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4 Factors That Make Companhia Brasileira a Solid Pick Now

Zacks

Investors must take a look at Companhia Brasileira de Distribuicao CBD, as this traditional food retailer in Brazil has seen its shares gain 11.4% in the past three months compared with the industry’s rise of 8.9%.



Let’s delve into the factors that are likely to continue driving this Zacks Rank #1 (Strong Buy) stock.

Assai Unit: The Primary Driver

Companhia Brasileira’s Assai segment has long been a major growth driver. Gross sales at Assai surged 22.8% in local currency, showcasing stellar performance in second-quarter 2018. The sturdy growth was driven by higher comps and store openings. Incidentally, Assai’s comps jumped 4.7% (excluding conversions), which also led to an increase of 200 basis points (bps) in market share. Management’s focus on making constant investments in this segment clearly reflects its robust prospects. For 2018, management envisions same store sales at Assai to be higher than the inflation level. Also, both Assai and Multivarejo are anticipated to witness continued market share gains.

Pilot Projects on Track

During the second quarter, the company unveiled two pilot projects (Compre Bem and Mercado Extra) for the Extra Super banner, to raise penetration in its targeted customer base. Compre Bem project includes 20 store conversions to tap a market niche that is currently controlled by the regional supermarkets. The project is aimed at lowering operating expenses, mainly logistics and IT costs. The Mercado Extra project at 10 stores is aimed at reinvigorating the Extra Super banner by strengthening the quality of perishables and customer service.

Strategy for 2018-2020

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

Management stated that focus on digital development will remain a priority in 2018, given consumers’ evolving shopping patterns. Also, the company’s core growth plans involve continued organic expansion and stores optimization, enhancing retail format offerings, and extending offerings of financial services (particularly at Assai). Moreover, the company targets generating synergies of more than $85 million from Latin America.

Impressive Q2 Raises Optimism

Backed by its growth endeavors, Companhia Brasileira delivered impressive second-quarter 2018 performance, wherein net income from continuing operations increased nearly 2.7 times (in local currency). Increased sales and higher adjusted EBITDA led to the upside. Well, gross revenues increased almost 10% year over year in local currency, backed by growth across both Assai and Multivarejo units.

Also, EBITDA margin expanded 70 bps, courtesy of higher margins at both segments. At Multivarejo, the margin expansion was backed by improved sales and operational efficiency, whereas Assai’s margins gained from higher sales and store-expansion efforts. Management is confident of strengthening the company’s position, and envisions both Assai and Multivarejo to witness continued market share gains in 2018.

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