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Investment in retail has been considered a safer alternative in bad times. This counter - cyclical industry provides a good choice for investment in the time of market turmoil. People can refrain from spending money on the luxuries in a recessionary environment but the need to meet the necessities, like food and grocery items, even in the most suppressed economic conditions has provided this industry an edge over other risky investments. The article analyzes the returns offered by Carrefour (OTCPK:CRRFY), Tesco (OTCPK:TSCDY) and Supervalu (SVU). A valuation will be carried out later in the article to reach a fair value and calculate the hidden upside potential in these retail giants.

The global food retail market generated $10.5 trillion in 2010 and is forecast to reach an estimated $13.2 trillion in 2015 with a CAGR of 5%. The retail giants have become especially important as they are capturing and expanding their share in the emerging markets. Within United stated the retail market comprises of more than one million retail stores that account for four trillion dollars in revenue.

Carrefour:

Europe's biggest retailer by sales has been facing some turmoil over the last few years. The retailer is experiencing slowdown in the European market and is working on a turnaround plan to survive the crisis. Carrefour discontinued activities in Greece, Colombia, Singapore, Malaysia and Indonesia in 2012 in an effort to release the operations that are dragging down its revenue.

Despite the strategic challenges faced by the retail giant, the returns offered to its investors have improved through time. Over a period of four years Carrefour managed to increase its return on assets from 0.62% to 1.24% and return on equity from 2.69% to 8.29 which is a great success. We can expect the Carrefour to continue its turnaround strategies which will trickle down to its revenue and stock return.

Carrefour

2009

2010

2011

2012*

Return on Assets %

0.63

0.82

0.73

1.24

Return on Equity %

2.96

3.99

4.08

8.29

*Year to date returns
Source: Morningstar

Tesco:

Tesco is the world's third largest grocery retailer by sales that is expanding beyond UK territories into emerging markets like China and India. These countries have an ever - mounting population that can prove to be a source of high demand for the retailer. Tesco is a key retail investment of Warren Buffet that has dipped 48% since March 2012. With the 1 - year target price of $15.83, Analysts expect Tesco to post a return of 15% to its investors.

Tesco's return on equity slightly decreased over the last four years whereas return - on - assets display a marginal rise.

Tesco

2009

2010

2011

2012*

Return on Assets %

5.6

5.0

5.7

5.7

Return on Equity %

17.2

16.8

16.9

16.3

*Year to date returns
Source: Morningstar

Supervalu

Supervalu dipped to the pits of yearly lows and has not been able to completely recover till date. The main reason for the negative investor sentiments is the huge debt load that has drained off most of Supervalu cash. The interest payment equals 59.49% of the current market capitalization of the retailer. To reduce some of this debt load, Supervalu has announced to release its many segments for an amount of $3.3 billion, $3.2 billion of which will be used to pay off debt. The market will take its time to analyze how the SUV's independent business fares.

The returns of the retailer are roaming in the negative territory due to debt load discussed previously.

SUPEVALU Inc

2009

2010

2011

2012*

Return on Assets %

-14.77

2.31

-10

-8.06

Return on Equity %

-66.91

14.37

-71.45

-152.83

*Year to date returns
Source: Morningstar

Stock Market Performance

Total Return % (03/04/2013)

1-Day

1-Week

1-Month

3-Month

YTD

Tesco

0.06

-1.18

-1.24

6.28

1.03

CRRFY

0.38

1.33

-3.27

8.57

3.3

Supervalu

3.54

9.04

5.67

60.78

65.99

Grocery Stores

-0.02

2.68

2.9

10.61

9.58

In stock market Supervalu posted the highest yield of 61% over 3 months. The previously discussed announcement is the reason behind the extra - ordinary 3 - month yield as it has shed some concerns of the investors regarding SVU's debt repayment abilities.

Revenue Sneak - Peak

First let's start from revenue growth of these four companies and determine how these companies fared in tough challenging conditions.

Revenue

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Carrefour (EUR MM)

70,486

72,668

74,497

77,901

82,149

86,967

87,379

91,513

80,455

86,600

Growth Rate

3.1%

2.5%

4.6%

5.5%

5.9%

0.5%

4.7%

-12.1%

7.6%

Tesco (GBP MM)

26,004

30,814

33,866

39,454

42,641

47,298

53,898

56,910

60,455

64,539

Growth Rate

18.5%

9.9%

16.5%

8.1%

10.9%

14.0%

5.6%

6.2%

6.8%

SUPERVALU Inc (USD MM)

19,160

20,210

19,543

19,864

37,406

44,048

44,564

40,597

37,534

36,100

Growth Rate

5.5%

-3.3%

1.6%

88.3%

17.8%

1.2%

-8.9%

-7.5%

-3.8%

Retailer

CAGR

Carrefour

1.7%

Tesco

10.7%

SUPERVALU Inc

10.1%

Over the years Tesco has not only maintained a positive growth in its revenue but has also posted a higher CAGR of 1.7%. 2011 was particularly a tough year for retailers as SVU and Carrefour has experienced a negative revenue growth but Tesco has outshone them in that year by reporting a revenue growth of 6.2%.

Margins Analysis

Net Income Margin Analysis

2009

2010

2011

2012

Carrefour

0.37

0.47

0.46

NA

Tesco

3.96

4.09

4.39

4.35

SUPERVALU Inc

-6.41

0.97

-4.02

-2.88

The positive growth in Tesco's revenue has trickled down to its bottom line as it has consistently posted a positive a high, positive net margin. So far, Tesco is performing well in our analysis. Let's move further to retailers' valuation to analyze the potential price hike based on the multiple - based analysis.

Valuation

For the purpose of the valuation, I have used price/earnings and price/sales multiple in order to determine the fair of value of the retailers. I assigned an equal weight to both the multiples and have summarized the results in the table.

Valuation Matrix

CARREFOUR

SUPERVALU

TESCO

INDUSTRY

P/E TTM

23

NA

10.6

18.70

P/S TTM

0.2

0.01

0.5

0.38

Valuation Matrix

CARREFOUR

SUPERVALU

TESCO

Weights

Equity Value based on P/E

3.5

NA

19.6

50%

Equity Value based on P/S

9.3

64

9.1

50%

Weighted Average Equity Value

6.41

32.14

14.32

Current Market Price

5.32

4.1

16.75

Upside Potential

20%

NA

-14%

Conclusion

The valuation puts French retailer Carrefour in the limelight. Though Tesco has done well in our previous analysis, it seems that the stock has become overvalued over time. Investors' interest in its recent performance has skimmed out its potential return. Carrefour, on the other hand, displays an upside potential of 20% that can still be capitalized by the market.

On the basis of the hidden potential, efforts to revive back, strategic turnaround plan and a healthy return on equity I will take a bullish stance on Carrefour.

Source: Carrefour, Tesco, Supervalu: Identifying The Best Bet