Rising Labor Costs And Saturated Retail Will Erode Margins

Key Takeaways

• Increasing e-commerce adoption and competitive pressures may erode revenue and compress margins for Chedraui's core brick-and-mortar business.
  
• Rising operating costs, integration challenges, and exposure to economically sensitive consumers threaten long-term profitability and earnings stability.
  
• Strategic expansion, digital transformation, and operational efficiency are driving resilient revenue growth, customer engagement, and diversified earnings while maintaining strong financial discipline.

Catalysts

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

• The rapid acceleration of e-commerce and changing consumer habits in both Mexico and the U.S. continue to draw demand away from traditional brick-and-mortar stores, a risk sharply amplified for Chedraui given its heavy investment in physical retail expansion; this long-term shift could erode same-store sales growth and put significant pressure on topline revenue.
  
• Persistent increases in labor costs and escalating regulatory pressure across North America threaten to drive up operating expenses, particularly for a company like Chedraui, which maintains large workforces in both strategic geographies, directly impacting net margins and reducing overall profitability in the medium to long term.
  
• Intensifying competition and risk of oversaturation in the grocery and discount retail segment may further compress pricing power, squeezing gross margins and potentially resulting in stagnant or even declining earnings as every new store dilutes returns rather than boosting growth.
  
• Chedraui remains heavily exposed to lower-income customers in Mexico, rendering it especially vulnerable to prolonged economic weakness or renewed inflationary cycles that can depress consumer spending and lead to disappointing revenue growth and net income deterioration.
  
• Ongoing integration challenges from major U.S. acquisitions, including Smart & Final, and potential underperformance in extracting expected synergies create a sustained risk of operational inefficiencies, which could ultimately weigh on EBITDA margins and erode anticipated shareholder returns.

Grupo Comercial Chedraui. de Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Grupo Comercial Chedraui. de compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Grupo Comercial Chedraui. de's revenue will grow by 6.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.2% today to 3.2% in 3 years time.
• The bearish analysts expect earnings to reach MX$11.0 billion (and earnings per share of MX$10.98) by about July 2028, up from MX$6.4 billion 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 17.3x on those 2028 earnings, down from 21.9x today. This future PE is lower than the current PE for the MX Consumer Retailing industry at 17.8x.
• Analysts expect the number of shares outstanding to grow by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.91%, as per the Simply Wall St company report.

Grupo Comercial Chedraui. de Future Earnings Per Share Growth

Risks

• Despite a challenging consumption environment in Mexico, Chedraui continues to gain market share for the 19th consecutive quarter and outperform industry benchmarks like ANTAD, which suggests resilience in same-store sales growth and supports the sustainability of revenues going forward.
  
• The company is making substantial investments in digital transformation, private label penetration, and especially its MiChedraui loyalty program, which now encompasses 75% of sales and 13.3 million members, indicating a strategic focus on customer engagement that could drive higher revenue per customer and more consistent earnings.
  
• Expansion in the U.S. Hispanic grocery market is yielding results, as Chedraui USA's operations-including El Super, Fiesta Mart, and Smart & Final-are seeing positive same-store sales and successful implementation of pricing strategies that grow traffic, which could translate to sustained topline growth and diversified earnings streams.
  
• Operational efficiency projects, such as the consolidation of distribution centers into the new RCDC and a greater focus on private label and inventory management, are poised to improve margins and reduce costs, thereby enhancing net margins and overall profitability over the long term.
  
• The company maintains strong financial discipline, demonstrated by low net debt to EBITDA and a willingness to invest further in strategic assets like tech and supply chain when value-adding opportunities arise, reducing risk to financial health and potentially supporting higher long-term returns on equity and shareholder value.

Valuation

• The assumed bearish price target for Grupo Comercial Chedraui. de is MX$130.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Grupo Comercial Chedraui. de'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 MX$190.0, and the most bearish reporting a price target of just MX$130.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be MX$347.1 billion, earnings will come to MX$11.0 billion, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 14.9%.
• Given the current share price of MX$144.91, the bearish analyst price target of MX$130.0 is 11.5% 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.