RCDC Consolidation And Pricing Adjustments Will Drive Improved Operations

Key Takeaways

• Transition to a single distribution center and product development boosts margins, enhancing operational efficiencies and positively impacting earnings.
  
• Expansion of small-format stores and loyalty program growth target increased revenue through market penetration and personalized promotions.
  
• Transition costs and currency risks amid competitive pressures could adversely impact profitability if strategic efficiencies and sales growth are not realized.

Catalysts

Operates self–service and real estate stores in Mexico and the United States.

• The transition to a single RCDC distribution center in California is expected to enhance operational efficiencies, reduce duplicate logistics costs, and improve inventory management, ultimately benefiting net margins and earnings.
  
• The ongoing development of Chedraui's private label products aims to increase sales share and improve gross margins due to typically higher margins on private label goods, impacting overall earnings positively.
  
• The robust growth of Chedraui's loyalty program, MiChedraui, provides enhanced customer insights and targeted marketing opportunities which may drive increased revenue through personalized promotions and higher customer retention.
  
• The focused expansion of smaller format stores (Supercito) is intended to capitalize on consumer preferences for convenience and proximity, potentially boosting revenue through increased market penetration and new store openings.
  
• The effective execution of Smart & Final's pricing strategy is expected to enhance customer count and volume, while ongoing vendor negotiations are anticipated to improve gross margins, positively influencing future earnings growth.

Grupo Comercial Chedraui. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Grupo Comercial Chedraui. de's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.4% today to 3.0% in 3 years time.
• Analysts expect earnings to reach MX$10.9 billion (and earnings per share of MX$11.14) by about May 2028, up from MX$6.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.4x on those 2028 earnings, up from 17.9x today. This future PE is greater than the current PE for the MX Consumer Retailing industry at 17.5x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.93%, as per the Simply Wall St company report.

Grupo Comercial Chedraui. de Future Earnings Per Share Growth

Risks

• Transition costs related to the Rancho Cucamonga distribution center (RCDC) are impacting financial metrics such as EBITDA, and there are uncertainties about future efficiencies and synergies, which could affect profitability if not realized. (Net margins, operating expenses)
  
• The company's heavy investment in price strategies, particularly for Smart & Final, risks prolonged impacts on margins if traffic and sales volumes do not increase sufficiently to offset lower prices. (Gross margins, operating expenses)
  
• The depreciation of the Mexican peso can positively impact U.S.-based revenues in reporting terms, but it also increases operational costs and presents a currency risk that could adversely impact financial results if trends reverse. (Revenue, net income)
  
• Economic activity slowdown in Mexico and negative calendar effects could hinder revenue growth, especially impacting same-store sales and overall market share if continued sluggishness persists. (Revenues, revenue growth rate)
  
• Competition remains a challenge, particularly in Mexico where consumption has slowed, and managing price competition while balancing labor costs and other expenses could pressure margins. (Net margins, revenue)

Valuation

• The analysts have a consensus price target of MX$151.429 for Grupo Comercial Chedraui. de 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 MX$180.0, and the most bearish reporting a price target of just MX$130.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MX$357.3 billion, earnings will come to MX$10.9 billion, and it would be trading on a PE ratio of 20.4x, assuming you use a discount rate of 14.9%.
  
• Given the current share price of MX$125.5, the analyst price target of MX$151.43 is 17.1% higher.
  
• 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.