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Why Should You Invest in Companhia Brasileira (CBD) Now

Zacks

Brazilian retail giant Companhia Brasileira de Distribuicao CBD has been reeling under tough retail environment for quite some time now. A slowdown in consumer spending in Brazil has been affecting the company’s home appliances sector as it depends largely on the disposable income of consumers.

Amid such a scenario, the company carries a Zacks Rank #2 (Buy) and has a VGM Score of A, which makes it a favorable investing option at the moment. We note that the VGM Score is a comprehensive tool that will allow investors to filter through the standard scoring system and choose better winning stocks. In order to screen out potential winning stocks, we consider only those that have a Zacks Rank #1 (Strong Buy) or #2 and a VGM Score of A or B.

Let us delve deeper to understand what is making the company so attractive.

Why Companhia Brasileira is a Prudent Investment Choice?


Shares Gaining Momentum: Amid tough retail environment, Companhia Brasileira has posted impressive results in the first half of 2017. We believe strong improvement in Extra Hiper markets and consistent growth at Assai has been the company’s strengths. The solid fundamentals of the company are reflected in its share price movement.

Companhia Brasileira has outperformed the industry as well as the broader Retail-Wholesale sector on a year-to-date basis. The stock has moved up 43.1% in the said time frame, higher than the industry’s growth of 7.9% and the sector’s increase of 20.8%.

The company has also seen significant upward estimate revision over the last 30 days. The Zacks Consensus Estimate has gone up 29.3% to 75 cents in 2017.

Focus on Higher-Return Formats — Assai and Multivarejo: Companhia Brasileira has been gaining on the back of strong improvement in Extra Hiper markets and consistent growth at Assai. Strong customer traffic expansion and increase in sales volume have also pushed sales higher in the first half of 2017. As a result, Companhia Brasileira expects to reiterate its focus on higher-return formats, such as Assai and Multivarejo.

The company also expects to renovate stores and focus on conversions of Extra Hiper stores into Assai, to strengthen its portfolio. The company also expects EBITDA margin of around 5.5% in the Food segment, supported by higher profitability at Assai and stability at Multivarejo.

Expansion and Modernization of Stores: Companhia Brasileira is gearing up to expand its stores and thereby its market share. The company has been putting greater emphasis on renovating Extra banners, as it has been performing better than the non-renovated stores over the last three years.

Store modernizations were carried out at all banners in the Food segment, most intensively at Extra. These renovations include not only the layout, but also new assortments and improvements in customer service, which will in turn drive higher sales.

In the last 12 months, Assai expanded 10 stores and converted two Extra Hiper stores, which contributed approximately R$600 million to net sales in the said period. In the second quarter of 2017, the company opened three stores, while four were under construction. The company also converted additional three stores in the quarter, besides 11 stores are undergoing conversion.

By the end of 2017, the company expects to complete 16 store conversions and also expects to open six to eight new Assai stores, which are expected to deliver a return of over 20%. The conversions will help accelerate the expansion of Companhia Brasileira’s cash-and-carry banner into new cities and states across Brazil.

Rationalizing Expenses: The change in the commercial strategy implemented at Extra as of the first quarter of 2016, with the launch of commercial actions “1,2,3 Savings Steps,” “Hyper Fair” and “The Lowest Price” helped in rationalizing expenses in both the operating and administrative areas. In the second quarter, higher gross margins and a decline in selling, general and administrative expenses at Multivarejo boosted EBITDA margin. We are encouraged by company’s operating efficiency and productivity projects.

Owing to the solid growth prospects, Companhia Brasileira is therefore currently a viable pick for investors.

Looking for Retail Stocks? Check these 3 Picks

Investors may consider some other top-ranked stocks from the same sector such as Burlington Stores Inc. BURL, Five Below Inc. FIVE and The Children's Place Inc. PLCE all carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Burlington Stores delivered an average positive earnings surprise of 17.7% in the trailing four quarters. It has a long-term earnings growth rate of 16.2%.

Five Below delivered an average positive earnings surprise of 8.7% in the trailing four quarters. It has a long-term earnings growth rate of 28.5%.

The Children's Place delivered an average positive earnings surprise of 16.3% in the trailing four quarters. It has a long-term earnings growth rate of 9%.

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