Carrefour Shrinks to Boost Value in Revival Plan

For Carrefour SA Chief Executive Officer Georges Plassat, smaller means more valuable.

Since Plassat, 63, took over as CEO last May, the French retailer has dispensed with assets in Colombia, Malaysia, Indonesia, Singapore and Greece, moves that have helped add about 5 billion euros ($6.5 billion) to the company’s market value. He may not be done there.

Though Plassat has said the asset sales are over, he might yet sell off underperforming operations in Turkey, Poland and Italy, Main First Bank predicts. Carrefour, which analysts expect to report a fifth straight decline in annual earnings tomorrow, may also downsize some hypermarkets in France, according to Deutsche Bank AG.

Following a path similar to that taken by European peers such as Tesco Plc and Metro AG, the CEO is forsaking international ambition to focus on boosting domestic sales that have barely grown in the past decade. Under Plassat, Carrefour has sold operations with sales of 5.2 billion euros, Deutsche Bank estimates.

“Carrefour has become a lot more hungry for cash to reinvest in its core European markets,” said Bryan Roberts, an analyst at Kantar Retail in London. “The more resources that can be freed up to fix France, the better.”

John Kershaw, an analyst at Exane BNP Paribas in London, estimates that the company may have to invest more than 2 billion euros to revive the business, whose domestic stores have been losing market share to rivals LeClerc and Intermarche. To win back shoppers, Plassat has pledged to give more control to store managers and reduce food prices, while adding more non-branded goods and pick-up points for online orders.

‘New Religion’

The company’s stock has risen 47 percent since Plassat’s arrival, partially offsetting a 71 percent decline in the preceding five years. The share of analysts with a buy rating on the stock has risen to 44 percent from 13 percent in that time, while the proportion with a sell recommendation has declined to 23 percent from 50 percent.

“Carrefour is like a new religion,” said Kershaw, who has an outperform recommendation on the stock. “People are being asked to believe, without any particular facts.” If Plassat can increase margins, “then the profit and shares could run further than the current valuation might suggest.”

The retailer’s European peers are also reconsidering their international strategies as weakening economies add to competitive pressure on domestic businesses.

Turkey, Poland

Tesco, the largest U.K. supermarket company, said Dec. 5 it would likely exit the U.S. after investing 1 billion pounds ($1.51 billion) over five years in creating an unprofitable convenience-store chain there. In that time, its British market share reached a seven-year low.

Metro AG, Germany’s largest retailer, sold its Real grocery stores in eastern Europe amid weakening sales across the region. Royal Ahold NV of the Netherlands agreed to sell its 60 percent stake in Swedish grocery chain ICA for more than $3 billion.

Carrefour, based in Boulogne-Billancourt, France, will decide in the coming months whether to invest in or exit Turkey, according to a person with knowledge of the matter. Italy and Poland are also under review, said the person, who declined to be identified because no decision has been made.

Gildas Aitamer, an analyst at Planet Retail, doesn’t expect Carrefour to sell many more assets, at least not this year. “We will have to see how greedy Carrefour will be for cash,” Aitamer said.

Oversized Empire

The retailer may say tomorrow that recurring operating income declined 5.3 percent to 2.08 billion euros in 2012, according to the median of 16 analyst estimates compiled by Bloomberg. The grocer in January maintained its forecast for profit of about 2.07 billion euros on that basis.

Plassat will have to contend with competition at home from closely held LeClerc, which has said it plans to overtake its larger rival in France by keeping prices low and opening more facilities where consumers shop online and pick up goods at a store or warehouse. Carrefour stores had sales in France of 44.7 billion euros in 2012, versus 40.7 million for LeClerc, according to Deutsche Bank.

Carrefour, whose French hypermarkets are on average 30 percent bigger than its large outlets in Spain, Italy and Belgium, could also shrink the sales area of some stores, Deutsche Bank analyst Sally Ronald said, and rent the space to other businesses such as cafes. That has worked for rival Casino Guichard-Perrachon SA, Ronald said.

“Plassat has said that Carrefour has the structure of an empire which we think primarily relates to the geographic spread of the business,” Ronald wrote in a note. But it “could also refer to Carrefour’s oversized stores.”

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