Companhia Brasileira de Distribuicao (CBD) Hits 52-Week Low - Analyst Blog

Shares of Companhia Brasileira de Distribuicao (CBD) dropped to a 52-week low of $34.55 on Dec 16 and eventually closed at $35.35. Shares of this Brazilian retailer have been declining since it reported sluggish third quarter 2014 results on Oct 31.

Disappointing Third Quarter

On Oct 31, CBD reported soft third quarter 2014 results given tough macroeconomic conditions and margin pressure.

Despite increased sales and profits owing to new store openings and tighter cost discipline, the company's aggressive pricing strategy has proven to be a drag on gross margins. The pricing strategy, taken up by the company since May 2013, focuses on lowering selling prices. This has helped it to win customers but at the cost of its gross margins.

In the third quarter, gross margin contracted 50 basis points from the prior-year quarter to 25.7%. The lower margins were due to the company's aggressive pricing policy and also due to greater contributions from Assaí and Cnova in the sales mix, which have lower margins. (Read: Companhia Brasileira de Distribuicao's Q3 Sales Sluggish)

Moreover, the company is focusing on store openings in new states, which results in higher pre-opening costs. In addition, higher investments to increase competitiveness in the Food Retail segment and intense promotional activities, especially at Nova Pontocom are also adversely impacting operating margins.

A tough retail environment also poses a challenge for the company. A slowdown in consumer spending has been affecting the company's home appliances sector as it depends largely on the disposable income of consumers.  In the home appliances sector, large multinational chains and other specialized Brazilian companies pose significant competitive threat to the company's secured market share.

CBD currently carries a Zacks Rank #3 (Hold).

Some better-ranked retailers worth considering in the industry include Ingles Market, Inc. (IMKTA), Safeway Inc. (SWY) and The Kroger Co. (KR). While Ingles Market sports a Zacks Rank #1, Kroger and Safeway carry a Zacks Rank #2 (Buy).