Companhia Brasileira De Distribuicao (CBD) Q2 Profits Fall

Brazilian retail giant Companhia Brasileira de Distribuicao (NYSE:CBD) or Grupo Pão de Açúcar (GPA) reported a decline in profits in the second quarter of 2016 but sales increased from the past year.

In the second quarter, adjusted net income of CBD declined 97.9% (in local currency) from the prior-year quarter owing to a deterioration of the economic scenario during the year, which resulted in lower demand and consumer confidence.

Adjusted net income margin was also down 80 basis points (bps) from the year-ago quarter.

Results in Detail

CBD posted improved second quarter 2016 sales, despite a weak economic environment and restricted spending.

In the second quarter of 2016, consolidated gross sales grew 4.7% year over year (in local currency) and compared favorably with preceding quarter’s growth of 4.4%.

Net sales of this retailer increased 3.5% year over year, which compared favorably with sales growth of 3% in the preceding quarter. Net sales were up 4.9% after adjusting for the calendar effect. Assai and Multivarejo continued to deliver stronger sales, while Via Varejo improved, and witnessed market share gains.

Comparable store sales grew 3.2% in the second quarter as against 0.4% decline in the preceding quarter.

Pao de Acucar opened 9 stores in the quarter, including 7 in the food segment (5 Minuto Pão de Açúcar, 1 Assaí and 1 Pão de Açúcar), 1 Casas Bahia and 1 Ponto Frio. A total of 59 stores were opened in the last 12 months. For 2016, the company plans to continue to focus on higher-return formats (Assai and Proximity).

Gross profit grew 9.8% in the quarter as against a decline of 6.3% in the preceding quarter. Gross margin expanded 140 bps to 25.4% due to the business mix effect and recognition of tax credits.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) decreased just 1%. Adjusted EBITDA margin declined 20 bps to 4.6% in the second quarter. Adjusted EBITDA had declined 52.4% in the preceding quarter.

The company operates through the food retail, cash and carry, electronics and home appliances retail (bricks and mortar), and e-commerce business segments. These segments are grouped into two large categories, namely Food Business (Multivarejo and Assai) and Non-Food Business (Viavarejo and Cnova).

Food Business

Food Business’ net sales increased 11.3% (adjusting for calendar effect) in the quarter, which compared favorably with preceding quarter’s growth of 10.9%.

Despite the economic slowdown, same-store sales, adjusted for the calendar effect, in the Food category grew 7.1%. The sales growth was driven by solid performance of Assai stores and improved sales volume at Multivarejo. It was significantly higher than 3.1% growth in the preceding quarter.

Non-Food Business

Net sales of the Non-Food Business decreased 3% in the quarter. However, the decline was narrower than the preceding quarter’s decline of 5.5%.

Cnova: Category net sales decreased 7.9% in the quarter.

Viavarejo: Viavarejo’s net sales grew just 0.3% in the quarter as a result of store closures in the second half of 2015 and the first quarter of 2016. We note that sales had declined 12.7% in the preceding quarter. The company witnessed sequential improvement in same-store sales trend. Same same-store sales grew 2.6% as against a decline of 11.8% in the preceding quarter, supported by banner conversions and solid sales of services in the period.

Companhia Brasileira de Distribuicao has a Zacks Rank #3 (Hold).

Stocks to Consider

Better-ranked stocks worth considering in the broader retail sector include Wal-Mart Stores, Inc. (NYSE:WMT) , Big Lots, Inc. (NYSE:BIG) and Dollar Tree Inc. (NASDAQ:DLTR) . All of these hold a Zacks Rank #2 (Buy).