Companhia Brasileira de Distribuicao (CBD) reported second quarter 2012 earnings per share of 31 cents compared to 22 cents in the second quarter of 2011. Second quarter 2012 earnings also surpassed the Zacks Consensus Estimate of 24 cents a share by 29.2%.

The increase reflected the continuing operational improvements in the two business segments, namely GPA Food and Viavarejo.

Quarter in Detail

In the second quarter of 2012, consolidated gross sales, comprising GPA Food and Viavarejo, increased by 7.2% (in local currency) driven by sales growth in both the segments. Consolidated net sales climbed by 6.8% during the quarter.

Gross profit climbed 8.5% year on year while the gross margin expanded by 40 bps to 26.9% from the prior-year quarter.

EBITDA (Earnings Before Interest Tax and Depreciation) increased 22.8% while EBITDA margin expanded 80 basis points year on year to 6.5%, driven by operational improvement at GPA Food.

GPA Food’s gross sales increased 7.3% in the quarter, driven by 4.7% growth in gross same store sales. The 14 new stores added in the year also boosted sales of the segment. Net sales in the segment climbed 7.9% year over year.

Same store sales climbed 4.8% in the food section and 4.3% in the non food section of GPA Food. Both Retail and Cash and Carry sub segments reported decent sales growth in the quarter.

Viavarejo’s sales got a boost on the back of increased sales in the home appliances segment, as two main shopping days, Mothers’ Day, in May, and Valentines’ Day, were celebrated in June in Brazil.

Recommendation

We are optimistic about the company’s position in the retail sector. CBD is a leading player in the global food retail sector based on both gross sales and number of stores.

However, it also faces intense competition from its rivals such as Wal-Mart Stores, Inc. (WMT) and Carrefour SA as well as from local and regional players in respective countries.

We maintain a long-term Neutral recommendation, which co-relates to a short term Zacks #3 Rank (Hold rating).

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