M4 BARRON’S March9,2020
EUROPEAN TRADER
TheUpsideofCarrefour’s
Turnaround Emerges
E
urope’s largest retailer,Carre-
four,has been hit hard by com-
petition fromAmazon.comand
other online rivals. Shares in the
grocer, which also sells clothes and elec-
tronics through its hypermarkets, fell from
83.70 euros ($93) in 2000 to €14.55, recov-
ering slightly to €16.78, as consumer shop-
ping habits shift from expensive-to-run
shops to the internet.
But the French-listed supermarket
group launched a turnaround plan in
2018, and its cost-cutting (€1 billion of
savings in 2019) and online investments
are beginning to show the potential to
boost earnings and shares.
In a February note, Goldman Sachs
deemed Carrefour (ticker: CA.France) a
Buy, saying it could rise 26.9% to a target
price of €20 due to higher profitability in
its key French market and higher growth
in Brazil. Goldman analyst Rob Joyce
wrote, “Across a range of metrics, Carre-
four looks very cheap on our estimates at
the current price.”
Broker Bryan Garnier set a target price
even higher, at €21.
Carrefour, which has a market value of
€13.2 billion, fetched 11.7 times this year’s
expected earnings, a price/earnings ratio
in line with its peers. In February, it
posted sales growth of 3.1% for the fourth
quarter from the same number of stores as
the previous year and posted 12-months
results for the year ending in December
2019 of €2 billion recurring operating
profit on total revenue of €74 billion.
Carrefour was started in 1959 by three
families, the Fourniers, Badins, and Def-
foreys, who ran a discount supermarket in
Annecy, a lakeside town in southeast
France. It pioneered the hypermarket con-
cept, selling food and items typically found
in department stores.
By 1970, it floated on the Paris stock
market and spent the next 30 years ex-
panding into Spain, Brazil, China, Mexico,
Malaysia, Thailand, Korea, Singapore, and
Poland, while also growing through
acquisitions.
Carrefour now has 12,300 stores in
more than 30 countries. Like many other
retailers founded before the internet,
Carrefour, with its network of large stores,
has been going through a tough time.
Shopping habits have changed. Con-
sumers are spending less time in malls
and on Main Street, preferring to buy on-
line. Pre-internet retailers are facing fierce
competition from online rivals unbur-
dened by physical stores with costly rent,
rates, staff, and heating costs.
To address this, CEO Alexandre Bom-
pard has been reducing the firm’s reliance
on nonfood items—it’s a key plank of the
turnaround plan. Boosting growth in the
important French market and nursing
hypermarkets back to health are also
priorities.
Bompard toldBarron’sthat “the Carre-
four 2022 plan is generating solid results
and sets the group on a profitable growth
trajectory. We...raise or confirm all the
Carrefour 2022 targets.”
The initiatives appear to be improving
financial results. Operating margins ex-
panded by at least about a third of a per-
centage point over the second half of 2019,
which has not been seen, for a comparable
period, in five years.
“This has been driven by a combination
of cost-cutting initiatives (head-count re-
duction, space, and range rationalization),”
Goldman’s Joyce wrote. Strategic changes,
such as less reliance on price promotions,
and driving customers toward higher-
margin private-label products have also
helped. Strong performance in Brazil and
Argentina has boosted performance, too.
However, the wheels could come off the
shopping cart in the short term on fallout
from the coronavirus, or a recurrence of
last year’s public-transport strikes. But
Bompart’s program of cost-cutting and
online investment could see investors
checking out with bigger gains.B
By Rupert Steiner Capital. Example: jeans-makerMavi
(MAVI.Turkey), whose shares are up by a
quarter over the past year despite a recent
selloff.
The bond yields do look tempting,
though, if the Turkish lira can avoid rapid
devaluation—and there are signs that it
can for a while. Many foreign investors
fled Turkey after its August 2018 collapse.
That makes currency markets easier to
control via local banks that will sell dol-
lars to shore up the lira at the govern-
ment’s behest.
“State-owned banks executing policy
goals are in the driver’s seat,” says Cristian
Maggio, head of emerging markets strat-
egy at TD Securities.
Turkey’s resilient economy is also pick-
ing up steam, or was pre-coronavirus.
Economists expect growth around 3% this
year, from zero in 2019. What Covid-19
takes in tourist dollars it may give back
through cheaper oil imports.
The question is how long investors can
enjoy 11%-plus interest before the next
major disruption. Erdogan did not stay on
the economic wagon long after the last
one.
He has bullied the central bank into
cutting interest rates below inflation and
commercial banks into a new mortgage-
lending frenzy—neither healthy indica-
tors over a longer term. “It’s unfortunate
that the government didn’t learn the les-
sons of 2018,” says Shamaila Khan, direc-
tor of emerging market debt at Alliance-
Bernstein.
Three investors are playing with Turk-
ish fire three different ways. TD’s Maggio
has exited the country. Bernstein’s Khan is
buying corporate debt of exporters that
are “long dollar” while avoiding the sover-
eign. PineBridge’s Faergemann is “tacti-
cally overweight” on the broader market,
strategically wary.
With returns from steadier bonds
dwindling to nothing, Turkish debt may
be hard to resist. But have an exit
strategy.B
EMERGING MARKETS
Turkey Looks Tempting—
Just Have an Exit Plan
I