Carrefour Declines on Concern French Margin Growth Unsustainable

Carrefour SA (CA), France’s largest retailer, fell in Paris trading on concern it may be forced to cut prices or concede market share in its domestic market, putting pressure on profit margins.

French competitors including Géant and Leclerc SA have reduced price-tags while Boulogne-Billancourt-based Carrefour has resisted, Bruno Monteyne, an analyst at Sanford C. Bernstein, said today in a note to clients. Gross margin in France, the company’s biggest market, widened 20 basis points in the six months through June, which the grocer attributed to cost savings from transportation of goods and a reduction in lost or stolen products.

“While this strategy has protected margin in the short term, we believe this will likely negatively affect performance in the medium term with a lack of price competitiveness leading to a future return to market share losses,” Monteyne wrote.

The shares fell as much as 5 percent, the most since Aug. 27, and were trading 4.3 percent lower at 25.96 euros as of 12:16 p.m. in Paris. The stock has declined almost 10 percent this year, valuing the company at about 19 billion euros ($25 billion).

The margin increase “is welcome but focus will be on whether cost savings can accelerate to compensate investment in price” in the second half of the year, John Kershaw, an analyst at Exane BNP Paribas, said in a note to clients.

First-half recurring operating income rose 7.9 percent to 833 million euros, Carrefour said earlier today in a statement. Analysts predicted 808.1 million euros, the average of eight estimates compiled by Bloomberg.

World Cup

Carrefour, which agreed in June to buy back discount stores in France, is focusing on price and convenience as it seeks to cement a domestic revival. The grocer reported second-quarter revenue that beat estimates earlier this month as promotions tied to the soccer World Cup lifted Italian sales for the first time in more than five years and growth accelerated elsewhere in Europe.

Profit also increased in Brazil and Spain, Carrefour’s second and third biggest markets after France, showing that a plan put in place two years ago is working, Chief Financial Officer Pierre-Jean Sivignon said on a call to reporters.

Carrefour reiterated plans to invest as much as 2.5 billion euros this year to accelerate store remodelings and expand different formats. About 1 billion euros of that will be allocated to France, Carrefour has said.

Net sales at current exchange rates declined 1.6 percent to 35.87 billion euros, including a 0.2 percent gain in Europe.

To contact the reporter on this story: Andrew Roberts in Paris at aroberts36@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net John Bowker, Thomas Mulier

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