French retailer Carrefour is seen reporting a hefty drop in 2009 profits this week after an especially tough year’s trading in Europe, but analysts say the worst of the earnings decline is likely to have passed.
Carrefour, the world’s second-biggest retailer after Wal-Mart, is seen posting a 27 percent fall in 2009 group profit from continuing operations to 917 million euros
($1.25 billion), according to a Reuters survey of 10 analysts.
Carrefour has already said it will report 2009 operating profit of 2.78 billion euros, slightly higher than previous guidance, thanks to cost-cutting and a sales upturn in the fourth quarter.
The breakdown of profitability by region should show some improvement in the second half of 2009 when compared with the first, though Latin America will be the only market to report year-on-year growth in operating profit, according to several analysts.
Carrefour spent much of last year slashing prices to woo cautious consumers in its key markets of France and Western Europe. New chief executive Lars Olofsson also kickstarted a program to make 4.5 billion euros of savings by 2012.
This year should see the first impact of the turnaround plan on Carrefour’s revenues and bottom line despite an uncertain economic outlook, as Thomson Reuters I/B/E/S consensus estimates for 2010 see the company reporting a rise in profits to just above 2008 levels.
“We could see some improvements in 2010. I think there’ll probably be some drastic changes in the way they operate,” said Isabel Cavill, an analyst with Planet Retail.
CEO Olofsson has shaken up Carrefour’s management team by hiring Procter & Gamble’s Jose Gonzalez-Hurtado as Chief Marketing Officer and Tesco’s James McCann as executive director of operations in France.
McCann will lead the company’s attempts to stem falling sales at its large, out-of-town hypermarkets in France, which account for nearly one quarter of group sales worldwide.
Analysts say Carrefour is unlikely to give detailed guidance for 2010 or a detailed strategy for its hypermarkets during the results presentation next week, but should at least reiterate its cost-cutting targets. STILL UNDERVALUED?
Although there are some concerns Carrefour will not be able to push through its transformation plan without higher than expected price cuts, analysts on average have a target price of 36.40 euros for its shares, above current levels of 34.70.
Carrefour’s shares already trade at an estimated 2009 price-to-earnings ratio of 17.40, higher than other retailers including Tesco, Wal-Mart, Belgium’s Delhaize Group and Dutch rival Ahold, which trade at 11 to 15.
Speculation Carrefour could sell assets such as its lucrative operations in Latin America — which press reports had said was an option pursued by activist shareholders Colony Capital and LVMH head Bernard Arnault — has helped support the premium, despite a denial from the retailer.
But even if Carrefour holds back from disposing of assets, it is still undervalued, according to Morgan Stanley analyst Edouard Aubin.
“Even without any (M&A) speculation, Carrefour is worth 41 euros,” he said. “I don’t think there is any speculative premium on the stock today.”
Concerns over the structural threats to Carrefour’s hypermarkets in France and Western Europe seem overdone, according to Aubin, who believes the problems may be resolved by better store management and changes already begun by Olofsson.
But with even Carrefour itself not yet ready to explain how and when it will definitively restore sales growth in France, it may be too early to price in a recovery, said Royal Bank of Scotland analyst Justin Scarborough.
“If the market wants to discount in a significant change in the fortunes of French hypermarkets in advance of the company having any clue themselves what’s going to happen… to me, it just doesn’t add up,” he said.