Carrefour: Is This Undervalued Retail Giant Poised for Growth Amid Recession Fears?
As fears of a recession grip stock markets and consumers get squeezed, fund manager Sean Peche is bucking the trend by placing a bullish bet on Carrefour, the French multinational retail giant. Peche, a portfolio manager at Ranmore Fund Management, believes the company’s defensive nature and ability to grow earnings amid inflation are key attractive qualities. This unexpected optimism has led to Carrefour becoming the second-largest holding in the Ranmore Global Equity Fund, which defied the market downturn, achieving a 31% return in 2023, outperforming the S&P 500.
Key Takeaways:
- Carrefour’s stock is undervalued: Despite its impressive performance, Carrefour’s stock has declined 23% in the past 12 months, a trend Peche attributes to investors favoring AI and tech stocks over consumer staples.
- Strong fundamentals: Carrefour has demonstrated consistent revenue growth, increasing from 74.2 billion euros in 2018 to 84.9 billion euros in 2023, a 14.4% rise. This growth, according to Peche, is fueled by efficient inventory management strategies aided by technology and AI.
- Profitable own-label strategy: Carrefour is capitalizing on consumers’ shift towards more affordable options by expanding its own-label product offerings. This strategy is particularly attractive as it delivers higher margins compared to branded goods.
- Growth opportunities: Peche highlights the company’s expanding advertising business, similar to Amazon, Tesco, and Sainsbury’s, as a potential growth driver. Carrefour is monetizing its online platforms by allowing brands to pay for prominent product placement.
- International expansion: Beyond its French market dominance, Carrefour’s international operations are showing promise, notably its Brazilian arm, which Peche suggests is undergoing a positive turnaround.
A Deep Dive into Carrefour’s Strengths
Peche’s bullish outlook on Carrefour is based on a number of factors. One of the most compelling aspects is the company’s strategic approach to inventory management amid rising inflation. Carrefour has implemented innovative technologies, including AI and weather forecasting, to optimize inventory levels and ensure a consistent supply of goods. This proactive strategy has allowed the retailer to avoid stock shortages and price hikes, a critical factor in retaining customer loyalty during turbulent economic times.
Carrefour’s own-label products have also played a significant role in its success. As consumers tighten their belts, they are increasingly opting for more affordable options. Carrefour has capitalized on this trend by expanding its own-label product lines. This strategy not only provides customers with budget-friendly choices but also generates higher profit margins for the company, as own-label products typically have lower markups than branded goods.
Emerging Growth Avenues
Peche also sees potential in Carrefour’s advertising business. The company is following in the footsteps of major online retailers like Amazon, Tesco, and Sainsbury’s by monetizing its online platforms. Brands are willing to pay for prominent product placement on Carrefour’s website and mobile applications, generating a new revenue stream for the company. Peche highlights the low cost associated with this business model, making it a particularly attractive avenue for growth.
Furthermore, Carrefour’s international operations show promise, particularly in Brazil. The company has a significant presence in emerging markets, generating nearly half of its revenue outside France. Peche believes that Carrefour’s Brazilian operations are undergoing a positive turnaround, which could contribute to future growth.
Analyst Views: A Mixed Perspective
While Peche remains optimistic about Carrefour’s prospects, not all analysts share his enthusiasm.
Cedric Lecasble from Stifel notes that Carrefour’s focus on profitability protection during the recent inflationary period has impacted its competitiveness. While the company has invested in price reductions to maintain market share in France, similar measures in other European markets have negatively affected profitability.
Sreedhar Mahamkali from UBS expresses a more cautious outlook, highlighting Carrefour’s projected 2.5 billion euro adjusted profit on the back of a European economic rebound in the second half of 2023. Mahamkali believes this projection is overly optimistic, predicting a modest decline in adjusted profits in the latter half of the year.
FactSet’s consensus price target for Carrefour’s stock is 17.35 euros, representing a potential 25% upside. However, the differing opinions among analysts underscore the uncertainty surrounding the company’s future performance.
Navigating the Uncertain Future
Carrefour’s success hinges on its ability to navigate the challenging economic climate. The company’s defensive nature and diverse revenue streams provide some level of insulation against economic downturns. However, the company’s reliance on the European market, which is facing significant economic headwinds, poses a potential risk.
Its success in adapting to evolving consumer preferences and leveraging technology to drive efficiency will be crucial in determining its future. The company’s focus on own-label products, its expansion into advertising, and its international growth initiatives will play a significant role in shaping its long-term prospects.
While the road ahead is uncertain, Carrefour’s strong fundamentals, strategic initiatives, and potential for growth make it an intriguing investment option for those seeking to diversify their portfolios amidst economic volatility.
