European Aging And High Costs Will Undermine Retail

Key Takeaways

• Structural challenges from e-commerce growth, demographic shifts, and rising competition threaten Carrefour's revenue, market share, and ability to expand margins.
  
• Persistently high costs, regulatory pressures, and limited digital transformation gains are likely to constrain cash flow and earnings growth.
  
• Strong digital transformation, market share gains, cost reductions, and strategic market expansion are driving operating income growth and supporting robust shareholder returns through value creation.

Catalysts

Operates as a food retailer in France, Spain, Italy, Belgium, Poland, Romania, Brazil, Argentina, the Middle East, Africa, and Asia.

• The accelerating shift toward e-commerce and digital marketplaces continues to undermine Carrefour's traditional brick-and-mortar retail formats, with persistent negative volume growth in core European markets and only limited offset from online gains, threatening to erode both revenue and long-term market share.
  
• Demographic decline and aging populations in Carrefour's core European markets are leading to structurally lower demand and diminished sales momentum, creating headwinds for top-line growth and increasing the risk of sustained like-for-like sales contraction.
  
• Carrefour's high fixed cost base, tied to its extensive hypermarket network and repeated restructuring efforts, is placing ongoing pressure on net margins, especially as the company struggles to fully realize digital transformation benefits and is forced into continual price investments to protect market share.
  
• Intensifying competition from hard discounters and digital-first grocery specialists is driving structural downwards pressure on gross and operating margins, while Carrefour's capacity to differentiate through private label and premium ranges shows signs of plateauing, indicating little room for margin expansion and increasing the likelihood of profit stagnation.
  
• Escalating regulatory requirements and labor, energy, and supply chain costs in Carrefour's operating regions are expected to outpace revenue growth and operational efficiencies, resulting in higher CAPEX and compliance expenditure and consequently suppressing free cash flow and long-term earnings growth.

Carrefour Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Carrefour compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Carrefour's revenue will decrease by 0.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.8% today to 1.0% in 3 years time.
• The bearish analysts expect earnings to reach €851.2 million (and earnings per share of €1.19) by about July 2028, up from €723.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.5x on those 2028 earnings, down from 12.0x today. This future PE is greater than the current PE for the GB Consumer Retailing industry at 6.0x.
• Analysts expect the number of shares outstanding to decline by 2.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.31%, as per the Simply Wall St company report.

Carrefour Future Earnings Per Share Growth

Risks

• Carrefour is demonstrating strong execution in its digital transformation and e-commerce initiatives, with e-commerce GMV reaching €6 billion and 18 percent growth, reinforcing leadership in home delivery and click & collect-this supports future revenue and margin growth through omnichannel expansion.
  
• The company is gaining market share and improving Net Promoter Scores in core countries such as France, Spain, and Brazil, indicating competitive pricing and improved customer satisfaction, which puts upward pressure on both top-line revenues and operating income.
  
• Sustained cost reduction efforts, including a targeted €1.2 billion in annual savings and ongoing store format optimization through conversion and franchising, are driving improved operating leverage and have delivered six consecutive years of recurring operating income growth and margin expansion.
  
• The expanding presence in high-growth markets like Brazil, supported by strategic acquisitions and asset-light model scaling, is supporting robust recurring operating income growth of over 25 percent in local currency, which could contribute positively to group earnings and future net income.
  
• Strategic portfolio review and disciplined capital allocation, such as opportunistic M&A (e.g., full ownership of Carrefour Brazil) and the ability to monetize a large real estate portfolio for value creation, enhance the firm's flexibility to generate value and boost free cash flow, supporting strong dividend and shareholder returns.

Valuation

• The assumed bearish price target for Carrefour is €9.3, which represents two standard deviations below the consensus price target of €13.92. This valuation is based on what can be assumed as the expectations of Carrefour's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €17.0, and the most bearish reporting a price target of just €9.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €89.3 billion, earnings will come to €851.2 million, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 10.3%.
• Given the current share price of €12.3, the bearish analyst price target of €9.3 is 32.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.