Will Comps Drive Companhia Brasileira (CBD) Q2 Earnings?

Companhia Brasileira de Distribuicao (NYSE:CBD) is set to report second-quarter 2017 results on Jul 25. The company posted a positive earnings surprise of 30% in the preceding quarter.

A glimpse at CBD’s stock performance shows that it has been gaining ground over the last six months. Shares of this Zacks Rank #2 (Buy) stock have gained 12.4% over the said time frame, outperforming the industry’s 8.7% gain. Notably, the industry is part of the top 41% of the Zacks Classified industries (108 out of the 256).

Let's see how things are shaping up for this announcement.

Which Way Are the Estimates Headed?

Let’s look at the estimate revision trend in order to get a clear picture of what analysts expect from the company right before the earnings release. The Zacks Consensus Estimate for second-quarter and 2017 earnings has been stable over the last 30 days.

What Does the Zacks Model Unveil?

Our proven model does not conclusively show an earnings beat for CBD this quarter. This is because a stock needs to have both a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP for this to happen.

CBD has an Earnings ESP of 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 6 cents. Although the company’s Zacks Rank #2 increases the predictive power of ESP, we need a positive ESP to be confident about an earnings surprise. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Factors at Play

On Jul 12, the company announced sales results for the second quarter, wherein it reported net growth of 9.0% driven by strength at Assai and the Extra banner. Both Multivarejo and Assai continued to gain market traction in the quarter. However, sales growth was lower than the preceding quarter’s 9.5% hike on a year-over-year basis. Comparable store sales grew 13.5% in the quarter, with strong customer traffic expansion and increase in sales volume offsetting the effect of the slowdown in food inflation. Inflation levels declined from 5.2% in the first quarter to 2.3% in the second.

During the second quarter, the company opened three stores, of which two were in the Minuto Pao de Acucar format and one in Assai (another four are under construction).

We note that this Brazilian company has been showing strong improvement in Extra Hiper markets and consistent growth at Assai.Store openings and conversion of Extra Hiper stores to Assai is also boosting sales. The conversions will help accelerate expansion of GPA’s cash-and-carry banner into new cities and states across Brazil. We are also encouraged by the company’s operating efficiency and productivity projects. Further, a higher gross margin and a decline in selling, general and administrative expenses at Multivarejo boosted the EBITDA margin.

However, CBD has been witnessing margin compression over the past many quarters. It is struggling to keep prices in check in the face of inflation in Brazil, which is hurting gross margin. Also, strong growth in the Assai business, though helping sales growth, is impacting margins as this business is characterized by low prices. A challenging economic scenario in Brazil has also dampened demand and consumer confidence.

Stocks Poised to Beat Earnings Estimates

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

The Clorox Company (NYSE:CLX) has an Earnings ESP of +0.67% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Tyson Foods, Inc. (NYSE:TSN) has an Earnings ESP of +1.64% and a Zacks Rank #2.

Energizer Holdings, Inc. (NYSE:ENR) has an Earnings ESP of +2.78% and carries a Zacks Rank # 2.

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