Like Colruyt, the retail sector is experiencing a difficult period between cost inflation and pressure on household budgets. However, a sharp correction opens up opportunities, in particular, if accounting traps are identified.
Listed on the stock exchange in 1977, Colruyt has become an important asset over the years. In the spring of 2019, the share price was over 67 euros after the division of shares into 500: a division of 1 in 10 in 1990 and 1999 and 1 in 5 in 2010. The trend changed radically on June 19, 2019, when the distributor de Hal warned that strong competition in the Belgian market weighs on its borders. The title fell by more than 15% in one session, the worst fall in its history.
Listed on the stock exchange in 1977, Colruyt has become an important asset over the years. In the spring of 2019, the share price was over 67 euros after the division of shares into 500: a division of 1 in 10 in 1990 and 1999 and 1 in 5 in 2010. The trend changed radically on June 19, 2019, when the distributor de Hal warned that strong competition in the Belgian market weighs on its borders. The title fell by more than 15% in one session, the worst fall in its history. Since then, Colewright has not recovered. The name certainly created some illusion in 2020, when consumers rushed to supermarkets in the midst of a pandemic. But the souffle fell quickly. From the end of 2020, market share began to decline. The explanations were varied, such as the development of the Dutch brand Albert Heijn in Flanders and the reduction of the distributor’s presence in stores. Last December, Colruyt announced that it had lost nearly a third of its profit potential with operating margins falling from 6.2% to 4.2% in the first half of the 2021-2022 fiscal year. Deterioration of profitability due to inflation of commodity prices and intensification of competition, which is caused, in particular, by the group to maintain its market share. This development led to a clear devaluation of stock market share, when Colruyt lost its distributor bonus, managed to gain market share without reducing its margin. In three years, the stock recorded a loss of 57%, which is much worse than what the name suffered during the collapse of salami (2000-2003) or the Great Recession of 2008. The fall of Colewright was exacerbated by a correction widespread in the distribution sector. Thus, in Europe, the Stoxx 600 Retail has fallen by almost 30% in the last six months. And in the United States, S&P Retail fell 26% over the same period. Walmart, the world’s largest retailer with annual sales of $ 576 billion and 2.3 million employees, fell the worst since 1987, falling 19 percent three days after quarterly figures were released in May. In general, the downward trend has accelerated since the end of February after Russia’s invasion of Ukraine. The surge in commodity and energy prices has actually fueled inflation and distributor concerns. On the one hand, the purchasing power of households and, consequently, sales are under pressure. On the other hand, costs increase due to rising prices for goods, premises (rent, energy) and wages. Finally, the last problem is the increase in stocks. Serious supply chain disruptions have forced distributors to increase their purchases and inventories to limit the risk of shortages. In the United States, Bloomberg is up 26 percent, or $ 44.8 billion a year. This affects profitability due to higher storage costs and financial costs in an increasing rate. In addition, many distributors who misjudged the evolution of consumer demand at the end of the pandemic have to lower the prices of certain products to eliminate their stocks. The management of these stocks is now so important for the sector that their valuation has become an important issue for distributors. At this level, it should be remembered that there are three main methods of inventory accounting. First: FIFO (First In First Out), when products sold are considered the oldest that have been purchased. Second: LIFO (Last In First Out), when products sold are considered purchased last. Third, the weighted average unit cost (WACC), when a company uses the average purchase price of its shares. As prices rise, a company that uses the FIFO method records better profits (sells old products purchased at a lower price) and sees the value of its inventories grow faster. This is especially true of Amazon, Lowe, Colruyt or Casino Guichard Perrachon. Conversely, a distributor using the LIFO method, such as Target, Macy’s or Carrefour, is directly under pressure for its profitability because of the higher price of the latest products purchased for sale. Tesco, Sainsbury’s or Metro AG use the CUMP method with more limited effects. Many groups also combine different methods, such as Walmart (LIFO in the US, FIFO internationally), Costco (LIFO in the US, FIFO internationally) or Ahold Delhaize (FIFO or CUMP depending on the product). The expected stabilization of inflation in the next few years will change the situation. Then distributors who use the FIFO method will try to return their margin. Another important element in the retail sector is the dynamics of market share. The recovery of these stocks is often a long and exhausting process, as it affects many aspects of the strategy: price positioning, location (convenience stores or peripheral stores), type of outlets (supermarket or hypermarket), e-commerce, marketing investments. As for the listed distributors operating in Belgium – remember that Aldi and Lidl are not world giants – Carrefour seems to be in the best position. The Group recorded an increase in market share in all its key countries (France, Spain, Brazil) in 2021 and in the first quarter of 2022, in part due to its presence in e-commerce and stores. In 2021, it stabilized its operating margin at a fairly low level (3.1%), leaving room for improvement, which the group wants to use. This recovery and these good prospects have not escaped the markets, as Carrefour posted a 34% increase over the last six months on Euronext Paris. Therefore, it seems better to position yourself in a downturn, even if the estimate remains reasonable (12 times higher than the profit expected in 2022 by consensus). The half-year results (expected on July 27) may be affected by the LIFO method used by Carrefour for inventory, but this is good in the long run. Read also | Carrefour lost 7% of its turnover in Belgium at the beginning of the year, while Ahold Delhaize experienced a normalization of its activities after the pandemic, from which it clearly benefited, in particular, due to its strong presence in e-commerce (Bol. Com). Thus, its operating margin fell to 4.2% in the first quarter according to historical figures. The Dutch distributor gained shares in its main markets, namely the United States and the Benelux countries. It is estimated that stock quotes are less than 12 times higher than expected earnings this year, which is a very favorable multiple, given the stable structural growth, in particular due to its strong presence in the United States (more than 60% of sales). The latter are experiencing stronger economic and demographic growth than Western Europe. Thus, analysts are quite confident: 19 tips on buying out of 27 recommendations in May, especially since the planned IPO of Bol.com in the second half of the year may accelerate the reassessment of the name. As for Colruyt, the group reacted quickly to the loss of its market share by strengthening its price positioning, and shares no longer have a premium (12 times the expected profit, according to Degroof Petercam), despite falling profits. However, it is premature to rely on Hal’s distributor. On the one hand, the publication of its annual indicators on June 14 will be crucial for assessing the effectiveness of the current strategy. On the other hand, his FIFO inventory valuation method risks continuing to put pressure on margins. Internationally, Walmart remains a recognized analyst, receiving 32 buying tips from 41 opinions in May. However, the giant has had a very bad start to its 2022-2023 fiscal year with lower-than-expected earnings and a downward revision of its full-year forecasts: abandoning its 5% to 6% growth target. However, analysts value her investment in e-commerce over the past 10 years, which has allowed her to become number 2 in online sales in the United States, after Amazon and ahead of eBay. According to global e-commerce provider Edge by Ascential, this will not be enough to maintain market share in the United States until May 2026. However, Costco is set to increase its market share in the United States from 3.8% in 2021 to 4.4% in 2026. The group also has significant potential for international development with its atypical model. To take advantage of favorable prices in their warehouses (with basic planning), the client must pay a membership fee. The formula, which has been running since Costco, shows the same growth of 8-10% per year in the United States and is (gradually) developing worldwide: Canada, Mexico, Great Britain, France, Spain, Korea, Taiwan, Australia, etc. Financially, his clients’ contributions make up the bulk of his profits, with a very low gross margin of 12% versus 24% at Walmart or 27% at Ahold Delhaize. Its mixed inventory valuation method (with a predominance of LIFO) should limit the impact of rising prices on profitability. However, this is undoubtedly a long-term investment with an expected value for money 34. If you prefer to take advantage of low-cost opportunities, you can turn to the UK. Evaluating their stocks using the intermediate CUMP method, both leaders, Tesco and Sainsbury’s, have expected price-earnings ratios of 12 and 10. Both stocks also fell more than 50% from their 2007 highs. British distributors However, in 10 years there have been difficulties with the local development of German discounters Aldi and Lidl, the instability of the pound sterling and numerous failures in supply chains associated with Brexit and the pandemic. After many years of restructuring, Tesco is finally seeming to reap the benefits of its strategy. In terms of price positioning, the UK leader is increasingly catching up with Aldi and gained market share last year. In terms of results, its operating profit recovered by 58% during the financial year 2021-2022 to 2.8 billion pounds. For 2022-2023, the British leader predicts stabilization, despite the difficult economic context. One of its main assets is the Clubcard loyalty program, which involves more than 20 million British households and about which the group uses all the data. Thus, analysts believe that they have 13 positive recommendations and 6 that should be followed, while predicting an improvement in results by 2025 each year (at least). Sainsbury’s is having more difficulty adapting to current conditions, and its operating profit is expected to fall 5-15% in fiscal 2022-2023. However, the distributor is ahead of its debt reduction program and has been able to consolidate its market share since last year. Thus, a very low estimate (8 times higher than last year’s profit) opens up prospects for recovery as soon as the environment improves. The name is also speculative, as private companies have already become interested in the second British distributor.