Chapter 5
Carrefour S.A.
Teaching Notes
Introduction
The Carrefour case is designed to teach students how to analyze the performance of a company using
financial statements. Carrefour S.A. is one of the world’s largest retailers. Following a decade of
restructurings and management changes, Carrefour appeared to be on a road to recovery. Under the
leadership of CEO Georges Plassat, the company managed to increase its return on equity to an
acceptable level of 11.5 percent in 2015. Carrefour’s ROE performance as well as investors’
sentiment about the retailer changed substantially in 2016 and 2017. Students are asked to perform
a step-by-step financial analysis, including the preparation of condensed financial statements, the
(alternative) decomposition of ROE, and the analysis of segment and non-financial information, with
the objective of understanding the reasons for Carrefour’s performance decline and investors’
negative sentiment.
Questions for students
The following set of questions can help to provide structure to the discussion:
1.
2.
3.
4.
Analyze Carrefour’s competitive and corporate strategy. What are the key risks of the
company’s strategy?
Analyze Carrefour’s operating management, financial management and investment
management during the years 2012 to 2017, making use of both financial statement data
and segment data. What are the primary drivers of the company’s performance decline
since 2012? How does Carrefour’s performance compare to the performance of Casino and
Tesco?
Summarize the key findings of the financial analysis. What explains Carrefour’s investors’
concerns and negative sentiment towards Carrefour’s stock since 2015? What actions
could management take to improve the company’s ability to pay out dividends?
If management succeeds in cutting costs by €2 billion in five years, what would that imply
for the retailer’s free cash flow to equity? How likely is it that Carrefour will be able to
increase dividends during the next five years?
Case analysis
Question 1
Key characteristics of Carrefour’s strategy and the associated risks are the following:
Competing on price and product. Carrefour follows a strategy that combines elements of a
differentiation strategy with elements of a cost leadership strategy, especially in its hypermarkets.
The hypermarkets differentiate themselves from competitor supermarkets (1) by offering a much
broader assortment (more product categories as well as a wider choice of brands within one product
category) and (2) investing in customer loyalty (e.g., by using a customer loyalty card and offering a
broad selection of lower-priced own brands). This strategy is backed up by a strong marketing
campaign. At the same time, however, Carrefour realizes that—especially during economic
To be used with Business Analysis and Valuation, 5th edn
ISBN 9781473758421 © Krishna G. Palepu, Paul M. Healy and Erik Peek, 2019
downturns—its customers have low switching costs and are relatively price sensitive. The company
therefore wishes to keep the prices in its hypermarkets at economic levels. The way in which the
company can achieve this is by:
- Keeping a close eye on what consumers want (by gathering “customer behavior data”, for
example, using customer loyalty cards) and timely adjusting its assortment and pricing to
changes as well as local differences in consumers’ preferences.
- Having a well-developed logistics network. This keeps turnover high and helps to control
costs.
- Benefiting from economies of scale, not only in logistics but also in purchasing (for example,
by aggregating of purchases and holding international negotiations with suppliers).
- Selling low-priced products under Carrefour’s own brand name.
An important risk of following a combination of strategies is that Carrefour’s hypermarkets are “stuck
in the middle.” The instructor could ask students to identify several points during the past one-and-ahalf decade at which this happened. For example, during the economic downturn at the beginning of
the 2000s, Carrefour focused too much on differentiation and improving its margins, while many of
Carrefour’s competitors, such as Leclerc, Auchan, Aldi, and Lidl, were able to aggressively lower their
prices during. Consequently, the company lost its competitive edge to price discounters, which
slowed down Carrefour’s growth and harmed its domestic market share. Further, the changes that
CEO Olofsson implemented during the years 2009 till 2011 also seem to have resulted from a mixture
of strategies. On the one hand Olofsson focused on increasing customers’ awareness of Carrefour’s
price competitiveness and cutting costs; on the other hand, the CEO attempted to revitalize the
hypermarket concept by converting hypermarkets into Carrefour Planet stores. The spin-off of
discount retailer Dia suggests that Olofsson wanted to position Carrefour as a differentiator rather
than as a cost leader. Nonetheless, at the end of 2011, several analysts argued that Carrefour should
quickly adjust its pricing strategy (i.e., switching to an “every day low price” [EDLP] strategy) to
improve performance. Carrefour’s decision to put a further roll out of the Carrefour Planet concept
on hold in 2012, its focus on cost savings during the following years, and its reacquisition of Dia
France in 2014 are all signals that during the period 2012 – 2017, Carrefour’s management was aware
of the risks of focusing too much on differentiation in an environment with intense price
competition.
International growth. When large companies such as Carrefour start to obtain a dominant
position in their domestic markets, they may be “forced” to expand overseas or enter other
industries. Starting in the 1970s and 1980s, Carrefour has substantially expanded its activities
overseas. As indicated above, achieving growth has also been an essential part of Carrefour’s
strategy, thereby aiming to obtain economies of scale in purchasing, logistics and the development of
Carrefour-branded products. For example, Carrefour sells its own branded products in the same
packaging worldwide (of course printed in different languages).
The company’s overseas retailing operations are, however, riskier than its domestic
operations. First, to some extent retailing remains a local business because consumers’ tastes differ
substantially across countries. Profitable expansion outside Carrefour’s domestic market is only
possible if the company has good knowledge about local customers’ preferences and tastes. Second,
many of Carrefour’s “intercontinental” hypermarkets are located in countries where the economic
environment is risky: consumers in economically less developed countries are likely to be more price
sensitive; East Asian and South American countries tend to have more bureaucracy and stronger
government protection of local firms. Third, in several countries, Carrefour competes with other
multinationals such as Tesco and Wal Mart, who are trying to gain a strong market position (mostly
through severe price competition), or strong local incumbents (such as in China).
In sum, although there are some good reasons to expand internationally, Carrefour’s
overseas operations tend to be in countries where consumers are likely more price sensitive, several
multinationals or local incumbents engage in severe price competition, and the economy is less
To be used with Business Analysis and Valuation, 5th edn
ISBN 9781473758421 © Krishna G. Palepu, Paul M. Healy and Erik Peek, 2019
stable. Furthermore, in 2011 analysts argued that, while Carrefour’s expansion into emerging
markets had been a good choice, the company’s emerging markets portfolio was too diversified.
After 2011, Carrefour’s management therefore started to restructure its international activities and
withdraw from several countries.
Online growth. In recent years, competition from online retailers has been increasing.
Amazon’s takeover of Wholefoods is a clear example of how online retailers may expand into food
retailing. Carrefour has been investing in its offering of online services; however, in 2016, the
retailer’s online sales contributed less than 2 percent of total revenue. It therefore seems important
that Carrefour continues to invest in online and omni-channel retailing to keep up with current
market developments.
Question 2
To start the discussion of Carrefour’s financial performance, the instructor could first show the
traditional ROE decomposition for Carrefour.1
Traditional ROE
decomposition
Net profit margin (ROS)
× Asset turnover
= Return on assets (ROA)
× Financial leverage
= Return on equity (ROE)
2017
0.9%
1.54
1.4%
4.21
6.1%
2016
1.4%
1.47
2.1%
4.34
9.0%
2015
1.6%
1.60
2.5%
4.53
11.5%
2014
1.6%
1.53
2.4%
4.80
11.6%
2013
1.2%
1.61
1.9%
5.58
10.7%
2012
0.8%
1.55
1.3%
6.20
8.0%
The traditional ROE decomposition shows that Carrefour’s return on assets is low, ranging from 1.3
percent to 2.5 percent between 2012 and 2017. It further suggests that Carrefour is highly leveraged,
which helps the retailer to achieve a reasonable return on equity, at least until 2016.
The instructor could ask students to think of potential limitations of the traditional ROE
decomposition in analyzing Carrefour’s performance. Two issues that are especially relevant for
Carrefour are that under this approach: (1) considering trade payables as financial rather than
operating liabilities causes leverage to be overstated and asset turnover to be understated and (2)
combining the assets, obligations, and results of Carrefour’s banking activities with those of its
retailing activities blurs the analysis of the retailer’s operating performance.
The first step of the alternative ROE decomposition is to prepare condensed financial statements.
Preparing such statements requires students to make a few significant decisions:
1. Allocating banking and financing income and expenses to investment profit. Given the focus
of the analysis on Carrefour’s retailing activities, it is strongly recommendable to classify
Carrefour’s banking, customer credit, and real estate activities as non-operating investments
(and associated income and expense items as investment profit).
2. Determining an appropriate tax rate. To calculate interest after tax and investment profit
after tax, a tax rate applying to these items is needed. In all calculations, we assume that the
statutory tax rate (derived from the tax footnote disclosures included in Exhibit 3) best
approximates this tax rate.
3. Allocating non-recurring tax items to net non-recurring income/expense.
1
Note that profit margins and returns on assets have been calculated after excluding non-recurring income or
expense after tax from profit or loss. See exhibit TN-1 for calculations.
To be used with Business Analysis and Valuation, 5th edn
ISBN 9781473758421 © Krishna G. Palepu, Paul M. Healy and Erik Peek, 2019
4. Determining an appropriate operating cash percentage. During the past six years, Carrefour’s
cash-to-revenue ratio ranged from 3.5 percent to 8.6 percent. A quick but reasonable
approach to finding an operating cash percentage is to set it equal to the historical minimum.
In all calculations, we assume that the operating cash percentage is 3.5 percent.
5. What to do with (a) non-controlling interest in equity and (b) net assets held for sale?
Because the focus of the financial analysis will initially be on the group (including noncontrolling interest), in all calculations we include non-controlling interest in equity and,
consequently, decompose return on group equity. Furthermore, a convenient way to
excluding assets held for sale while analyzing Carrefour’s performance is to subtract net
assets held for sale from equity.
The calculations that are needed to prepare condensed financial statements are shown in Exhibit TN1. In these statements, the assets, liabilities, and results of Carrefour’s banking, customer credit, and
real estate activities have been included in ‘(other) non-operating investments’ and ‘investment and
interest income’. As indicated, doing so helps to ensure that the financial analysis focuses on the
company’s core activities, i.e., its retailing activities.
The next step is to produce the following set of ratios, decomposing ROE into net operating margin,
net operating asset turnover, return on non-operating investments, and the financial leverage
effect:2
Alternative ROE
decomposition
Net operating profit margin
× Net operating asset turnover
= Return on Net Operating
Assets
2017
0.2%
3.81
2016
0.8%
3.58
2015
1.0%
3.83
2014
1.0%
3.62
2013
0.6%
3.99
2012
0.3%
3.80
0.7%
2.9%
3.9%
3.7%
2.3%
1.2%
0.7%
2.9%
3.9%
3.7%
2.3%
1.2%
0.80
0.81
0.83
0.81
0.78
0.74
17.2%
17.2%
19.2%
16.7%
17.5%
14.4%
0.20
4.0%
0.19
5.6%
0.17
6.6%
0.19
6.1%
0.22
5.6%
0.26
4.6%
Spread
× Financial leverage
= Financial leverage gain
1.8%
1.14
2.1%
2.8%
1.20
3.4%
3.8%
1.29
4.9%
3.6%
1.50
5.5%
2.7%
1.88
5.0%
1.4%
2.40
3.5%
ROE = Return on Invested
Capital + Financial leverage gain
6.1%
9.0%
11.5%
11.6%
10.7%
8.0%
Return on Net Operating Assets
x (Net Operating
Assets/Invested Capital)
+ Return on Non-Operating
Investments
x (Non-Operating
Investments/Invested Capital)
= Return on Invested Capital
After having discussed the above calculations, the instructor could ask students to compare (1)
Carrefour’s return on assets (ROA) with its return on net operating assets (RNOA) and (2) Carrefour’s
leverage under the traditional approach with its leverage under the alternative approach. RNOA
exceeds ROA, primarily because Carrefour’s net investment in operating assets is substantially lower
2
Note that net operating profit margins and returns on net operating assets have been calculated after
excluding non-recurring income or expense after tax from NOPAT.
To be used with Business Analysis and Valuation, 5th edn
ISBN 9781473758421 © Krishna G. Palepu, Paul M. Healy and Erik Peek, 2019
than total assets. Two factors contributing to this are that (a) net operating assets excludes
Carrefour’s banking, customer credit, and real estate assets and (b) that, like most other (food)
retailers, Carrefour makes significant use of supplier financing (making net working capital negative).
Abstracting from the different definitions of leverage under the two approaches (asset-to-equity
versus debt-to-equity), Carrefour appears less leveraged under the alternative ROE decomposition
approach, as the leverage measure under the alternative approach correctly excludes trade payables
and other operating liabilities from debt.
The instructor could then ask students to perform a time-series and peer analysis of the above set of
ratios.
Time-series analysis
The analysis of Carrefour’s return on equity decomposition clearly shows that in all years, returns on
non-operating investments help the retailer to significantly improve its returns on invested capital.
Without its banking, customer credit, and real estate activities, Carrefour would not have been able
to earn reasonable returns on equity during the period 2012 – 2017. Given that retailing is
Carrefour’s core business, this is a clear concern. After concluding this, the instructor could ask
students to take a closer look at Carrefour’s operating performance. This would yield the following
insights:
-
-
During the most recent three years, NOPAT margins decreased from 1.1 percent to 0.1
percent. This trend raises the question of whether Carrefour has been able to cope with
competition and warrants a closer inspection of the retailer’s operating margins.
At first sight, it appears as if Carrefour has been able to maintain a relatively stable net
operating asset turnover ratio. For example, in 2017, net operating asset turnover reverted
to its 2015 level of 3.8. The instructor could stimulate students to evaluate the effect of
Carrefour’s 2017 impairment losses (of €1.0 billion) on net operating assets and turnover.
When adding back the impairment charge to net operating assets, Carrefour’s 2017 net asset
turnover ratio drops to 3.6. This calculation illustrates that the retailer’s asset turnover
improvement is primarily an accounting artifact and warrants a closer inspection of
Carrefour’s store productivity and working capital management.
The negative effect of Carrefour’s operating performance on return on equity has been amplified by
the retailer’s financing choices. That is, Carrefour has reduced its reliance on debt during the period
2012 – 2017. This choice may have been motivated by the company’s low profitability. A
consequence of this choice is, however, that Carrefour’s financial leverage effect steadily decreased
during the past four years.
Peer analysis
Carrefour’s net operating asset turnover exceeds that of Casino and Tesco. However, the fact that
Casino’s PP&E turnover is substantially higher than its net non-current asset turnover reveals that
Casino has a substantial amount of goodwill, which negatively affects net operating asset turnover.
Differences in asset turnover are therefore smaller than they appear at first sight. Casino’s NOPAT
margin is substantially higher than Carrefour’s (around 3 percent), which suggests that Casino is
better able to cope with competition in the French market than Carrefour.
Tesco’s NOPAT margins are slightly more moderate than those of Casino. Note, however, that if
Carrefour would manage to earn a comparable NOPAT margin (of around 2 percent), its return on
net operating asset would reach an acceptable level of 7.5 percent, given the retailer’s net operating
asset turnover of 3.8.
To be used with Business Analysis and Valuation, 5th edn
ISBN 9781473758421 © Krishna G. Palepu, Paul M. Healy and Erik Peek, 2019
It is noteworthy that both Casino and Tesco have significant non-operating investments because both
retailers offer financial services. While these activities help Carrefour to boost its return on invested
capital, they have a negative effect on the returns of invested capital of Casino and Tesco. This
significant difference signals that there is a risk that some of the costs of Carrefour’s financial services
cannot be clearly identified and are therefore absorbed by operating items in the income statement,
thereby understating operating performance and overstating non-operating performance. If we
include ‘financing fees and commissions’ (after tax) into NOPAT, Carrefour’s NOPAT margins are as
follows and remain significantly lower than those of its peers:
Net operating profit margin
2017
1.0%
2016
1.6%
2015
1.7%
2014
1.6%
2013
1.3%
2012
1.1%
As indicated, the above analyses raise some issues that warrant a closer look at Carrefour’s operating
performance. The instructor could ask students to further dissect the retailer’s operating profit
margins and operating asset turnover, also using Carrefour’s segment information displayed in
exhibit 2.
A closer look at Carrefour’s operating performance
To further analyze profit margins, the following ratios could be calculated:
Line items as a percent of
revenue (%)
Revenue
Net operating expense
Other income/expense
Net operating profit before
tax
Interest and investment
income
Interest expense
Tax expense (recurring)
Tax expense (non-recurring)
Profit or loss
2017
100.0
-99.0
-1.8
-0.8
2016
100.0
-98.5
-0.6
1.0
2015
100.0
-98.2
-0.4
1.4
2014
100.0
-98.2
0.1
1.9
2013
100.0
-98.6
0.0
1.4
2012
100.0
-98.7
-1.2
0.1
1.7
1.7
1.7
1.6
1.8
1.9
-0.6
-0.6
-0.2
-0.5
-0.8
-0.8
0.2
1.2
-0.8
-0.9
0.1
1.5
-0.8
-1.1
0.1
1.7
-1.0
-1.1
0.2
1.4
-1.1
-0.8
0.3
0.3
Cost of sales
Selling, general, and admin.
Expense
-79.5
-20.8
-79.2
-20.6
-79.1
-20.4
-79.3
-19.8
-79.9
-19.7
-80.1
-19.5
Personnel expense
Depreciation and amortization
-10.9
-3.4
-10.8
-3.2
-10.7
-3.1
-10.4
-3.0
-10.3
-3.0
-9.9
-3.0
These ratios provide a several noteworthy insights:
-
-
During the most recent three years, cost of sales as a percentage of revenue increased
slightly though significantly (given Carrefour’s thin margins). This is likely a consequence of
intense competition, especially in the retailer’s home market.
An even stronger effect on margins came from a gradual and steady increase of SG&A
expenses to revenue or, specifically, of personnel expense to revenue.
During the most recent three years, increased depreciation also contributed to a reduction in
margins. This increase most likely results from the strong increase in CAPEX, focused on store
refurbishments and internet services.
To be used with Business Analysis and Valuation, 5th edn
ISBN 9781473758421 © Krishna G. Palepu, Paul M. Healy and Erik Peek, 2019
To further analyze asset turnover, the following ratios could be calculated:
Asset management ratios
Net operating working
capital/Revenue (%)
Net non-current operating
assets/Revenue (%)
PP&E/Revenue (%)
Net non-current asset
turnover
PP&E turnover
Trade receivables turnover
Days’ receivables
Inventories turnover
Days’ inventories
Trade payables turnover
Days’ payables
Cash conversion cycle
2017
-6.6
2016
-7.1
2015
-6.2
2014
-6.0
2013
-6.1
2012
-6.0
32.9
35.0
32.4
33.7
31.2
32.3
20.9
3.04
21.7
2.85
19.7
3.09
20.6
2.97
18.6
3.20
19.7
3.09
4.79
28.69
12.5
9.37
38.4
4.16
86.6
-35.6
4.60
28.58
12.6
8.63
41.7
3.94
91.3
-37.0
5.08
33.91
10.6
9.56
37.6
4.46
80.8
-32.5
4.86
33.06
10.9
9.54
37.7
4.43
81.3
-32.7
5.37
33.84
10.6
10.43
34.5
4.65
77.3
-32.2
5.07
35.82
10.1
10.87
33.1
4.76
75.6
-32.5
Carrefour’s working capital management ratios show that the retailer has increased its reliance on
supplier financing; however, the positive effect of this increase on the efficiency of the retailer’s
working capital management has been partly offset by an increase in days’ inventories. The analysis
of non-current asset management ratios suggests that store productivity increased slightly during
2017; however, as argued earlier, accounting choices such as the recognition of impairment charges
make the observed changes in non-current asset turnover difficult to interpret. The instructor could
therefore lead students’ attention to the segment and non-financial information displayed in exhibit
2.
Segment and non-financial information
Exhibit TN-2 displays a set of non-financial ratios, estimated by geographic segment. The instructor
could use this set of statistics to discuss the following questions: Did Carrefour’s geographic focus
change during the past six years? If so, how? How did store productivity vary across geographic
regions and develop over time (within regions)? How did operating profit margins vary across
geographic regions and develop over time (within regions)? How may geographic differences in
margins and productivity have affected Carrefour’s strategic decisions and overall profitability?
The analysis and discussion of the ratios displayed in Exhibit TN-2 could lead to the following
conclusions:
-
-
-
During the period 2012 – 2017, Carrefour’s operating performance suffered most in France
and Asia. In its home market, where competition was intense, operating margins decreased
during four years in a row. In Asia, average operating profit margins approached zero. The
Latin American market outperformed the other markets, both in terms of operating margins
and store productivity. Stores in the Rest of Europe also developed comparatively strong
margins during 2015 – 2017.
Revenue per square meter has been comparatively high in France, suggesting that in
Carrefour’s home market improving margins must be a key focus. Revenue per square meter
has been low in Asia, suggesting that in Asia both margins and store productivity require
attention.
Although CEO Plassat withdrew from several international markets (including Greece, Turkey,
Malaysia, and Indonesia) at the start of his term in 2012, in an attempt to leave
To be used with Business Analysis and Valuation, 5th edn
ISBN 9781473758421 © Krishna G. Palepu, Paul M. Healy and Erik Peek, 2019
-
underperforming markets and improve Carrefour’s geographic focus, changes in the retailer’s
geography were small during the subsequent five years. Carrefour’s focus on France
increased slightly (in terms of store space), most probably as a result of the acquisition of Dia
France (the acquisition did not really help to increase France’s revenue share). Furthermore,
the retailer maintained its presence in the heavily underperforming Asian market.
Growth in store space has generally been low during the six-year period. This did not imply,
however, that Carrefour kept its capital spending low. While CEO Plassat initially cut back on
capital expenditures (‘capex’), capex quickly returned to high levels after 2012. The segment
statistics on net capex (i.e., capital expenditure minus depreciation) show that Carrefour
invested mostly in France and Latin America. As indicated in the case, these investments
primarily relate to store refurbishments and internet services and are thus part of the
retailer’s strategy to improve its online presence.
Question 3
The following picture emerges from the financial analysis of Carrefour:
-
-
-
-
Operating versus non-operating investments. Although Carrefour’s return on equity improved
and reached acceptable levels during 2012 – 2015, non-core/non-operating activities
contributed most to equity performance. The company’s operating performance has been
weak throughout the past six years.
Competition. The intense competition in Carrefour’s home market has had a very negative
effect on the company’s NOPAT margins, thereby preventing the company to earn an
acceptable return on its net operating assets.
Cost control. Carrefour’s operating margins also came increasingly under pressure due to
increasing personnel expenses and depreciation (presumably of store refurbishments and
investments in online activities), underlining the importance for the retailer to control its
costs (especially given the retailer’s competitive weakness).
Geography. After 2012 very few changes have been made to Carrefour’s geography.
Carrefour’s Asian segment (primarily China) has strongly underperformed and requires
attention.
Carrefour’s key challenge seems to be to improve its operating margin. The company’s
transformation plan, announced in January 2018, seems to focus on improving margins through
cutting costs.
The instructor could ask students: Given Carrefour’s operating asset turnover, at what operating
margin would the retailer earn a “normal” return on net operating assets? Answering this question
helps to determine a benchmark against which Carrefour’s current operating margins and its planned
operating margin investments can be evaluated. A normal return on net operating assets for a food
retailer is likely between 6.5 – 8.5 percent. Given the Carrefour’s operating asset turnover of 3.6, an
operating margin of around 2 – 2.5 percent would help Carrefour to earn an acceptable return on net
operating assets of between 7 and 8. 5 percent.
Given Carrefour’s NOPAT margin of 0.2 percent in 2017, Carrefour must increase its operating margin
by approximately 2 percent of sales to reach its “normal” return on net operating assets. This
increase in operating margin is equivalent to an amount of €1.6 billion (after tax) based on
Carrefour’s 2017 revenue level. Hence, Carrefour’s planned cost savings of €2 billion seem barely
sufficient to help the retailer return to a normal level of profitability. The class discussion could focus
on what other actions the retailer could take to improve margins. Possible actions include (a)
reducing price promotions, (b) restructuring or disposing of low-margin activities in Asia, or (c)
To be used with Business Analysis and Valuation, 5th edn
ISBN 9781473758421 © Krishna G. Palepu, Paul M. Healy and Erik Peek, 2019
finding more cost-efficient ways of improving online presence (such as entering into strategic deals
with existing online retailers).
Question 4
To help students understand the relationship between Carrefour’s underperformance and its
decision to cut dividends, the instructor could ask students to calculate Carrefour’s free cash flow to
equity under the following long-term scenario:
1. Carrefour’s NOPAT improves relative to 2017 because management succeeds in cutting
operating expenses by €2 billion (before tax).
2. Carrefour’s revenue growth is limited and changes in working capital are, therefore, zero.
3. Carrefour’s capital expenditures remain at their 2017 level of €3.8 billion (as reported in the
cash flow statement).3;
4. Carrefour’s growth non-operating investments is zero.
Under this scenario, Carrefour’s free cash flow to debt and equity would be close to €1.3 billion:
NOPAT plus NIPAT 2017
Non-current operating accruals
2017
Capex
- Change in net working capital:
- Change in non-operating
investments:
After tax effect of cost cutting:
= FCF to debt and equity
Given (excl. non-recurring
items)
Given
Given
0
0
65.4% x €2 billion
1,053
2,745
-3,800
0
0
1,308
1,306
Carrefour must use this free cash flow to pay interest, pay off debt, and make dividend payments to
shareholders. Given the company’s interest expense after tax of €0.3 billion (476 x 65.4%) and the
relatively low need for reducing debt, one could be tempted to conclude that if management indeed
succeeds in reducing operating expenses and restoring operating margins, sufficient free cash flow
(around €1.0 billion) will be available to increase dividends. Given Carrefour’s 775 million shares
outstanding, €1.30 would be available per share.
The instructor could conclude by discussing potential reasons for why it may be reasonable to expect
that Carrefour will not significantly increase its dividends in the near future. These reasons could
include the following:
-
-
Anecdotal and academic evidence indicates that companies are reluctant to increase
dividends if there is a significant chance that the increase cannot be sustained. This
reluctance arises from the fact that investors tend to respond strongly to dividend cuts.
The above calculation is based on a scenario in which management achieve its targeted cost
reduction of €2 billion. Carrefour’s historically low margins signal that the company has often
not succeeded in controlling its costs, which may make investors skeptical. Furthermore, the
need to continue investments in online activities may put further pressure on the retailer’s
free cash flow. Note that each one-percent increase in net non-current operating assets
decreases the retailer’s free cash flow by €260 million (ignoring investments in working
3
Note that the difference between the amount of capital expenditures reported in the text and the amount
disclosed in the cash flow statement is primarily attributable to the way we accounting for operating leases in
the adjusted financial statements.
To be used with Business Analysis and Valuation, 5th edn
ISBN 9781473758421 © Krishna G. Palepu, Paul M. Healy and Erik Peek, 2019
-
capital). Hence, unexpected additional future investments could easily erode Carrefour’s
positive free cash flow.
Although Carrefour’s degree of leverage is not abnormally high, the retailer’s current
financial spread is thin, which may make debt financing comparatively risky. If Carrefour
wishes to further reduce leverage in the near future, this will further reduce free cash flow.
Students could, of course, also think of factors that could help Carrefour generate more free cash
flow. These factors may include (a) future spin-offs of geographic segments such as the retailer’s
underperforming stores in China or (b) selling (and leasing back) real estate to Carmila. The main
objective of this discussion is therefore not to arrive at a predetermined conclusion but to help
students understand how the financial (ratio) analysis can provide a solid basis for a critical
evaluation of a company’s ability to generate (future) free cash flows.
To be used with Business Analysis and Valuation, 5th edn
ISBN 9781473758421 © Krishna G. Palepu, Paul M. Healy and Erik Peek, 2019
Exhibit TN-1 Condensed Financial Statements
2017
78,897.0
2016
76,645.0
2015
76,945.0
2014
74,706.0
2013
74,888.0
2012
76,789.0
-964.8
-364.0
-911.9
311.1
-964.8
469.2
934.0
-860.7
395.9
469.2
680.1
1,120.0
-817.7
377.7
680.1
885.6
1,301.0
-797.2
381.9
885.6
609.2
1,059.0
-912.9
463.1
609.2
-169.4
236.0
-1,004.7
599.4
-169.4
1,105.7
1,418.0
65.4%
143.2
432.0
65.5%
103.6
304.0
62.0%
-121.1
-55.0
62.0%
-171.1
11.0
62.7%
406.1
956.0
68.1%
926.7
179.0
1,105.7
283.2
-140.0
143.2
188.6
-85.0
103.6
-34.1
-87.0
-121.1
6.9
-178.0
-171.1
651.1
-245.0
406.1
911.9
860.7
817.7
797.2
912.9
1,004.7
1,279.0
65.4%
1,191.0
65.5%
1,149.0
62.0%
1,007.0
62.0%
1,160.0
62.7%
1,230.0
68.1%
835.9
76.0
911.9
780.7
80.0
860.7
712.7
105.0
817.7
624.2
173.0
797.2
726.9
186.0
912.9
837.7
167.0
1,004.7
– Interest expense after tax
= Interest expense
x (1 – Tax rate)
= Interest expense after tax
311.1
476.0
65.4%
311.1
395.9
604.0
65.5%
395.9
377.7
609.0
62.0%
377.7
381.9
616.0
62.0%
381.9
463.1
739.0
62.7%
463.1
599.4
880.0
68.1%
599.4
= Profit or loss (group)
-364.0
934.0
1,120.0
1,301.0
1,059.0
236.0
CONDENSED STATEMENTS OF EARNINGS
Revenue
Net operating profit after tax
Profit or loss
- Investment profit after tax
+ Interest expense after tax
= Net operating profit after tax
of which: Net non-recurring expense after tax
= Net non-recurring expense (income)
x (1 – Tax rate)
= Net non-recurring expense after tax
(excluding non-recurring tax items)
+ Non-recurring tax expense (income)
= Net non-recurring expense after tax
+ Net investment profit after tax
= Investment and interest income (excluding
Carrefour Banque)
x (1 – Tax rate)
= Net investment profit after tax (exluding
Carrefour Banque)
= Profit/loss Carrefour Banque (after tax)
= Net investment profit after tax
To be used with Business Analysis and Valuation, 5th edn
ISBN 9781473758421 © Krishna G. Palepu, Paul M. Healy and Erik Peek, 2019
CONDENSED BALANCE SHEETS
Ending operating working capital
Operating cash
+ Trade receivables
+ Inventories
+ Other current assets
– Trade payables
– Other current liabilities
= Ending operating working capital
+ Ending net non-current operating assets
Non-current tangible assets
+ Non-current intangible assets
+ Derivatives (asset net of liability)
– Deferred tax liability (net of asset)
– Other non-current liabilities (non-interestbearing)
= Ending net non-current operating assets
+ Ending non-operating investments
Excess cash
Minority equity investments
+ Other Non-Operating investments
= Ending non-operating investments
= Total business assets
Ending debt
Current debt
+ Non-current debt
+ Preference shares
= Ending debt
+ Ending group equity
Ordinary shareholders' equity
+ Non-controlling interest in equity
- Net assets held for sale
= Ending group equity
= Total invested capital
2017
2016
2015
2014
2013
2012
2,761.4
2,682.6
2,693.1
2,614.7
2,621.1
2,687.6
2,750.0
2,682.0
2,269.0
2,260.0
2,213.0
2,144.0
6,690.0
7,039.0
6,362.0
6,213.0
5,738.0
5,658.0
1,741.0
1,951.0
1,873.0
1,989.0
1,487.0
1,263.0
-15,082.0 -15,396.0 -13,648.0 -13,384.0 -12,854.0 -12,925.0
-4,095.0 -4,413.0 -4,341.0 -4,194.0 -3,808.0 -3,462.0
-5,234.6 -5,454.4 -4,791.9 -4,501.3 -4,602.9 -4,634.4
16,463.0
9,341.0
0.0
147.0
16,668.0
9,906.0
0.0
286.0
15,156.0
9,509.0
0.0
236.0
15,381.0
9,543.0
0.0
236.0
13,935.0
9,044.0
0.0
410.0
15,143.0
9,409.0
0.0
276.0
0.0
25,951.0
0.0
26,860.0
0.0
24,901.0
0.0
25,160.0
0.0
23,389.0
0.0
24,828.0
831.6
1,355.0
3,118.0
5,304.6
26,021.0
622.4
1,361.0
3,006.0
4,989.4
26,395.0
30.9
1,433.0
2,792.0
4,255.9
24,365.0
498.3
1,471.0
2,813.0
4,782.3
25,441.0
2,135.9
496.0
2,579.0
5,210.9
23,997.0
3,885.4
384.0
2,690.0
6,959.4
27,153.0
1,069.0
12,797.0
0.0
13,866.0
1,875.0
12,526.0
0.0
14,401.0
966.0
12,761.0
0.0
13,727.0
1,757.0
13,505.0
0.0
15,262.0
1,683.0
13,994.0
0.0
15,677.0
2,263.0
16,905.0
0.0
19,168.0
10,061.0
2,099.0
-5.0
12,155.0
26,021.0
10,427.0
1,582.0
-15.0
11,994.0
26,395.0
9,631.0
1,039.0
-32.0
10,638.0
24,365.0
9,190.0
1,037.0
-48.0
10,179.0
25,441.0
7,843.0
754.0
-277.0
8,320.0
23,997.0
7,303.0
874.0
-192.0
7,985.0
27,153.0
To be used with Business Analysis and Valuation, 5th edn
ISBN 9781473758421 © Krishna G. Palepu, Paul M. Healy and Erik Peek, 2019
Exhibit TN-2 Segment Analysis
2017
2016
2015
2014
2013
2012
Operating profit margin (as reported, including financial services)
France
1.9%
Rest of Europe
3.2%
Latin America
4.5%
Asia
0.1%
2.9%
3.5%
4.9%
-0.9%
3.3%
2.9%
4.9%
0.2%
3.6%
2.2%
4.9%
1.5%
3.4%
2.0%
4.5%
2.0%
2.6%
2.4%
4.3%
2.6%
Revenue per square metre (€thousand, per sq.m.)
France
Rest of Europe
Latin America
Asia
6.22
3.77
6.66
2.16
6.27
3.69
6.21
2.24
6.40
3.27
6.33
2.44
6.81
3.34
6.39
2.28
6.99
3.47
6.60
2.33
6.96
NA
6.93
2.47
Non-current asset turnover
France
Rest of Europe
Latin America
Asia
3.33
3.08
4.91
5.47
3.33
2.75
4.03
5.08
3.58
2.79
5.23
5.16
3.51
2.74
4.26
4.70
3.91
2.80
4.79
5.13
3.99
2.83
4.29
5.12
Growth in store space (sq.m.)
France
Rest of Europe
Latin America
Asia
-0.12%
5.11%
10.58%
-4.36%
-1.09%
1.83%
1.52%
-7.25%
2.65%
2.78%
2.87%
5.90%
-0.29%
-0.15%
0.76%
-2.41%
0.27%
-7.92%
-2.74%
0.67%
Net CAPEX to non-current assets
France
Rest of Europe
Latin America
Asia
1.96%
2.42%
8.47%
-1.15%
6.61%
2.98%
12.30%
-1.94%
3.52%
2.71%
10.33%
-0.67%
4.17%
2.28%
15.57%
1.99%
4.24%
0.22%
8.17%
6.16%
Geographical distribution of revenues
France
Rest of Europe
Latin America
Asia
45.4%
26.8%
20.3%
7.5%
46.8%
26.2%
18.9%
8.1%
47.1%
25.6%
18.6%
8.7%
47.3%
25.7%
18.6%
8.4%
47.3%
25.7%
18.4%
8.6%
Geographical distribution of store space
France
Rest of Europe
Latin America
Asia
34.9%
33.9%
14.6%
16.6%
35.2%
33.5%
14.4%
17.0%
33.9%
36.2%
13.5%
16.4%
32.7%
36.2%
13.7%
17.4%
32.8%
35.8%
13.5%
17.9%
To be used with Business Analysis and Valuation, 5th edn
ISBN 9781473758421 © Krishna G. Palepu, Paul M. Healy and Erik Peek, 2019
46.0%
27.2%
18.5%
8.3%