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COLRUYT: Cost inflation outpaces top line growth

COLRUYT: Cost inflation outpaces top line growth

30.11.2011 11:10

Feedback analyst meeting: 
 - If one excludes the DATS24 activities, personnel costs rose by 20bps as a % of sales in 1H/12. Wages are up 2.5% and a further 3.1% step up of automatic wage indexation is expected in January 2012 for office employees. Store staff saw their wages rise by 1% in February 2011, May 2011 and August 2011. 
 - Amortisation, depreciation and impairment rose by 31bps to 2.3% of sales due to higher investments (10bps), a change in accounting rules (10bps) and an impairment charge (10bps). 
 - The Belgian Colruyt stores realized 5.9% (KBCS 6.3%) top line growth (€ 2,435m) on the back of 1.9% inflation, 1.4% volume growth and additional selling space. Colruyt’s market share rose by 55bps y/y to 24.79% in 9M11. Whereas Carrefour (18,32 EUR, -1,35%) and Delhaize lost share, the hard discounters gained the most. Poor weather conditions affected the contribution of meat, fruit and vegetables to revenues and gross profit. Colruyt saw increased customer traffic but the value of the average basket was slightly down. Volumesremain solid however. Colruyt’s lowest price strategy is clearly paying off. 
 - For the long term, the group aims to have 260 (old target: 240) Colruyt stores in Belgium compared to 222 at the end of 1H11/12. They also aim to increase the average store size from 1,530m2 to 1,800m2.

Sales guidance:
As far as the Belgian Colruyt stores are concerned, management aims at 5.5-7.0% sales growth in FY11/12 based on 2-3% new space, 1.5-2.5% inflation and 1-2.5% volume growth. At the end of June 2011, the group was still aiming at 5.0-6.5% growth for the current financial year. The inflation assumption has been revised upwards however.

The group maintains its FY11/12 guidance: net profits should approach last year’s level. This will be challenging however given the 7.8% decline in 1H11/12 and persistently weak consumer confidence. Note that the group will face easier comparables in 2H11/12 as the EBIT margin declined from 6.9% in 1H10/11 to 6.1% 2H10/11. We are counting on 5.8% in 2H11/12 implying a 29bps y/y decline. Our FY11/12 net profit forecast (€ 323m or -4.5%) is more conservative than the company guidance. We are lowering our EPS forecasts for FY11/12 and FY12/13 by respectively 3% and 1%. Our FY13/14 forecast remains virtually unchanged.

Even though the stock is trading at more acceptable valuation multiples following the 32% share price correction since this year’s peak (€ 40 on 23 May), we maintain our HOLD rating because we anticipate that margin pressure will persist in 2H11/12. Moreover, consumer confidence is set to remain weak as austerity measures will be announced by the new government.

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