Carrefour soldiers on despite sales slump

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A newly opened Carrefour hypermarket in France.

Carrefour is contemplating whether it should drop its annual earnings forecast as the retail giant’s reorganisation in France did not boost sales growth as fast as expected.

Up until July 13, Carrefour forecasted a progression in sales and current operating income this year. The company also issued restated earnings on the basis of 2010 performance that took into account the spinoff of its Dia discount chain as well as other items. A spokeswoman for the retailer said the companys forecast related to the restated figure. But the stock fell as much as 1.1 % in Paris this week, bringing its market value to 13 billion euros.

We expect Carrefour to formally abandon its 2011 guidance of earnings before interest and taxes growth and communicate a very cautious target for the year given the limited visibility on the economic landscape, Nomura analysts including Nicolas Champ wrote in a note dated Aug. 25. The median estimate of five analysts surveyed by Bloomberg News shows that the worlds second largest retailer may have its current operating income drop 11 % to 2.4 billion euros ($3.5 billion) in 2011 from 2.7 billion euros. Last month Carrefours first-half profit slumped by around 23%, crippling its chances of meeting its annual target.

Managements full-year guidance for Ebit growth is over optimistic, said Arnaud Joly, an analyst at CA Cheuvreux, in a note to investors. He anticipated a decline of between 11 percent and 15 percent this year is more realistic.

Chief Executive Officer Lars Olofsson named new management at the French business and a new chief financial officer amid the decline in earnings. The CEO is seeking to reverse decreasing market share via a 1.5 billion-euro revamp of 500 superstores, or hypermarkets, across Europe. First-half profit dropped to 35 percent in France.

PRICE INCREASES

Carrefour is losing market share in France due to cost increases. LeClerc and Intermarche, privately held grocers whose prices are between 3 and 5 % below those of their larger rival and seem willing to focus more on volume growth than near-term margins, according to Sanford C. Bernstein analystChristopher Hogbin.

Niamh McSherry, an analyst at Berenberg Bank inLondon, said although its new format dubbed Carrefour Planet provides more space to categories like frozen and organic foods, beauty and fashion it doesnt make way for the consumer demand for convenience and proximity as the locations remain the same.

Analysts say Carrefour has invested almost 1 billion euros over the last two years. The French shopping giant aims to reduce operating costs by 480 million euros this year, as well as achieve 225 million euros in purchasing cost savings but the limited sales growth and the extremely competitive environment, meeting detailed targets to trim costs will be key to supporting near-term margins, wrote Hogbin in a research note. Some investors are reconsidering its international markets due to the increased pressure from the performance at home.

BRAZIL

In July the retailers plan to combine its Brazilian unit with Cia. Brasileira de Distribuicao Grupo Pao de Acucar was abandoned after the deals main backer pulled out. Another plan would hatch if Gama, the investment fund of Banco BTG Pactual that proposed the Brazilian transaction, came up with one, said Pierre Bouchut last month. September would see the replacement of Bouchut as CFO by Pierre-Jean Sivignon .

In Brazil, Carrefour wrote down the value of its business by 550 million euros last year. It changing its purchasing decisions, cutting overhead and converting under performing superstores to its more successful Atacadao cash and carry brand. But it hopes to a significant increase in operating income in Brazil in 2011.

Some of Carrefours owners include, Colony Capital LLC, Blue Capital and Groupe Arnaul. Knight Vinke Asset Management LLC, which owns about 1.5 percent of the retailer and it said it opposes the sale of any assets outside ofEurope on an individual basis. The investor has urged the retailer to improve its business in Europe.

Carrefour will not be selling its business in Brazil. Neither has it been in talks with Wal-Mart about a potential deal since 2009, Olofsson, told a Brazilian newspaper last week. But Wal-Mart, the worlds largest retailer, has also explored a bid for Carrefours Brazilian stores.

NEXT MOVE

Olofsson said that his retail outlet had tried to do too much, too quickly”. In order to build a sustainable platform, it has decided to sacrifice some of its short-term sales growth. Noel Prioux, the head of the French business said, We want to get back to the best prices, item by item. Carrefours prices can be 3 to 5 percent higher than some competitors, analysts insisted.

Fewer stores will be converted to Carrefour Planet, this year than originally forecast, and may reduce the 1.5 billion euros it allocated for investment in the project. However, as planned the full conversion will only take place by 2013.

Olofsson said that commodity price hikes are severely affecting consumption in southern Europe. Carrefour will reduce capital expenditure in Greece andItaly, by the same date and instead of coverting its 103 stores in Spain it will remodel them.

The Chief Financial Officer Pierre Bouchut of the store said that it will not slow down the global rate of expansion. In regions such as Latin America, Asia and Europe, it will lifting its capital expenditure and include e-commerce. It expects to open around 475 new stores in its growth markets.

CARREFOUR UAE

The UAE has proven to be one of the stores growth markets. The hypermarket chain operates in the Gulf under a franchise deal with UAE conglomerate Majid Al Futtaim Holdings.In June, Rose Carbajo, general manager for Carrefour UAE, Qatar, Oman and Kuwait told Arabian Business, We will be opening four new stores between now and the end of September. It plans to rebrand its Express stores to Carrefour Market.

Sources: Bloomberg, The News Tribune, Arabian Business

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