A Discount Grocer Poised for an Upside Move
By KATHY GORDON
Jeronimo Martins' shares could jump 20% to 30% in 2014 as its Polish discount grocer Biedronka hits a sweet spot in the sector.
Polish discount grocer Biedronka is going cheap. Shares of the grocer's Portuguese parent, Jeronimo Martins SGPS (ticker: JMT.Portugal), are at their lowest in over a year. Even with the margin-pinching investment needed to ride out a highly competitive environment in Poland, Jeronimo Martins has lots of room to grow.
Its supermarket chain is the largest in Poland, and it plans to spread Biedronka's smiling ladybug logo further afield. Currently with around 2,400 stores, Jeronimo Martins is targeting 3,000 by 2015, an opening rate of 300 per year.
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Jerónimo Martins, SGPS, S.A., through its subsidiaries, produces, distributes, and sells food and other fast moving consumer goods products in Portugal, Poland, and Colombia. It operates 2,125 food stores under the Biedronka name; a pharmacy network of 36 units under the Apteka Na Zdrowie brand, and 32 stores under the Hebe name; 359 supermarkets in Mainland Portugal and 13 on the Island of Madeira under the Pingo Doce name; and 36 cash and carry stores and 3 food service platforms in Mainland Portugal, and 1 cash and carry store and 1 food service platform on the Madeira Island under the Recheio name, as well as 5 food retail stores in Colombia. The company also operates restaurants and take aways under the Refeições No Sítio do Costume name; a network of petrol stations; Bem-Estar stores; 25 chocolates and confectionary retail stores under Hussel name; and 6 kiosks and 11 coffee-shops under the Jeronymo name.
The shares look cheap after another update Monday that pointed to slowing growth in Poland. The Polish economic and competitive environment has been sliding, which has led to two trading updates below market expectations. Shares closed Friday at €13.23 ($17.91), down 28% from an April peak of €18.50 and now trade below 20 times 2014 forecast earnings of €0.72, offering a good entry point as both the macroeconomic climate and the competitive environment appears ready to turn. Most analysts expect shares to jump 20% to 30% in 2014.
THE DISCOUNT CHAIN HAS HIT a sweet spot in the grocery sector. It appeals to cash-strapped consumers shopping in small local stores, but it has also expanded its range of fresh foods and attracted growing numbers of middle-market customers to its stores.
As the market leader, Biedronka commands about 15% of Poland's grocery sector. There will be further competition in the market when France's Groupe Auchan's acquisition of 54 hypermarkets from Germany's Metro (MEO.Germany) is completed, bringing Auchan's market share to 7%, and improving its buying power. Still, HSBC expects the hypermarket players to be more rational in order to improve their profitability.
The market hasn't been very "rational" for several quarters. The grocers have been driven into a price war by Biedronka's rivals, not least Tesco (TSCO.UK), which has been feeling the pinch in Poland as customers shun its large-format stores in favor of visits to smaller discounters and corner shops.
The effect has been to depress margins across the industry. Jeronimo Martins is no exception. The company says it will take a 20- to 30-basis-point (0.2 to 0.3 percentage point) hit to margins in fiscal 2013, in part because of competitive pricing, as well as start-up costs for a venture in Colombia.
Lower prices helped Tesco post positive same-store sales in the six weeks to Jan. 4 in Poland, but it's likely to have come at a heavy cost. Exane BNP Paribas estimates Tesco had to give away 250 basis points of margin and expects the company to retrench its operations in the country in 2014, which will ease the pressure on the entire industry.
In a more rational marketplace, Biedronka's value proposition and perception of improved quality should put it on its front foot again. Comparable sales growth won't necessarily revisit the double-digit figures of yesteryear, but HSBC analysts expect like-for-like growth to bounce back to over 5% in Poland, although it may take until after the second quarter to get there. There is also scope for margin improvement built on operational efficiencies. Jeronimo Martins opened two new distribution centers in 2013 and will have 17 by 2016.
Poland accounts for 65% of sales and over 80% of earnings before interest, tax, depreciation, and amortization for the company. The remainder comes from Portugal, where Jeronimo Martins operates the Pingo Doce chain of supermarkets and a smaller cash-and-carry business called Recheio. Having traded through a tough economic environment, Pingo Doce recorded better-than-expected revenue growth in the fourth quarter, up 3.6% excluding fuel on a same-store basis. An improving economic outlook and strong value proposition will help retain momentum.
Jeronimo Martins also has two new ventures it hopes to build out to profitability. The HeBe health and beauty chain in Poland is expected to break even in the next three or four years, and the company plans to open 200 more stores by 2016 to complement the 100 already operating. Meanwhile, it is testing the waters in Colombia with a rollout of a chain of local discount stores. While these may be long-term projects tying up some of Jeronimo Martins' resources for the moment, the diversification is welcome and could lead to longer-term growth.
MOST EUROPEAN RETAILERS have reported Christmas trading over the past week, and none have as appealing a growth story as Jeronimo Martins. Carrefour(CA.France) disappointed in China, Koninklijke Ahold (AH.Netherlands) stumbled in the U.S., and Metro reported sales declines in two-thirds of its businesses.
Low inflation in the euro zone won't help any of these grocers at home. The European Union's statistics agency, Eurostat, said Thursday that consumer prices in December rose 0.3% from November, and 0.8% from December 2012. This is down from a 0.9% annual rise in November. Core inflation, which strips out volatile food and energy, fell 0.7%, its lowest level since record-keeping began in 2001.
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