Rancho Cucamonga Distribution Center And Expansion Plans Will Improve Future Operational Efficiencies In Retail

Key Takeaways

• Expansion through new stores and distribution centers is set to boost revenue growth and operational efficiency despite initial costs.
  
• Loyalty programs and strategic acquisitions may improve customer retention and expand market presence, driving increased earnings.
  
• Aggressive pricing and rising costs in U.S. operations and new investments pressure margins and earnings, while Mexico faces revenue growth challenges.

Catalysts

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

• Grupo Comercial Chedraui's expansion strategy, including the opening of new stores in both Mexico and the U.S. as well as the integration of a new distribution center in Rancho Cucamonga, is expected to drive future revenue growth and operational efficiencies, despite initial transition costs.
  
• The implementation of a new pricing strategy for perishables at Smart & Final, supported by an aggressive marketing campaign, aims to increase customer traffic and market positioning, potentially improving revenue and market share.
  
• The company's strategic focus on organic growth and accretive M&A initiatives indicates potential for expanding market presence and increasing earnings through consolidation and improved operational scale.
  
• Enhanced customer engagement through the Mi Chedraui loyalty program, which now accounts for 74% of sales, could drive higher revenue per customer and improved margins due to increased customer retention and purchases.
  
• The completion of the distribution center's transition and optimized supply chain are expected to lower operating expenses, improve gross margins, and increase the EBITDA margin, particularly in the latter half of 2025 and beyond.

Grupo Comercial Chedraui. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Grupo Comercial Chedraui. de's revenue will grow by 8.4% 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$10.7 billion (and earnings per share of MX$11.97) by about March 2028, up from MX$6.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting MX$11.9 billion in earnings, and the most bearish expecting MX$9.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.3x on those 2028 earnings, up from 16.1x today. This future PE is greater than the current PE for the MX Consumer Retailing industry at 16.1x.
• 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 14.54%, as per the Simply Wall St company report.

Grupo Comercial Chedraui. de Future Earnings Per Share Growth

Risks

• The aggressive pricing strategy at Smart & Final has led to internal deflation, affecting gross margins in an effort to increase customer traffic, which could strain short-term profitability. [Impacts net margins]
  
• Transition costs and operating expenses related to the new distribution center and Smart & Final's strategy have reduced EBITDA margins, introducing financial pressures in the U.S. operations. [Impacts EBITDA and net margins]
  
• Higher labor costs and accelerated store openings in both Mexico and the U.S. have increased operating expenses, potentially impacting net earnings if not offset by sufficient revenue growth. [Impacts operating expenses and net earnings]
  
• Same-store sales growth in Mexico slowed due to softer economic activity and tough comparisons, which might pose challenges for sustaining revenue growth. [Impacts revenue growth]
  
• Financial expenses increased due to higher interest expense related to capital investments, such as the RCDC, which might pressure net income if not matched by enhanced operational gains. [Impacts net income]

Valuation

• The analysts have a consensus price target of MX$157.714 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$359.1 billion, earnings will come to MX$10.7 billion, and it would be trading on a PE ratio of 21.3x, assuming you use a discount rate of 14.5%.
• Given the current share price of MX$112.85, the analyst price target of MX$157.71 is 28.4% 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.