Colruyt’s performance in H2 FY19/20 was below our expectations, largely due to a soft performance by the retail segment. Perhaps, investors were also spooked by 40bp erosion in the Belgian market share (vs H1 FY19/20). We believe the top line will remain under competitive pressure in the forecast years. The recent improvement in the gross margin is also unlikely to make an impactful contribution to the bottom line, in our opinion.
Companies: Etablissementen Franz Colruyt
Colruyt has been strengthening its grip on the Belgian market by gaining market share and sustained profit margins. While this performance is expected to continue in the remainder of FY19/20, we reiterate that the top line and profitability will remain flattish. Competition is likely to increase due to the gradual revamp of traditional competitors and an encouraging start by Jumbo in Belgium.
Colruyt announced FY18/19 results in line with our estimates. The H2 performance was a bit softer as the company witnessed fluctuating promotional pressure in the retail market. We believe Colruyt will continue to make price and promotional investments to sustain the top-line momentum. The margins are likely to remain under pressure in FY19/20. We will trim our estimates but are likely to maintain the stock recommendation.
Colruyt reported strong H1 FY18/19 results with a better than expected expansion in the gross margin, supported by softer competition/promotional activity in Belgium. However, we maintain our cautious view on the company due to its expensive multiples/valuations and an expected intensification of the competition in the Belgian retail sector in the forecast years. The stock recommendation remains ‘Sell’.
Colruyt reported good FY17/18 results. However, the competitive pressure is likely to spike in the home country, largely due to sustained performance revival efforts by Ahold Delhaize and Carrefour, and the growing presence of discounter Lidl. As a result, the company’s profit margin is likely to be a bit strained in the forecast years. The stock valuation is still dear at current levels. No change in our stock recommendation.
Colruyt reported good top-line growth in FY16/17 but profitability disappointed. Reported revenue increased 3.4% (vs FY15/16: 2.9%; FY16/17 includes an additional month of sales of the disposed French foodservice business ‘Pro à Pro’). Excluding the disposed French business, top-line growth came in at 2.8% (+30bp vs our estimate), largely driven by the good performance in the retail segment (contributes c.76% to group revenue). The segment clocked 2.4% revenue growth despite an unfavourable calendar impact (there was no Easter in FY16/17, whereas, it fell twice in the last FY). Colruyt’s stores in Belgium and Luxembourg recorded 1.4% revenue growth (vs +2.8% in FY15/16), supported by sales price inflation and ongoing store modernisation. Likewise, French Colruyt stores also performed satisfactorily (+5.0% vs FY15/16: +5.2%), thanks to new customer additions and an increase in the average shopping cart value. Wholesale & Foodservice segment was up 2.7% (vs FY15/16: +3.0%; contributes c.18% to group revenue); the strong performance in the Foodservice business (+5.0% yoy) was offset by a flattish Wholesale business (+0.4% yoy). Revenue growth from other activities also returned into the black (+8.1% yoy vs 9.0% decline in FY15/16; contributes c.6% to group revenue), underpinned by volume gains, higher fuel prices in H2 FY16/17 and new filling stations.
Despite the 10bp gross margin improvement, the underlying operating margin tanked 30bp to 5.3% (vs our estimate: 5.5%), largely due to increased operating expenses (+40bp yoy as a percentage of revenue) and a higher depreciation charge (+13% yoy). The company proposed a gross dividend of €1.18 per share (+5% yoy). Management is anticipating a competitive environment in 2017/18, with no significant upturn in the short-term economic climate in both Belgium and France.
Colruyt’s H1 sales progressed by only 2.6% yoy to reach €4,655m. The Retail and Wholesale division maintained steady sales growth compared to last year (4.1% and 2.9%, respectively) but the Filling stations and other activities showed a 15.6% decline in H1 revenues. The EBITDA margin was almost stable at 8.0% but EBIT lost 20bp to 5.5% due to the underperforming Corporate business. The Belgium retailer still enjoys a strong cash situation despite a higher capex and the increase in WCR. We note, also, the ballooning pension deficit, coming in at €167.2m vs. €83.8m recorded at the end of March 2016.
In a challenging Belgian grocery market, Colruyt released revenues up 3% to €8.9bn. Due to the pressure on sales prices, volume growth was not fully reflected in revenue growth. Price pressure was brought about by price deflation, competition and the consumer trend towards cheaper products. The group continued to invest in employees, processes and efficiency gains. These investments and the fact that higher sales volumes were not entirely reflected in revenue growth, caused net operating expenses to rise slightly more than revenue. With the gross margin being in line with the prior year's level, the EBITDA margin remained stable at 7.9% of revenue.
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