Technology is changing the economy. Not only the financial sector, but also the retail industry. We are changing our consumption habits towards the so-called e-commerce. Amazon is leading this digital trend, and it is affecting the whole sector, as it shows the “Death by Amazon” Index. Since the take over of Whole Foods, some uncertainty has arose regarding the future of the consumer staples sector and the potential new acquisitions by Amazon. Carrefour seems to be its main target, but (or maybe because) its performance in the last year have been disappointing. The retailer issued a profit warning in August, expecting a drop of 12% in operating income, which made the share fall a 13%, reaching its lowest level since 2012. In addition, the 17th of January, Carrefour issued another profit warning, in which they expected a drop in 2017’s operating profit by 3 percent point more than expected a few months ago, though the market reacted positively.
Source: Google Finance
Since 2015, Carrefour has drop almost a 40% in the stock market because of the bad performance of its results. In July 2017, Alexandre Bompard, CEO of Fnac, became CEO of Carrefour as well. Since its IPO in 2013, Fnac share has multiplied by almost 5, as opposed to Carrefour share, which is currently below the 2013 level. So that, the objective of Bompard at Carrefour is to create value for its shareholders, as he has done to Fnac ones. He has recently presented the strategy for the next years, in which Carrefour is going to focus on e-commerce to avoid losing market share with Amazon, cutting costs and allocating capital into the most profitable formats.
So, with this new strategy, how much is worth Carrefour? The answer, as always, is in the numbers resulting from the narrative. Our analysis is based on the Equity Valuation Simple Template, which can be found, together with other resources, here. Our research gives a 2020 equity value of almost €23bn, assuming the same EV/FCF multiple as today’s and a Net Debt to EBITDA around historical levels. With these numbers, the expected share return is 59% for the next three years. Yet, we have to take into account the dividends that are going to be distributed, which amount to €1,7bn, so the total expected 3-years return is 71%, which is equal to 19% annualized.
This analysis assumes 1% growth in revenues, and an expansion in margins as a result of the implementation of the strategy. EBITDA margin is expected to be 5% in 2020, from its actual level of 4.87% (2016), considering a reduction in 2017’s level. Gross margin is expected to achieve a level of 22.5%, which is lower than its actual margin of 22.83% in 2016, because of the increasing competition.
Source: Carrefour Annual Reports and Market Inefficiencies
So that, we expect €83.6bn in revenues, 4.2bn in EBITDA and a Net Profit for the group of 1.2bn. With this data, the expected FCF for 2020 is almost 1.7bn. If the strategy is well implemented and Carrefour manages to adapt to the new environment of higher competence and digitalization, the company can give satisfactory returns to its shareholders of, at least, 19% annualized for the next 3 years. However, the new CEO must look beyond 2020 or 2022 to survive Amazon and achieve the objective of being the leader of the industry.
So that, following our framework of the three key attributes of a good investment, we are expecting growth, though very little, in sales; an improve in margins due to the implementation of the strategy; and no multiple expansion, even though it cannot be discarded as current relative valuation is affected by the short-term uncertainty associated to the profit warnings.