Oct 18, 2009
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Carrefour recovery in doubt, shares under pressure

Oct 18, 2009

By Lionel Laurent

PARIS, Oct 16 (Reuters) - French retailer Carrefour's (CARR.PA) ignominious exit from Russia and weak performance suggest its recovery plan will be a long slog and will put its share price under pressure.

Carrefour said late on Thursday 15 October it could not see growth opportunities in Russia, where it had only gained a foothold four months ago, and so was getting out.

It also reported falling third-quarter sales, and though it said it was keeping its operating profit target for this year, it guided towards the lower end of its 2.7 billion-2.8 billion euro range.

Several analysts said falling sales in Western Europe, particularly France, would make for a more challenging environment going into 2010.

The pressure from home may also have led to Carrefour's departure from the Russian market, after it became clear that it would not be able to invest as much as its rivals to grow there.

Akin Bayer, managing director of Metro Cash & Carry Russia, said the "major reason why Carrefour exited is that they are struggling at home".

He said Metro (MEOG.DE) first arrived in Russia in 2001, followed by French retailer Auchan in 2002. By the time Carrefour opened its first hypermarket in Moscow in 2009, it would have required a significant amount of investment to grow in the face of the strong established competition.

There is continued market talk it may also exit Brazil.

Bernard Arnault, chairman of luxury goods group LVMH (LVMH.PA), and investment firm Colony Capital control a 13.5 percent stake in the group and there is recurrent talk, denied by spokespeople for the investors and retailer, that they are demanding faster action to reverse the company's declining fortunes. Many presume that would mean asset sales.


Carrefour, the world's second-largest retailer, derives more than 40 per cent of its sales from France, with the bulk coming from hypermarkets, which are struggling as consumers turn to convenience stores closer to home and cut back on discretionary non-food purchases.

"The big, big issue is France," said Mike Dennis, an analyst with MF Global. "The whole of Carrefour France makes the same operating profit as 192 Tesco hypermarkets in the United Kingdom. It's that bad."

Carrefour Chief Executive Lars Olofsson, who joined this year, has promised to save 4.5 billion euros in costs by 2012.

He said he would spend 600 million euros this year on cutting prices to drive sales. Carrefour sales fell 2.9 percent in the third quarter, missing analysts' average forecast by one percentage point.

"The business so far this year has been one whereby Carrefour reinvested expected cost savings back into the business, which is good in itself but doesn't really have a material positive impact yet," said John David Roeg, an analyst with ING in Amsterdam. "Much more is needed to get to a structural market share gain."

Analysts say it will take time for Carrefour to revamp its hypermarkets effectively. Carrefour has appointed a new chief for the French division, Guillaume Vicaire, but he will not take the reins until January 2010. An action plan for hypermarkets is not expected until 2011. The company has not yet indicated how much the transformation will cost.

Shares in Carrefour closed 3.33 percent lower on Friday 16 October at 30.15 euros, underperforming a 0.6 percent fall for the FTSEurofirst 300 index and a 0.42 percent drop for the DJ Stoxx retail index.

It could come under further pressure, as it still trades at a forward price-to-earnings ratio of 15.8, higher than smaller rival Casino Guichard's (CASP.PA) 12.1 and global market leader Wal-Mart's (WMT.N) 14.2.

Sanford C. Bernstein analyst Christopher Hogbin recommended investing in Casino over Carrefour, citing a more attractive valuation and the fact that Casino's management is guiding towards a fall in annual operating profit of 2 percent.

Carrefour, on the other hand, is looking at a fall of 20 percent. (Additonal reporting by Maria Kiseleva in Moscow, Editing by Marcel Michelson/Will Waterman)

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