9% for the considered Latin America: 2016-2021F in millions of euros countries as a whole, between 2017 and 2021. Carrefour has different number of stores per country, so that was taken into consideration when applying the 2021F 2020F growth rates, for the forecasted period. It is expected that Carrefour will grow 2019F more than the market, however it is important to consider that some of 2018F 2017F Carrefour´s customers will start to buy its products online. In this sense, it is 2016A predicted that will be some cannibalization. The evolution of the number of stores 0 5.000 10.00015.000 20.000 will be for hypermarkets, from 316 to 352, for supermarkets, from 168 to 201, for Hypermarkets Supermarkets Convenience stores convenience stores, from 468 to 584 and for Cash & Carry, Carrefour won´t open
Source: Analyst estimates stores. For the forecasted period, both countries will face deflation, however the economy will improve a lot. Besides this, it is expected an improvement of the layout of stores. In this sense, sales per square meter, will increase from 5406€/sq.m to 5632€/sq.m. In this region, it is not expected a change in size of
Figure 38. Average Growth rate for each stores, so the average sales area remain equal to 7345 sq.m for hypermarkets format since 2017F to 2021F in Asia and 1319 for supermarkets. 10,0% 8,0% Asia 6,0% 4,0% China´s economy will continue to grow but at a downward trend, while Taiwan 2,0% 0,0% will face a slightly increase over the years. Consumer confidence index is 2017F 2018F 2019F 2020F 2021F -2,0% expected to increase as well as consumer expenditure. Until now, Carrefour has Convenience - China
Hypermarktes - Both not supermarkets in China neither convenience stores in Taiwan, and it is not Supermarkets - Taiwan expected that the company will open. In terms of market prospects, sales for
Source: Euromonitor International hypermarkets will grow at an average rate of -0.4%, for the considered countries as a whole, between 2017 and 2021. For China, sales for convenience stores will
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CARREFOUR COMPANY REPORT
grow at an average rate of 8.1%. For Taiwan, sales for supermarkets will grow at
Figure 39. Evolution of in-store sales in an average rate of 5%. Carrefour has different number of stores per country, so Asia: 2016-2021F in millions of euros that was taken into consideration when applying the growth rates, for the
2021F forecasted period. The evolution of the number of stores will be for hypermarkets, 2020F from 293 to 264, for supermarkets, 30 to 40, for convenience stores, from 25 to 2019F 2018F 65 and for Cash & Carry, Carrefour won´t open stores. According with 2017F 2016A consumer´s expectations, Carrefour will adjust the size of its stores. Average 5.500 6.000 6.500 Sales area for hypermarkets it for supermarkets is estimated to remain more or Hypermarkets Supermarkets less the same. The inflation rate will slightly increase for both countries and the Convenience stores investment to attract new customers will increase sales per square meter, from Source: Analyst estimates 2748€/sq.m to 3035€/sq.m.
Costs
Since the main revenue stream of Carrefour´s business are goods, its costs of goods sold are relatively high, as well as for the overall industry. In the past Figure 40. Gross Margins: Carrefour vs Competitors years, they corresponded, on average, to 80% of total revenues. In terms of
40% peers, the average proportion is 75%, except for Tesco and J. Sainsbury which have higher costs (around 95% of total sales). In this sense, Carrefour has been 20% cutting its costs and is establishing new targets. For instance, it wants to reduce 5% package´s costs in France until 2018. Besides that, it has been acquiring 0% 2012A 2013A 2014A2015A 2016A some companies. This strategy can contribute to economies of scale and
-20% consequently reduce costs. Therefore, it is expected that the percentage of costs Casino Guichard-Perrachon Ahold Delhaize of sales will decrease in the following years, corresponding to an increase in Sainsbury´s Tesco Wal-Mart gross margins (figure 41). However, as sales increase, these costs will increase. Carrefour
Source: Analyst estimates The group also have other operating costs, such as repair costs, electricity, and water consumption, which are projected to increase, in terms of percentage, taking into account that inflation will increase all regions except America Latina. However, the company is becoming more environmentally friendly. So the expected increase in percentages will be slightly lower. Figure 41. Carrefour´s Gross Margins: 2016A-2021F Other costs that the company will face are: employee benefits expenses, 22% property rentals, advertising expenses and cost of loyalty programs. In general 22% terms, these costs as a proportion of total revenues, will present higher 21% percentages. In the case of property rentals, it is expected an increase, 21%
20% supported by the overall inflation and the increase in number of stores, despite of the change in size of Carrefour´s formats, in order to correspond to consumer´s patters. Relatively to advertising expenses it is expected that percentages will be Gross margins relatively higher comparing with the percentage in 2016, considering the high Source: Analyst estimates
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CARREFOUR COMPANY REPORT
competition. For the same reason, Carrefour will spend more on loyalty
Table 16. Capital investment programs.
Capital expenditures Capex by Expansion unit outlook An important part of the FCF calculations lies on Net CAPEX, which includes
Hypermarkets €€€ = Property, plant and equipment (PP&E), depreciation and amortization (D&A) and
up intangibles assets. Due to the fact that the main value drivers of Carrefour are its Supermarkets €€ multi format and omni-channel model, the structure of PP&E was developed 12 Convenience € Up up based on the number of stores and sales are of each format per region . Taking stores into consideration that Carrefour wants to invest more in stores with lower
Cash & Carry € Up up formats, especially convenience stores, the necessity of capital is lower. In all regions, the convenience format is the one where the number of stores increases
E-commerce € Up up more from 2016 to 2021: France (4156 vs 4270); Europe (2110 vs 2246); Latin America (468 vs 584); Asia (25 vs 65). According with consumer trends, the
Source: Investors presentation Figure 42. PP&E and D&A in millions of company wants to reduce the size of hypermarkets and supermarkets, especially euros: 2012-2021F in France and Europe. Besides that, it is estimated that the company will close 16.000 some hypermarkets in Europe and Asia between 2016 and 2021, which is the 14.000 12.000 format with a higher sales area and capex. So the average sales area will 10.000 decrease. The decrease of hypermarkets is expected to be from 395 to 376 in 8.000 Europe and from 293 to 264 in Asia. In France, the increase is very low from 229 6.000 4.000 to 231. Just in America Latina, the increase is predicated to be more visible, from 2.000 316 to 352. In this sense, total PP&E is estimated to decrease, from EUR13406 0 million in 2016 to EUR11849 million in 2021. This decrease will contribute to a decrease in CAPEX. PP&E D&A
Source: Analyst estimates Over the past years, D&A presented a strong correlation with PP&E. So, the same structure was followed. Since intangible assets consist mainly of software
Figure 43. Inventories and Suppliers and and other assets related to the stores, they were estimated as a percentage of Trade receivables in millions of euros: between 2012-2021F sales. In this sense, it is predicted that they will increase.
2021F Net Working Capital 2020F 2019F The most important items of Net Working Capital are: Inventories, Trade 2018F Receivables, Suppliers and other creditors. As a retail company, Carrefour has 2017F 2016A Suppliers and other creditors higher than Inventories and Trade Receivables. 2015A This happens because the company receives money from its clients mainly at the 2014A 2013A time of the purchase, so it has lower account receivables. Besides that, retail 2012A business relies on accounts payables loans in order to reduce investment needs 0 5.000 10.000 15.000 20.000 and improve return. For the forecasted period, inventory–to-COGS ratio is Trade receivables Suppliers and other creditors predicted to increase. E-commerce sales will rise, so the company will keep more Inventories
goods on hand considering that customers that buy online, not only demand Source: Analyst estimates
PAGE 23/32
12 2 2 PP&E Gross/ Total sales area = €/m ; PP&E estimated = No.stores * Sales area * €/m ; Accumulated Depreciation t = Accumulated depreciation t-1 + Depreciation t – Absolet t
CARREFOUR COMPANY REPORT
more choice but have plenty of alternatives if their preferred good is not in stock. Trade receivables-to-sales ratio will slightly decrease, taking into account the
recovery in the economy. Account payables-to-COGS ratio is expected to decrease considering that accounts receivables is predicted to decline. In terms of Net Working Capital, is estimated that it will increase progressively from 2016 to 2021. This means that current assets are higher than current liabilities, what not always happened in the previous years.
Non-operating items and Net Financial Assets
Non-operating items and Net Financial Assets are important to arrive at the equity value of the Company. The most important items in these sections are the Figure 44. Carrefour´s ROIC between 2013- 2021F following described. Investments in companies accounted for by the equity
3,00% method are expected to increase around 7% each year taking into account the
2,50% improvement in the economy. Provisions are expected to increase mainly
2,00% because Post-employment benefit obligations item is projected to increase
1,50% compared with some years ago. Consumer credit financing is estimated to 1,00% decline around 20%, considering the recover in the economy: consumers need 0,50% less credit. Total borrowings are predicted to decrease through years, following 0,00% the tendency of previous years except in 2016.
Growth rate and ROIC
Source: Analyst estimates Growth rate and ROIC are two variables present in the continuation value of a company that can affect its final price target. As Carrefour is present in a mature industry, the increase for grocery retailers’ sales is expected to be, in general terms, progressively lower through years. Just e-commerce offer can contribute for a higher growth. However, some customers that start to buy online progressively stop to buy in-store, so there is some cannibalization. In this sense, it was used a growth rate of 1%. It terms of ROIC, it is expected an increase mainly due to lower capital intensity of growth.
Free Cash Flow
Based on some estimations presented above, it was calculated the Operating Free Cash Flow for each year, which represents the value from operations. Using the WACC (calculated below) and taking into consideration the non-operating assets and liabilities and subtracting Net Debt, it was obtained the Final Equity value for each year.
2021F - 2016A 2017F 2018F 2019F 2020F continuing
value Operating FCF -1.074 -370 535 509 506 21.667
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CARREFOUR COMPANY REPORT
Table 17. Cost of equity
Financials
Yield 1.25% WACC assumptions Annualized Probability of 0.26% default To discount the forecasted Free Cash Flow and arrive to the Carrefour´s value, it
Recovery rate 31.3% was used the weighted average cost of capital (WACC). The WACC is the
Cost of debt 1.07% opportunity cost that any investor takes investing in a specific business rather
Source: Analyst estimates than others with similar risk. Taking into account that the capital structure of Carrefour is divided in financial debt and equity, the cost of each one was estimated individually. Financial debt of Carrefour is composed a mix of short- Table 18. Unlevered Beta of the industry term and long-term borrowings such as bonds, notes, commercial papers and
Unlevered other liabilities. As of December 31, 2016, the company’s short-term borrowings Companies Beta accounted to EUR1875 million, and long-term borrowing accounted to EUR6200 Carrefour 0.92 million. To calculate the cost of debt, it was used the YTM of a 10-year note Casino Guichard- 0.75 Perrachon issued by Carrefour (EMTNs, EUR, 10Y, 1,25%), the annualized default
Koninklijke Ahold 0.58 probability based on the credit rating given by Mooddy´s (Baa1) and a recovery Delhaize NV
Axfood AB 0.69 rate of 31.3%. This recovery rate is the average Corporate Debt Recovery Rate
Distribuidora 0.75 for a Sr. Unsecured Bond in 2016. Through this, a cost of debt of 1.07% was Internacional obtained. Dixy Group PJSC 0.75
Jerónimo Martins 0.72 To calculate the cost of equity, it was followed the CAPM approach with the
Ica Gruppen AB 0.46 following inputs: risk-free rate, the levered beta of the company and the market
J Sainsbury PLC 0.66 risk premium. The overall idea behind CAPM is that investors need to be Tesco PLC 0.41 recompensed for the period they have their money invested and for the risk they Colruyt SA 0.43 are taking. As the German Bund rates are a better approximation of a risk-free WM Morrison 0.35 Supermarkets PLC asset compared with the French sovereign bond rates, it was used a 10-year Sonae 0.59 Germany Bund for the risk-free rate. It was obtained a risk-free of 0.4%, which Kesko OYJ-B SHS 0.64 represents the time value of money. The levered beta was estimated using the Wal-Mart Stores Inc 0.37 company´s industry beta. Fourteen companies of the industry were used in this Average of the 0.6 industry
approach plus the own Carrefour. The companies´ betas were calculated using
Source: Analyst estimates its returns and the MSCI World index returns for seven years (monthly data). At this stage, the Carrefour´s beta obtained was 1.1213. The OLS betas mentioned above were adjusted and unlevered to obtain the beta of the industry. Finally, the Table 19. Cost of equity
beta of the industry, 0.6 present in table 18, was levered to the company´s target
Risk free in € 0.4% debt-to-equity ratio, arriving at a value of 0.71. The market risk premium was
Market risk estimated based on the historical market risk premium approach. It was used the premium 7.10% annualized average of monthly historical returns of MSCI index since 1970 and Levered Beta 0.71 the 10-year German Bund calculated above. With this method it was obtained a Cost of equity 5.44% market risk premium of 7.1%. With these variables, it was achieved a cost of Source: Analyst estimates equity of 5.44%.
PAGE 25/32
13 Confidence interval: 0.74-1.49; Number of observations: 81; Confidence level: 95%; R2 = 0.31
CARREFOUR COMPANY REPORT
Figure 45. D/EV ratio of Carrefour (market The Capital structure of Carrefour is characterized by considerable high levels of values) since 2011 debt. The D/EV ratio has been relatively high, but a visible decline, with little fluctuations, has been noticed. Since 2012, the average ratio is 21% (figure 45). 2011 In this sense it is expected that the company will try to maintain this level. 2012 Comparing the D/EV ratio of Carrefour with its peers, just Casino and Tesco have 2013 higher ratios (figure 46). 2014 Even though the WACC for each year depends on the capital structure of each 2015 year, the estimated WACC, with a small variation, will be close to 4.46%. 2016
0% 20% 40% 60% Sensitivity analysis Source: Bloomberg WACC and growth rate are two variables present in the continuation value of a company that can affect its final price target. In this sense, a sensitivity analysis was performed. Since the company is changing its capital structure, this is one of the main factors that can affect WACC. The risk premium should not experience Figure 46. D/EV ratio of Carrefour vs the 5 competitors in 2016 substantial variations since it has been relatively constant over the years while the levered beta can suffer significant adjustments considering that it was Wal-Mart Stores Inc estimated based on the company´s industry beta. So, cost of equity is an important element for cost of capital. On the other hand, the cost of debt impact TESCO PLC is smaller. Additionally, these scenarios also consider smaller changes in the
J SAINSBURY PLC growth rate as a result of its unpredictable nature. As can be seen in the table, higher growth rates lead to lower prices compared with lower growth rates, for AHOLD DELHAIZE NV the same WACC. This occurs because a higher growth rate not always creates CASINO GUICHARD- value. When ROIC is lower than the cost of capital, a higher growth rate will PERRACHON actually destroy more value. Carrefour faces this situation because its ROICs are CARREFOUR SA very low, as for the overall industry.
0 0,2 0,4 0,6
Source: Bloomberg
Growth rate 19,21 0,50% 0,75% 1,00% 1,25% 1,50% 3,46% 32,83 31,71 30,37 28,73 26,66 3,96% 26,82 25,45 23,85 21,95 19,66 Wacc 4,46% 22,33 20,88 19,21 17,29 15,04 4,96% 18,85 17,39 15,75 13,88 11,75 5,46% 16,08 14,65 13,07 11,29 9,29
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CARREFOUR COMPANY REPORT
Appendix
Financial Statements
Income statement
2012A 2013A 2014A 2015A 2016A 2017F 2018F 2019F 2020F 2021F Revenues 3 75.673 74.888 74.706 76.945 76.645 77.904 78.573 79.580 80.893 82.212 France 35.341 35.438 35.336 36.272 35.877 36.142 36.517 36.922 37.388 37.980 Europe 19.786 19.220 19.191 19.724 20.085 19.915 20.036 20.081 20.274 20.360 Latin America 14.174 13.786 13.891 14.290 14.507 15.213 15.447 16.028 16.638 17.369 Asia 6.373 6.443 6.288 6.659 6.176 6.635 6.574 6.549 6.592 6.503 Item non-attributable -1 1 0 0 0 0 0 0 0 0 Cost of sales -60.659 -59.828 -59.270 -60.838 -60.789 -61.639 -62.019 -62.662 -63.543 -64.423 Gross Margin 15.014 15.060 15.436 16.107 15.856 16.265 16.555 16.918 17.350 17.789 Other operational revenue 733 744 758 924 1.134 1.199 1.210 1.225 1.245 1.266 Other revenue 7 732 745 757 924 1.134 1.199 1.210 1.225 1.245 1.266 Item non-attributable 1 -1 1 0 0 0 0 0 0 0 Loyalty program costs -653 -588 -609 -552 -591 -616 -622 -629 -640 -650 Sales, general and administrative expenses -13.028 -13.178 -13.281 -14.105 -14.147 -14.403 -14.528 -14.712 -14.956 -15.200 Employee benefits expense -7.475 -7.679 -7.762 -8.209 -8.240 -8.344 -8.416 -8.523 -8.664 -8.805 Property rentals -893 -905 -908 -1.035 -1.022 -1.044 -1.053 -1.066 -1.084 -1.102 Advertising expense -887 -856 -866 -896 -955 -1.000 -1.009 -1.022 -1.039 -1.056 Other expenses 4 -3.773 -3.738 -3.745 -3.965 -3.930 -4.015 -4.050 -4.101 -4.169 -4.237 EBITDA 2.066 2.038 2.304 2.374 2.252 2.445 2.615 2.802 2.999 3.205 Depreciation and amortisation 5 -1.518 -1.432 -1.381 -1.470 -1.487 -1.614 -1.459 -1.435 -1.426 -1.428 Item non-attributable 0 -7 0 1 -1 0 0 0 0 0 Non-recurring income and expenses (operational) -520 -180 -188 -352 -284 0 0 0 0 0 Restructuring costs -287 -52 -111 -237 -154 0 0 0 0 0 Asset impairments and write-offs -233 -128 -77 -115 -130 0 0 0 0 0 Operating income from sales (before tax) 28 426 735 552 481 831 1.156 1.367 1.573 1.776 Taxes -13,32 -159,97 -263,54 -196,13 -166,15 -281,93 -391,99 -463,77 -533,67 -602,48 Operating income from sales (after tax) 15 266 471 356 315 549 764 904 1.040 1.174 OPERATIONAL RESULT 15 266 471 356 315 549 764 904 1.040 1.174
Unrecognized actuarial gains and losses on defined -168 25 -129 -17 -109 0 0 0 0 0 benefit plans Gains and losses on Hedging instruments 6 39 15 1 10 0 0 0 0 0 Foreign currency translation gains and losses -192 -455 13 -602 361 0 0 0 0 0 Changes in the fair value of available-for-sale financial 7 5 13 -5 -4 0 0 0 0 0 assets Item non-atributable -1 0 1 1 0 0 0 0 0 0 Other comprehensive income after tax -348 -386 -87 -622 258 0 0 0 0 0 Other non-operational revenue 1.576 1.631 1.465 1.540 1.586 1.661 1.673 1.691 1.715 1.739 Financing fees and commissions 6 1.331 1.384 1.246 1.330 1.373 1.411 1.423 1.441 1.465 1.489 Rental revenue 245 247 219 210 213 250 250 250 250 250 Net income from equity-accounted companies,net 137 30 37 44 -36 15 16 17 18 19 Non-recurring income and expenses (non-operational) -140 324 337 95 -88 0 0 0 0 0 Other non-recurring items -374 -101 1 31 -127 0 0 0 0 0 Net gains on sales of assets 234 425 336 64 39 0 0 0 0 0 Non- Operating income before tax 1573 1985 1839 1679 1462 1676 1689 1708 1733 1758 Taxes -748 -745 -659 -597 -505 -568 -573 -579 -588 -596 Non- Operating income after tax 825 1240 1180 1082 957 1108 1116 1129 1145 1162 Item non-attributable -2 0 -2 0 0 0 0 0 0 0 NON-OPERATIONAL RESULT 475 854 1.091 460 1.215 1.108 1.116 1.129 1.145 1.162 Finance costs, net -488 -428 -399 -347 -377 -344 -266 -217 -168 -118 Other financial income and expenses, net 8 -395 -294 -164 -168 -138 -138 -138 -138 -138 -138 Net financial result before taxes -883 -722 -563 -515 -515 -482 -404 -355 -306 -256 Tax shield -319 -274 -214 -196 -177 -177 -148 -122 -96 -76 FINANCIAL RESULT -564 -448 -349 -319 -338 -305 -256 -233 -210 -180
NET INCOME FROM DISCOUNTINUED OPERATIONS 2 1.069 306 67 4 -40 0 0 0 0 0 Comprehensive result 994 978 1.280 501 1.152 1.351 1.624 1.799 1.975 2.156 Comprehensive result (from comprehensive income) 994 978 1.280 501 1.152 1.351 1.624 1.799 1.975 2.156 Check TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE
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CARREFOUR COMPANY REPORT
Balance Sheet
2012A 2013A 2014A 2015A 2016A 2017F 2018F 2019F 2020F 2021F Operating Assets Working Cash 379 375 374 385 384 391 394 399 406 412 Inventories 6 5.658 5.738 6.213 6.362 7.039 7.852 8.295 8.800 9.370 9.975 Trade receivables 7 2.144 2.213 2.260 2.269 2.682 2.291 2.311 2.341 2.379 2.418 Consumer credit granted by the financial 5.646 5.602 5.980 6.009 6.273 6.232 6.286 6.367 6.472 6.577 services companies 5 Goodwill1 8.608 8.277 8.228 8.495 8.640 8.640 8.640 8.640 8.640 8.640 Other intangible assets2 801 767 1.315 1.014 1.266 1.229 1.239 1.255 1.276 1.297 Property and equipment3 11.509 11.109 12.272 12.071 13.406 12.118 11.916 11.843 11.864 11.849 Gross PPE 27.966 27.124 29.103 29.115 31.168 30.267 30.333 30.500 30.746 30.950 Depreciation and impairment -16.457 -16.015 -16.831 -17.044 -17.762 -18.149 -18.417 -18.657 -18.882 -19.101 Other assets 9 789 841 853 705 907 842 850 861 875 890 Deferred tax, net 339 360 236 236 286 259 261 264 269 273 Tax receivables 520 715 1.136 1.168 1.044 941 950 962 978 994 Item non-attributable 0 0 0 3 -1 0 0 0 0 0 Total Operating Assets 36.393 35.997 38.867 38.717 41.926 40.794 41.142 41.732 42.528 43.325
Operating Liabilities Suppliers and other creditors 12.925 12.854 13.384 13.648 15.396 13.947 14.033 14.179 14.378 14.577 Other payables 10 2.422 2.763 3.022 3.244 3.153 2.684 2.707 2.742 2.787 2.833 Accrued employee benefits 1.633 1.696 1.856 1.874 1.760 1.631 1.645 1.667 1.694 1.722 Other items 789 1.067 1.166 1.370 1.393 1.053 1.062 1.075 1.093 1.111 Tax payables 1.040 913 1.172 1.097 1.260 1.127 1.137 1.152 1.171 1.190 Provisions 4.475 3.618 3.581 3.014 3.064 3.033 3.059 3.099 3.149 3.201 Post-employment benefit obligations 1.256 1.273 1.426 1.258 1.279 1.203 1.213 1.229 1.249 1.270 Claims and litigation 2.584 1.814 1.570 1.222 1.312 1.286 1.297 1.314 1.335 1.357 Other 635 531 585 534 473 544 549 556 565 574 Total Operating Liabilities 20.862 20.148 21.159 21.003 22.873 20.791 20.936 21.172 21.485 21.801
Net Operating Assets 15.531 15.849 17.708 17.714 19.053 20.003 20.206 20.560 21.043 21.524
Financial Assets Cash equivalents (Excess of Cash) 6.194 4.382 2.739 2.339 2.921 0 0 0 0 0 Other current financial assets 352 359 504 358 239 239 239 239 239 239 Assets held for sale 465 301 49 66 31 21 14 10 7 5 Investment property4 513 313 296 383 314 327 327 327 327 327 Investments in companies accounted for by the 384 496 1.471 1.433 1.361 1.459 1.564 1.677 1.798 1.928 equity method Other non-current financial assets 1.125 1.146 1.340 1.291 1.510 1.282 1.282 1.282 1.282 1.282 Total Financial Assets 9.033 6.997 6.399 5.870 6.376 3.328 3.426 3.535 3.653 3.781
Financial Liabilities Total borrowings 8 11.246 9.233 8.572 7.628 8.075 6.230 5.081 3.931 2.760 1.444 Consumer credit financing 4.998 4.910 5.307 5.249 5.330 4.264 4.264 4.264 4.264 4.264 Liabilities related to assets held for sale 273 24 1 34 16 11 7 5 4 3 Item non-attributable 0 0 0 1 0 0 0 0 0 0 Total Financial Liabilities 16.517 14.167 13.880 12.912 13.421 10.505 9.352 8.200 7.028 5.711
Net Financial Assets -7.484 -7.170 -7.481 -7.042 -7.045 -7.177 -5.926 -4.665 -3.375 -1.930
Non controlling interest (NCI)/Minority 866 754 1.037 1.039 1.582 1.215 1.227 1.249 1.278 1.307 Interests Common Shareholders' Equity 7.181 7.925 9.190 9.633 10.426 11.611 13.052 14.646 16.390 18.287 Check TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE
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CARREFOUR COMPANY REPORT
Cash Flow Statement
2013A 2014A 2015A 2016A 2017F 2018F 2019F 2020F 2021F Revenues 74.888 74.706 76.945 76.645 77.904 78.573 79.580 80.893 82.212 Cost of sales -59.828 -59.270 -60.838 -60.789 -61.639 -62.019 -62.662 -63.543 -64.423 Gross Margin 15.060 15.436 16.107 15.856 16.265 16.555 16.918 17.350 17.789 Other operational revenue 744 758 924 1.134 1.199 1.210 1.225 1.245 1.266 Loyalty program costs -588 -609 -552 -591 -616 -622 -629 -640 -650 Sales, general and administrative expenses -13.178 -13.281 -14.105 -14.147 -14.403 -14.528 -14.712 -14.956 -15.200 EBITDA 2.038 2.304 2.374 2.252 2.445 2.615 2.802 2.999 3.205 Depreciation and amortisation -1.432 -1.381 -1.470 -1.487 -1.614 -1.459 -1.435 -1.426 -1.428 EBIT 606 923 904 765 831 1.156 1.367 1.573 1.776 Non-recurring income and expenses (operational) -180 -188 -352 -284 0 0 0 0 0 Income Taxes -160 -264 -196 -166 -282 -392 -464 -534 -602 NOPLAT 266 471 356 315 549 764 904 1.040 1.174 Depreciation and amortisation -1.432 -1.381 -1.470 -1.487 -1.614 -1.459 -1.435 -1.426 -1.428 Gross Free Cash Flow 1.698 1.852 1.826 1.802 2.163 2.223 2.338 2.466 2.602 Change in Net Capex 667 3.043 1.235 3.219 289 1.267 1.378 1.468 1.435 Change in PP&E -400 1.163 -201 1.335 -1.288 -202 -73 21 -15 Change in Goodwill -331 -49 267 145 0 0 0 0 0 Change in Intangibles -34 548 -301 252 -37 10 16 21 21 Depreciation and amortisation -1.432 -1.381 -1.470 -1.487 -1.614 -1.459 -1.435 -1.426 -1.428 Change in Net Working Capital 226 160 -326 -343 2.245 420 451 491 526 Change in Working Cash -4 -1 11 -1 7 3 5 7 6 Change in inventories 80 475 149 677 813 443 505 570 605 Change in Accounts Receivable 69 47 9 413 -391 20 30 38 39 Change in Consumer credit granted by the financial services companies -44 378 29 264 -41 54 81 105 105 Change in other assets 52 12 -148 202 -65 8 11 14 15 Change in Tax receivables 195 421 32 -124 -103 9 12 16 16 Change in Deferred tax, net 21 -124 0 50 -27 2 3 4 4 Change in Suppliers and other creditors -71 530 264 1.748 -1.449 86 146 199 199 Change in Tax payables -127 259 -75 163 -133 10 15 19 19 Change in Other payables 341 259 222 -91 -469 23 35 45 46 Operating Free Cash Flow 805 -1.351 917 -1.074 -370 535 509 506 641 Other comprehensive income after tax -386 -87 -622 258 0 0 0 0 0 Other non-operational revenue 1.631 1.465 1.540 1.586 1.661 1.673 1.691 1.715 1.739 Net income from equity-accounted companies,net 30 37 44 -36 15 16 17 18 19 Non-recurring income and expenses, net 324 337 95 -88 0 0 0 0 0 Non- Operating income before tax 1.985 1.839 1.679 1.462 1.676 1.689 1.708 1.733 1.758 Taxes -745 -659 -597 -505 -568 -573 -579 -588 -596 Non- Operating income after tax 1.240 1.180 1.082 957 1.108 1.116 1.129 1.145 1.162 Non-operational Result 854 1.091 460 1.215 1.108 1.116 1.129 1.145 1.162 Investment in Non-Operational Invested Capital 970 708 463 -189 975 76 71 69 77 Change in Assets held for sale -164 -252 17 -35 -10 -7 -4 -3 -2 Change in Investment property -200 -17 87 -69 13 0 0 0 0 Change in Investments in companies accounted for by the equity method 112 975 -38 -72 98 105 113 121 130 Change in Other non-current financial assets 21 194 -49 219 -228 0 0 0 0 Change in Other current financial assets 7 145 -146 -119 0 0 0 0 0 Change in Consumer credit financing -88 397 -58 81 -1.066 0 0 0 0 Change in Liabilities related to assets held for sale -249 -23 33 -18 -5 -4 -2 -1 -1 Change in provisions -857 -37 -567 50 -31 26 40 50 52 Non - Operating Free Cash Flow -116 383 -3 1.404 133 1.040 1.058 1.076 1.085 Net income from discontinued operations 306 67 4 -40 0 0 0 0 0 Total Free Cash Flow Available to Investors 995 -901 918 290 -237 1.575 1.567 1.583 1.726 Interest -722 -563 -515 -515 -482 -404 -355 -306 -256 Finance costs, net -428 -399 -347 -377 -344 -266 -217 -168 -118 Other financial income and expenses, net -294 -164 -168 -138 -138 -138 -138 -138 -138 Tax Shields 274 214 196 177 177 148 122 96 76 Change in Financial Debt -201 982 -543 -136 1.076 -1.148 -1.151 -1.171 -1.316 Change in Total borrowings -2.013 -661 -944 447 -1.845 -1.148 -1.151 -1.171 -1.316 Change in Excess Cash -1.812 -1.643 -400 582 -2.921 0 0 0 0 Net Change in Equity (in Cash) -347 268 -56 184 -533 -171 -183 -202 -230 Total Cash Flows From Investors -995 901 -918 -290 237 -1.575 -1.567 -1.583 -1.726 CHECK TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE
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CARREFOUR COMPANY REPORT
Disclosures and Disclaimer
Research Recommendations
Buy Expected total return (including expected capital gains and expected dividend yield) of more than 10% over a 12-month period.
Hold Expected total return (including expected capital gains and expected dividend yield) between 0% and 10% over a 12-month period.
Sell Expected negative total return (including expected capital gains and expected dividend yield) over a 12-month period.
This report was prepared by Catarina Gomes Fernandes, a Master in Finance’s student of Nova School of Business & Economics (“Nova SBE”), within the context of the Field Lab – Equity Research.
This report is issued and published exclusively for academic purposes, namely for academic evaluation and masters graduation purposes, within the context of said Field Lab – Equity Research. It is not to be construed as an offer or a solicitation of an offer to buy or sell any security or financial instrument.
This report was supervised by a Nova SBE faculty member, acting merely in an academic capacity, who revised the valuation methodology and the financial model.
Given the exclusive academic purpose of the research notes produced by Nova SBE students, it is Nova SBE understanding that Nova SBE, the author, the present report and its publishing, are excluded from the persons and activities requiring previous registration from local regulatory authorities. As such, Nova SBE, its faculty and the author of this report have not sought or obtained registration with or certification as financial analyst by any local regulator, in any jurisdiction. In Portugal, the author of this report is not registered with or qualified under COMISSÃO DO MERCADO DE VALORES MOBILIÁRIOS (“CMVM”, the Portuguese Securities Market Authority) as a financial analyst. Rosário André - as the academic supervisor of the author - is registered as a financial analyst with CMVM. No approval for publication or distribution of this report was required and/or obtained from any local authority, with the exception of CMVM, which regulates the issuance and publication of equity research reports.
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CARREFOUR COMPANY REPORT
Germany: Pursuant to §34c of the WpHG (Wertpapierhandelsgesetz, i.e., the German Securities Trading Act), this entity is not required to register with or otherwise notify the Bundesanstalt für Finanzdienstleistungsaufsicht (“BaFin”, the German Federal Financial Supervisory Authority). It should be noted that Nova SBE is a fully-owned state university and there is no relation between the student’s equity research reports and any fund raising programme.
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The information contained in this research notes was compiled by students from public sources believed to be reliable, but Nova SBE, its faculty, or the students make no representation that it is accurate or complete, and accept no liability whatsoever for any direct or indirect loss resulting from the use of this report or of its content.
Students are free to choose the target companies of the research notes. Therefore, Nova SBE may start covering and/or suspend the coverage of any listed company, at any time, without prior notice. The students or Nova SBE are not responsible for updating this report, and the opinions and recommendations expressed herein may change without further notice.
The target company or security of this report may be simultaneously covered by more than one student. Because each student is free to choose the valuation method, and make his/her own assumptions and estimates, the resulting projections, price target and recommendations may differ widely, even when referring to the same security. Moreover, changing market conditions and/or changing subjective opinions may lead to significantly different valuation results. Other students’ opinions, estimates and recommendations, as well as the advisor and other faculty members’ opinions may be inconsistent with the views expressed in this report. Any recipient of this report should understand that statements regarding future prospects and performance are, by nature, subjective, and may be fallible.
This report does not necessarily mention and/or analyze all possible risks arising from the investment in the target company and/or security, namely the possible exchange rate risk resulting from the security being denominated in a currency either than the investor’s currency, among many other risks.
The purpose of publishing this report is merely academic and it is not intended for distribution among private investors. The information and opinions expressed in this report are not intended to be available to any person other than Portuguese natural or legal persons or persons domiciled in Portugal. While preparing this report, students did not have in consideration the specific investment objectives, financial situation or particular needs of any specific person. Investors should seek financial advice regarding the appropriateness of investing in any security, namely in the security covered by this report.
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CARREFOUR COMPANY REPORT
The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion about the target company and its securities. He/ She has not received or been promised any direct or indirect compensation for expressing the opinions or recommendation included in this report.
[If applicable, it shall be added: “While preparing the report, the author may have performed an internship (remunerated or not) in Carrefour SA. This Company may have or have had an interest in the covered company or security” and/ or “A draft of the reports have been shown to the covered company’s officials (Investors Relations Officer or other), mainly for the purpose of correcting inaccuracies, and later modified, prior to its publication.”]
The content of each report have been shown or made public to restricted parties prior to its publication in Nova SBE’s website or in Bloomberg Professional, for academic purposes such as its distribution among faculty members for students’ academic evaluation.
Nova SBE is a state-owned university, mainly financed by state subsidies, students tuition fees and companies, through donations, or indirectly by hiring educational programs, among other possibilities. Thus, Nova SBE may have received compensation from the target company during the last 12 months, related to its fund raising programs, or indirectly through the sale of educational, consulting or research services. Nevertheless, no compensation eventually received by Nova SBE is in any way related to or dependent on the opinions expressed in this report. The Nova School of Business & Economics does not deal for or otherwise offer any investment or intermediation services to market counterparties, private or intermediate customers.
This report may not be reproduced, distributed or published, in whole or in part, without the explicit previous consent of its author, unless when used by Nova SBE for academic purposes only. At any time, Nova SBE may decide to suspend this report reproduction or distribution without further notice. Neither this document nor any copy of it may be taken, transmitted or distributed, directly or indirectly, in any country either than Portugal or to any resident outside this country. The dissemination of this document other than in Portugal or to Portuguese citizens is therefore prohibited and unlawful.
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