Carrefour: Consolidation-Driven Growth And A Handsome Dividend

seekingalpha05-10

Carrefour is a large food retailer that has been actively consolidating its key markets and increasing its focus.The company's financial figures may not yet reflect the positive results of its recent ...

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In the past years, Carrefour has renewed its focus and it has been an active consolidator in its key markets. These results are likely not yet visible in the company’s figures. The management recently demonstrated confidence in the business performance by increasing the dividend by 55% and maintaining stock buybacks at a typical level of €700-800 million. Company overview Carrefour is a French based but international grocery chain. It has approximately 14 900 stores in different formats. 6000 of the stores are in France, over 6000 in other European countries and the rest primarily in Latin America but also in Africa, Middle-East and Asia. Carrefour’s revenues are tilted towards France, bringing in 46% of sales. Rest of Europe represents 28% and Latin America 26%. The company has around 320 000 employees and a market cap of approximately 11 billion euros.   Carrefour's foot print. (Carrefour) In 2023, its revenues grew 10.4% and adjusted earnings per share by 12%. The net free cash flow was supported by the reduction in working capital and sale and leasebacks. One of the key metrics of Carrefour, recurring operating income, developed negatively due to currency fluctuations, but grew close to 10% at constant currency basis.   2023 key figures. (Carrefour) Despite these encouraging numbers, investors might be worried about the development of operational and net income of continuing operations. Carrefour’s net income from continuing operations decreased 32%. This was a result of higher SG&A expenses and D&A that grew more than revenue and gross margin. Also, the income from equity-accounted companies was 5% lower than previous year. The net income was further weighed down by non-recurring expenses, mainly related to restructuring activities and impairment related to closed stores in Brazil.   Development of the net income and cash flow. (Author, annual reports) In the first quarter of 2024, Carrefour’s sales increased by 13.5% in constant currency. The operations in Brazil improved from a troubled state, but elsewhere the performance was muted. Unfortunately, Carrefour only reports profitability figures in connection with H1 results. A levered and larger footprint should bear fruit Carrefour isn’t necessarily a quality company, it has made many missteps in the past. The bull thesis stands on Carrefour’s steps to consolidate food retail industry in its key markets and leverage the increased footprint by private label, e-commerce and efficiency synergies. These actions are likely not yet fully visible in the financials. In addition, as Carrefour has usually acquired stores from motivated sellers, mostly they have been made at accretive multiples.   Long-term and forecasted business development. (Tikr) An active consolidator in the food retail Carrefour has a long history of growing by acquisitions and consolidating its key markets in food retail. According to Carrefour, in the French food retail market the three largest players hold 63% market share, up from 56% in 2018. Last year, Carrefour announced an acquisition of 19 shops in Romania and 175 shops in France from Louis Delhaize. The French business should add around 5.2 billion euros to Carrefour revenue when it closes in summer 2024. The deal was valued at enterprise value of €1.05 billion at 4.2x EV/EBITDA after synergies. The acquired stores realized 4.3% EBITDA margin, whereas Carrefour has typically seen an EBITDA margin between 4.5% to 5%. This supports Carrefour’s ambition to achieve significant synergies from the deal. In the beginning of this year, Carrefour purchased 31 stores from a troubled grocery chain Casino in France, enhancing its position in the home market further. In 2021, Carrefour took the number two position in Spain by acquiring Supersol and its 172 stores. Furthermore, it acquired 43 stores in 2023 from El Corte Ingles for €53 million. In Brazil, Carrefour acquired Grupo BIG from Walmart (WMT), which nearly doubled its store count in the country. Carrefour also operates 51 Sam’s Club stores in Brazil. Although Carrefour failed in Taiwan and China, from where it is practically pulling out, the company is building a presence in Africa. In West Africa, Carrefour collaborates with Majid Al Futtaim (375 stores in total and 50 new stores in 2023) and in East Africa with CFAO Group (30 stores). African expansion is unlikely to move a needle for Carrefour for a long time, especially in the form of joint venture or franchise model, but they are markets where it can grow organically. In 2023, the company also began operations with partners in Mongolia, Israel and Bulgaria and it’s about to return to Czechia. As investors know very well, acquisitions have a high probability to fail or perform poorly. During 2023 the operations in Brazil are pressured by Grupo Big integration. Carrefour closed more than 100 stores due to unprofitability, dampening the total store growth of the group. However, in the Q1 2024 operations from Brazil turned from negative growth to positive. Also, Carrefour has confirmed that they are going to achieve approximately €370 million of synergies by 2025. Carrefour owns less than 70% of the business in Brazil. Multiple levers for growth and efficiency Carrefour has been rather successful with its private label initiatives that have taken place since the 1970s. Last year, 36% of food sales were private labels, a significantly higher number than food retailers in the U.S. according to Statista. Rolling out the similar level of private label sales to the newly acquired stores should increase their financial performance. Although Carrefour might have been a bit late in e-commerce, it launched its first e-commerce endeavor already in 2000. Since 2018 Carrefour has invested more than two billion euros in its digital capabilities and e-commerce. According to the company, e-commerce is now “accretive to earnings”. In 2023, it reached €5.3 billion of GMV and aims to achieve €10 billion by 2026. The combination of successful private labels, e-commerce investments, cost savings and consolidation in the key markets should create a powerful flywheel for profitability. Bringing new shops under the Carrefour umbrella enhances their profitability by tapping them into Carrefour’s infrastructure. The costs of investments into e-commerce are spread to larger revenue base and the new shops can boost their sales through Carrefour is constantly working with efficiency and cost reductions. It recently increased the annual cost cutting target from one billion euros to 1.2 billion. It has been and can further sell and lease back many of its owned real estate to fund growth. There’s also interesting optionality covered inside Carrefour. One of them is a payment platform called Market Pay, which operates in seven countries and has 160 000 payment terminals. In five countries, Carrefour offers financial services, including credit cards (10 million), insurance and consumer loans. For example, in Brazil, its credit portfolio grew 22% in the Q1 2024. Furthermore, it has a joint venture called Carrefour Links offering retail media marketing services to 450 clients currently. Pressured by inflation and competition It is widely known that the competition in retail and especially in food retail is fierce. In Europe, the discount retailers Aldi and Lidl have expanded to most of Carrefour’s markets, if not to all of them, challenging the market leader. On the other hand, discount retailers pressure more smaller regional players, which can be attractive acquisition targets for Carrefour. Continued inflation is one of the main risks for Carrefour, who itself has declared a war against inflation, sometimes freezing the prices of defined products. As groceries are even politically important and competition is tense, it could be difficult to raise prices. Although food inflation has slowed down, wage inflation and increasing distribution costs could be an upcoming challenge. There’s also a possibility that we see a deflation of food, which would hurt Carrefour’s growth prospects. Currently, it's said that Carrefour suffers from a significant price gap to its major rival, Leclerc. In the Q1 earnings release, Carrefour indicated further “price investments” of price reductions for hundreds of products. The pressured consumers could be still more inclined to shop at the discounters and at cheaper alternatives. There’s room for the share price to appreciate Estimating the fair value of Carrefour is a bit trickier. Its financials include a lot of exceptional items, asset sales and currency fluctuations especially in Argentina. If we take the reported adjusted earnings per share (€1.83) as a starting point and assume modest earnings growth expecting slightly higher growth than historically in the back of the company's initiatives, focus and transformation. The average P/E-multiple has been 12.6 in the past three years. With a terminal multiple of 12x the fair value for the stock would be €18.5. If we apply a P/E-multiple of 10, the stock would be fairly valued at the moment.   Fair value calculation. Figures in euros. (Author) Compared to some of Carrefour’s international peers, Carrefour is one of the cheapest stocks, especially based on the cash flow. A P/E-multiple of 12, applied in the fair value calculation above, could be a stretch but not out of the question if Carrefour succeeds to grow profitably. The lowest EV/EBITDA multiple is a demonstration of Carrefour’s fairly strong balance sheet and value.   Multiples of a peer group. (Tikr) According to Tikr, there are sixteen analysts following the company with an average target price of €18.8. Since 2018, Carrefour stock has been range bound between 13-18.5 euros. If we see deterioration of the market or fundamentals, we could see the stock sliding towards €13. Upside here looks rather limited in the short term, and a risk/reward might not be tempting for the short-sighted. Fortunately, a shareholder will also benefit from a lucrative dividend and stock buybacks. Share price development. (Koyfin) A significant increase to the dividend Carrefour pays a dividend once per year and the next ex-dividend date is the 28th of May. The company increased the dividend by 55% from €0.56 to €0.86 per share. Carrefour intends to continue increasing the dividend by 5% per year in the coming years. Currently, the dividend yield stands at 5.5%. The following ex-dividend date is on 28th of May. Unfortunately, an investor needs to take into account the tax treatment by the French state.   Dividend, EPS and cash flow per share. (Tikr) Based on the chart above, the dividend has been well covered by earnings and cash flow in the recent past. Furthermore, Carrefour has boosted the shareholder yield by significant share buybacks. Already in Q1 2024 Carrefour has secured €428 million out of the planned €700 million. The number of outstanding shares has come down from 773 million in 2018 to 691 million at the end of 2023.   Dividend and buybacks. (Carrefour) Conclusion Carrefour’s leading and strengthening position in multiple markets is a result of a transformation and increased focus in the key markets. The recent acquisitions are likely not yet fully visible in the company’s financials. The management appears confident in the positive development in the future. Meanwhile, Carrefour rewards shareholders with handsome dividends and buybacks.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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