Pao de Acucar Upped to Strong Buy - Analyst Blog

Zacks Investment Research upgraded Companhia Brasileira de Distribuicao CBD also known as Grupo Pão de Açúcar (GPA) to a Zacks Rank #1 (Strong Buy) on Mar 29. The stock has witnessed strong momentum ever since company announced strong fourth quarter and full year 2013 results last month, despite tough macroeconomic conditions.

Why the Upgrade?

On Feb 13, this Brazilian retailer posted fourth quarter 2013 results and delivered profits of R$864 million ($403 million) compared with R$503 million ($259 million) in the year-ago quarter. The year-over-year increase in profits reflects growth in all its business segments  - food retail, cash and carry, electronics and home appliances retail (bricks and mortar),and e-commerce. These segments are grouped into two large categories, namely GPA Food and Viavarejo.

GPA Food comprises supermarkets, hypermarkets, neighborhood stores, cash-and-carry stores, gas stations and drugstores while Viavarejo includes household appliances and e-commerce operations through Nova Pontocom.

Consolidated gross sales increased 14.9% year over year (in local currency), benefiting from double-digit comparable store sales growth. Pão de Açúcar opened 50 new stores in the quarter, which also fueled sales growth.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) increased 23.8%. Adjusted EBITDA margin increased 60 basis points to 9.5% in the fourth quarter, owing to a significant decline in the selling, general and administrative expense ratio from 19.0% in the year-ago quarter to 16.8% in the fourth quarter of 2013.

During the year, Pão de Açúcar focused on implementing a competitive pricing strategy in the Food Retail segment, especially in the Extra banner segment, which helped it to gain market share and increase customer traffic.

The ViaVarejo segment strengthened its presence in the capital markets by carrying out an IPO at the end of 2013. The IPO fortified the financial structure of GPA, helping it to reduce its net debt position. The company launched Extra Marketplace, a new sales model at Nova Pontocom in 2013 that brings together in a single website offers from multiple stores in a variety of segments thus offering a better product assortment.

Pão de Açúcar is gearing up to expand its stores and market share by cutting down on costs in the face of a tough retail environment. The company expects to open 400 new food stores by 2016, which includes 360 new convenience stores in its Mini Mercado format. The company also has expansion plans for its wholesaler, Assai, which has been posting solid results in the last few quarters. The company is expected to open 12 to 15 stores per year through 2016 under the Assai banner, particularly in the fast-growing Northeast region. In addition, Pão de Açúcar plans to open 210 stores by 2016 in the ViaVarejo unit.

This retailer witnessed upward estimate revisions after the announcement of its fourth quarter 2013 results. Estimates for 2014 and 2015 increased 0.9% and 1.3%, respectively over the past 60 days.

Other Stocks to Consider

Other stocks worth considering in the retail sector include Etablissements Delhaize Fr. DEG, The Kroger Co. KR and Fortune Brands Home & Security, Inc. FBHS, all with a Zacks Rank #2 (Buy).