Restructuring And E-Commerce Expansion Will Strengthen Future Position

Key Takeaways

• Successful turnaround project and strategic expansion initiatives enhance margins and drive potential revenue and profit growth.
  
• E-commerce and premium formats expansion, coupled with retail media growth, improve market penetration and profitability.
  
• Restructuring and nonrecurring expenses challenge profitability, while e-commerce growth faces sustainability issues due to logistics costs and competition impacts.

Catalysts

Engages in the operation of supermarkets, specialized stores, and department stores in Brazil.

• Successful execution of a turnaround project, resulting in a reduced net debt and financial leverage from 10.6x to 1.6x the EBITDA, suggests a more robust capital structure that could improve earnings stability and investor confidence.
  
• Expansion of e-commerce, with a significant growth trajectory and a shift to a 100% ship-from-store model, improves margins and increases penetration, likely enhancing overall revenue growth and net margins.
  
• Strategic expansion of premium proximity formats such as Minuto Pão de Açúcar in Sao Paulo, which have higher margins and growing market share, is expected to drive revenue and profit growth as well as improvement in net margins.
  
• Strong same-store sales growth, especially in higher-margin categories like perishables, and positive consumer response to the revitalized Extra Mercado stores indicate potential for sustained revenue growth and increased earnings.
  
• The development and expected growth in retail media, which offers high margins, can contribute significantly to improving gross margins and overall profitability.

Companhia Brasileira De Distribuicao Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Companhia Brasileira De Distribuicao's revenue will grow by 7.4% annually over the next 3 years.
• Analysts are not forecasting that Companhia Brasileira De Distribuicao will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Companhia Brasileira De Distribuicao's profit margin will increase from -8.9% to the average US Consumer Retailing industry of 1.8% in 3 years.
• If Companhia Brasileira De Distribuicao's profit margin were to converge on the industry average, you could expect earnings to reach R$428.6 million (and earnings per share of R$0.87) by about April 2028, up from R$-1.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.5x on those 2028 earnings, up from -1.1x today. This future PE is lower than the current PE for the US Consumer Retailing industry at 12.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 26.12%, as per the Simply Wall St company report.

Companhia Brasileira De Distribuicao Future Earnings Per Share Growth

Risks

• The company's ongoing restructuring and nonrecurring expenses, such as a significant impact from impairments and tax settlements, could affect its net income negatively and pose challenges for profitability improvements. This could influence the earnings negatively going forward.
  
• A major contributor to the net loss was an increase in labor contingencies and provisions for probable losses related to the INSS, which could lead to cash disbursements in the future, thereby impacting net margins and cash flow.
  
• Operational efficiency gains have been positive, but the closure of underperforming stores indicates potential risks in store operations that may affect revenue if not adequately addressed.
  
• Despite significant growth in the e-commerce segment, its sustainability at high margins could be affected by logistics costs and competition, potentially impacting the overall profitability and EBITDA margins.
  
• Market share gains and premium segment focus may not fully offset the competitive pressures and macroeconomic challenges, affecting the overall revenue growth trajectory.

Valuation

• The analysts have a consensus price target of R$3.291 for Companhia Brasileira De Distribuicao based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$4.0, and the most bearish reporting a price target of just R$2.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$23.3 billion, earnings will come to R$428.6 million, and it would be trading on a PE ratio of 7.5x, assuming you use a discount rate of 26.1%.
• Given the current share price of R$3.62, the analyst price target of R$3.29 is 10.0% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.