Is This Retailer The Perfect Short Candidate?

Jun.27.13 | About: Colruyt SA (CUYTF)


In this article, I'll analyse the Colruyt Group (OTC:CUYTF), a Belgian supermarket chain with a focus on retail customers. The company has just announced their FY 2013 results, and I think this company is overvalued compared to its peers.

I'll first of all give a brief introduction to the Colruyt Group, whereafter I'll discuss the 2013 results. I will discuss the economic situation in Belgium and then explain why I think Colruyt is an excellent candidate to take a short position in.

The Colruyt Group

The Colruyt Group was founded in 1925 and has profiled itself as a discount supermarket over the past few decades. The company mainly focuses on their home turf, as they operate 227 stored in Belgium, and just 62 stores outside Belgium (one in Luxemburg and 61 in France under various brand names). The fact that the company is solely focused on eurozone countries France and Belgium is one of the reasons why I consider Colruyt to be a good candidate to initiate a short position.

Colruyt and Belgium

Colruyt is one of the largest players on the Belgian retail market, as the discount supermarket currently had a market share of 25.75% at the end of Q3 FY 2013. I expect this market share to decrease, as the competition on the Belgian market is increasing now Albert Heijn, a supermarket chain owned by Ahold (AHONY.PK) has entered the market, introducing lower prices than Colruyt currently can offer.

This increased competition on its domestic market will obviously decrease Colruyt's profit margins and will definitely affect the company's bottom line.

Another problem is obviously the economic situation in Belgium (and France). Although both countries don't face the same problems as the PIIGS (but keep in mind some commentators added Belgium to that list so it briefly became the PIBIGS about 18 months ago), both governments will have to cut more costs and increase tax revenues.

I'll focus on Belgium as Colruyt obtained in excess of 75% of their revenues from Belgian customers. During the presentation of their annual report for 2012/2013, the Bank of International Settlements announced Belgium needs to cut an additional 34 billion Euros ($45B) in order to get their Debt to GDP ratio under 60% by 2040. As this ratio is currently close to 100%, the European Commission has asked Belgium to take immediate action to tackle this problem and has threatened to start its procedure against excessive deficits.

As Belgium is a very small country with no natural resources, there are only two possibilities to save an additional 34 billion euros over the next few year. The government either has to cut expenses or increase income (by introducing/increasing taxes), and the solution will very likely consist of a combination of both.

An increase in taxes would obviously decrease the available capital for consumers, thus reducing their consumption profile which will in turn reduce the revenues and profits of supermarkets. As Colruyt currently has no exposure to growth markets, they are extremely vulnerable for even the slightest downturn in the Belgian economy.

The FY 2013 results

Colruyt has released their FY 2013 earnings on Tuesday, and in this paragraph I'll have a closer look at them.

Revenues increased by 5.9% to 8.312B EUR (approximately $10.9B) and the net profit increased to 353.7M EUR, which is an increase of just 3.1% versus 2012. This obviously shows there is a slowdown in profitability, and Colruyt's net profit margins are decreasing. In this table I'll have a quick look at the net profit margins from 2010 till 2015. As you can see, Colruyt's profit margins have been decreasing year after year, and although according to analysts revenues and profit expectations are projecting a recovery in the company's net profit margin, I'm more cautious because of the aforementioned reasons.


Net Profit Margin













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Comparison to its peers

In this table, I'll briefly compare Colruyt with some of its closest peers.


Delhaize (DEG)


Carrefour (OTCPK:CRRFY)


P/E 2014





P/E 2015





Net Profit Margin 2013





Yield (2013)





Exposure to growth markets?





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As you can see, the only parameter where Colruyt outperforms their peers is the net profit margin. They are consistently worse than Delhaize, Ahold and Carrefour in terms of Price/Earnings, dividend yield and exposure to growth markets.

Investment thesis

As I expect a further slowdown in the eurozone and more specific in Belgium, I think Colruyt's net margins (which have been decreasing since 2010) will continue to be under pressure and will soon drop under the 4%-level. Although this is still higher than most of their peers, Colruyt is also much more expensive than their peers, trading at a 50% higher price/earnings ratio than the other retailers. As Colruyt doesn't have any exposure to growth markets, I think this premium is unwarranted, and Colruyt is too expensive in this market, especially after the 8% jump in reaction to its financial results.

Based on the aforementioned arguments, I'm betting on a declining share price. As Colruyt only has a listing on the OTC-market, there are no option chains available in the USA. But as it's a member of the Belgian BEL20-index, there are equity options available on Euronext Brussels, and writing naked calls there might be an interesting strategy to think about.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.