Chapter 5
Carrefour S.A.
Teaching Note
Version: May 2013
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 steady decline in company performance during the past three years, Carrefour
has cut its dividends by more than fifty percent. Students are asked to analyze Carrefour’s
financial statements and segment data to find explanations for the company’s recent
dividend cut and assess whether further changes to the company’s dividend payout ratio can
be expected. The case’s focus on current and near-term dividend decisions helps to steer
students’ attention away from long-term trends in performance (i.e., avoiding conclusions
that “anything can happen in the long run”), toward recent performance changes and the
transitory versus persistent nature of such changes.
The discussion of the financial analysis is preceded by a discussion of Carrefour’s
strategy and accounting. The accounting analysis covers operating lease adjustments, (basic)
pension adjustments, and the distinction between operating and investment assets. It also
includes a discussion of how the financial analysis is affected by Carrefour’s spin-off of
discount retailer Dia (and how to adjust for the spin-off using IFRS 5 footnote disclosures).
The case can be taught in two sessions, first focusing on Carrefour’s strategy and
accounting choices, then discussing the retailer’s financial performance and cash flows. An
advantage of discussing the case in two sessions is that it allows the instructor to provide
students with standardized and adjusted financial statements (and possibly a set of financial
ratios) prior to the second session.
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 accounting. Are any adjustments to Carrefour’s financial
statements necessary? How would you account for the spin-off of Dia?
Analyze Carrefour’s operating management, financial management and investment
management during the years 2008 to 2011, making use of both financial
statement data and segment data. What are the primary drivers of the company’s
performance decline since 2008? 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
decision to cut its dividends in 2011?
5.
Taking into account management’s outlook for 2012 (and making some simplifying
assumptions about future margins and turnover), estimate Carrefour’s 2012 free
cash flow. How likely is it that Carrefour will be able to pay out (at least) 52 cents in
dividends in 2012? What actions could management take to improve the
company’s ability to pay out dividends?
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 some
elements of a differentiation strategy with elements of a cost leadership strategy, especially
in its hypermarkets. Specifically, the hypermarkets differentiate themselves from competitor
supermarkets (1) by offering a much broader assortment (more product categories (food
and non-food) as well as a wider choice of brands within one product category (including its
own brands)) and (2) investing in customer loyalty programs (e.g., the “Pass” card). This
strategy is backed up by a strong marketing campaign. At the same time, however, Carrefour
realizes that—especially during economic 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 (through customer surveys and
building a “customer behavior database” using data gathered through, for example,
the company’s customer loyalty card) and by timely adjusting its assortment and
pricing to changes 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 of
supplies (aggregation of purchasing; 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
become “stuck in the middle.” The planned changes that Jose Luis Duran—the new CEO—
announced after replacing Daniel Bernard suggest that this happened during the first half of
the 2000s. While many of Carrefour’s competitors, such as Leclerc, Auchan, Aldi, and Lidl,
were able to aggressively lower their prices during the economic downturn, according to
Duran Carrefour had focused too much on differentiation and improving its margins per
square meter of store space (which mixes percentage margins and asset turnover).
Consequently, the company lost its competitive edge to price discounters (by losing its
reputation for low prices), which slowed down Carrefour’s growth and harmed its domestic
market share. Some students may argue that the changes that CEO Olofsson implemented
during the years 2009 till 2011 were also part of a combination 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, however, 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.
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. Carrefour’s corporate strategy is to expand overseas rather than
diversify. More importantly, as indicated above, achieving growth is an essential part of
Carrefour’s strategy because (international) growth helps the company 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, more risky 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. Consequently, a slightly safer way to expand abroad is to
acquire local supermarket chains. A disadvantage of this strategy is, however, that
acquisition premiums have to be paid, which can also drive down profits.
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 has to compete with other multinationals such
as Tesco and Wal Mart, who are trying to gain a strong market position (mostly through
severe price competition).
In sum, Carrefour’s overseas operations tend to be in countries where consumers are
likely more price sensitive, several multinationals engage in severe price competition, and
the economy is less stable. Nonetheless, an important benefit of the retailer’s expansion into
other geographical market is that it helps Carrefour to become less sensitive to local
economic cycles, such as the European economic downturn. Note, for example, that in 2011
Carrefour earned close to 59 percent of its operating profit in Latin America and Asia even
though the company generated 28 percent of its fiscal sales in these regions. At the end of
2011 analysts argued, however, that while Carrefour’s expansion into emerging markets had
been a good choice, the company’s emerging markets portfolio was too diversified.
Question 2
First, one of Carrefour’s key assets are the company’s stores, many of which it leases under
operating leases. At the end of 2011, Carrefour had large operating lease commitments.
Exhibit TN-1 estimates the net present value of these commitments. The estimated PV of
Carrefour’s operating lease payments is approximately €3.15 billion, which is equivalent to
slightly more than 31 percent of Carrefour’s non-current debt in 2011 (3,150/10,257) and
implies an understatement of Carrefour’s non-current tangible assets by approximately 19
percent (3,150/[13,770 + 3,150).
The calculation of operating lease commitments is based on the following
assumptions:
- New lease commitments in year t are equal to the sum of (a) PV of lease
commitments in year t minus [1 + r]* PV of lease commitments in year t-1 and (b)
actual lease payments in year t minus year t lease payment as anticipated at the end
of year t-1.
- The lease repayment is equal to the PV of lease commitments in year t-1 plus new
lease commitments in year t minus the PV of lease commitments in year t.
- Deprecation is set equal to the lease repayment.
- The interest expense is equal to the difference between the actual lease payment
and the lease repayment.
Second, Carrefour has off-balance sheet pension liabilities (assets) in the years 2009 –
2011 (2006 – 2008). Exhibit TN-2 shows the annual differences between the funded status of
Carrefour’s pension plans and the on-balance sheet pension liability, as well as the balance
sheet adjustments that must be made to bring the off-balance sheet commitment to the
balance sheet.
Third, Carrefour combines (food and non-food) retail with financial (e.g., financial
services and property rental) activities. To analyze the profitability of Carrefour’s retail
business and be able to compare Carrefour, Casino and Tesco on the same basis, the analyst
must remove financing components from Carrefour’s revenues, for example, by classifying
financing fees and rental revenues as investment income (and investment property and
consumer credit as investment assets).
Finally, to improve comparability across years the analyst must assess how
Carrefour’s 2010 performance and financial position would have been had the discount
retailer been spun-off at the beginning of 2010. In accordance with the requirements of IFRS
5, Carrefour has disclosed restated 2010 income statements and cash flow statements
(excluding Dia). Exhibit TN-3 shows Dia’s 2010 standardized balance sheet, which can be
used to restate Carrefour’s 2010 balance sheet. This balance sheet has not been disclosed by
Carrefour (as it is not required under IFRS 5) but comes from Dia’s 2011 financial statements.
Questions 3 and 4
The key focus of the case is on understanding the reasons for why Carrefour cut its dividend
and assessing whether further dividend changes can be expected. Therefore, the financial
analysis will focus on understanding the short-term changes in performance and the
transitory versus persistent nature of such changes.
During the years 2008 through 2011, Carrefour’s return on equity (including other,
one-time items) decreased from 14.4 percent to -29.0 percent, suggesting a dramatic decline
in performance. The retailer’s income statements show, however, that negative one-time
items such as impairment charges and restructuring costs had a significant impact on ROE,
especially in 2011 when Carrefour recognized large impairment losses on goodwill in Italy
and Greece. After removing these one-time items, return on equity becomes as follows:
2011
-4.2%
2010 excl Dia 2010 original
12.0%
13.0%
2009
10.8%
2008
16.8%
Some students may argue that restructuring costs tend to be a persistent component
of Carrefour’s operating performance and must therefore be classified as operating expense
rather than other expense. When doing so, the retailer’s return on equity becomes:
2011
-6.1%
2010
9.7%
2010o
10.3%
2009
9.3%
2008
16.3%
In the remainder of this analysis it is assumed that restructuring expenses are
transitory items classified as other expenses.
Exhibit TN-4 displays a set of ratios for Carrefour, Casino and Tesco. The ROE
decomposition indicates that Carrefour has lower operating profit margins than Casino and
Tesco but significantly higher operating asset turnover. Because over the past years
Carrefour’s operating profit margins have been low—to the tune of one percent and
eventually turning negative in 2011—the retailer’s returns on operating assets have been
below that of its two peers.
In 2009 and 2010 Carrefour outperformed Casino in terms of return on equity for two
reasons: (1) Carrefour’s investment assets were more profitable than those of Casino and (2)
Carrefour had higher leverage, helping the retailer to achieve a greater financial leverage
gain. Tesco also has fewer and less profitable investment assets than Carrefour but has
achieved higher ROE performance, primarily because of its superior operating performance.
During the most recent years Carrefour’s operating asset turnover increased, from
3.39 to 3.51 (including Dia) between 2009 and 2010 and from 3.28 to 3.72 between 2010
and 2011. Carrefour’s NOPAT margin has been low and relatively stable, around 1 percent,
until 2011, when the margin turned negative. The retailer’s financial leverage steadily
increased, from 2.18 in 2008 to 3.14 in 2011.
In sum, during the past years Carrefour’s operating asset turnover has been high and
increasing. However, the retailer has not been able to generate sufficient margin to convert
high asset turnover into high (or normal) operating performance. In 2008 through 2010
Carrefour’s high investment performance (i.e., performance in the company’s financial
segment) and high leverage helped the retailer to achieve normal or above-normal returns
on equity. However, in 2011 the retailer’s financial leverage effect turned negative,
underlining the risks of Carrefour’s financial strategy. The following sections analyze the
components of Carrefour’s and its peer’s ROE in further detail.
Operating asset turnover
Carrefour’s operating asset turnover increased in 2010 and 2011, which possibly leads some
students to conclude that Olofsson’s actions to improve turnover indeed paid off. After
having discussed the above ROE decomposition, the instructor can ask students to further
decompose asset turnover, examine non-financial and segment data, and skim through
Carrefour’s footnote disclosures to identify the drivers of the retailer’s asset turnover
improvement. Further analysis of operating asset turnover reveals the following:
-
-
Days’ inventories remained fairly constant between 2009 and 2010 but increased in
2011, in spite of Carrefour’s intention to reduce days’ inventories by seven days. This
is worrisome as inventory turnover is one of the key profit drivers of a retailer.
Carrefour makes much use of supplier financing, as evidenced by the retailer’s
relatively high days’ payables. Between 2008 and 2010 days’ payables decreased by
close to seven days (in total). This reduction in Carrefour’s reliance on supplier
financing had a negative effect on operating asset turnover.
-
In 2011 Carrefour recognized a goodwill impairment charge of €1,938 million,
thereby artificially improving its non-current asset turnover. When adding back the
charge to non-current assets, Carrefour’s 2011 non-current asset turnover ratio
changes from 3.00 to 2.80 (versus 2.67 in 2010). The goodwill charge thus explains
about 60 percent of the increase in Carrefour’s non-current asset turnover ratio.
Given the above observations, the primary driver of the improvements in operating
asset turnover during 2009 – 2011 is the change in PP&E turnover. PP&E turnover increased
from 4.38 to 4.77 in 2010 and from 4.65 (excluding Dia) to 4.76 in 2011. The instructor can
ask students to make use of Carrefour’s non-financial and segment data (in Exhibit 1) to
examine two questions: Which segments contributed most to the increase in non-current
asset turnover? Did the increase in non-current asset turnover result from an increase in
store productivity?
The second question is relevant because non-operating factors such as asset write
downs or sale-and-leaseback transactions (see e.g. Note 3 on page 234) can affect the
carrying value of PP&E without changing Carrefour’s operating capacity. Between 2009 and
2011, net sales per 1,000 square meters of store space (in Carrefour’s non-discount division)
was as follows:
Non-discount
total
2011
6.48
2010
6.50
2009
6.20
Percentage
change
-0.32%
4.93%
These data illustrate that Carrefour’s store productivity improved by close to 5
percent in 2010 but remained constant during 2011.
The first question is especially relevant given that Carrefour has recently spun off its
discount division. Between 2009 and 2011, net sales to tangible and intangible fixed assets in
Carrefour’s operating segments was as follows:
2011
2010
2009
France
7.52
7.58
7.64
Rest of
Europe
4.64
4.71
4.67
Latin America
4.37
3.97
3.43
Asia
4.88
4.89
4.48
Hard
discount
5.94
5.50
During these years, net sales per 1,000 square meters of store space was as follows:
2011
2010
2009
France
11.37
11.17
11.04
Rest of
Europe
5.30
5.51
5.57
Latin America
6.45
6.04
4.81
Asia
2.77
2.82
2.56
Hard
discount
4.92
4.50
The analysis of Carrefour’s segment data shows that store productivity improved only
marginally in France and even worsened in the Rest of Europe. Thus, the observed increase
in PP&E turnover is driven by store productivity improvements in Latin America, Asia, and
Carrefour’s hard discount division.
In sum, the picture that emerges from the detailed analysis of Carrefour’s operating
asset turnover confirms that in spite of its many efforts, management has struggled (and
failed) to improve store productivity and inventory turnover, especially in its (core) European
segments. In 2011, the company’s operating asset turnover improvement appeared largely
artificial. In 2010, operating asset turnover improved only in the company’s emerging market
segments and its (discontinued) hard discount division.
The instructor may conclude this discussion by asking students about the managerial
implications of their observations. Two implications that will likely surface are:
- Given the ineffectiveness of past efforts to improve turnover, it seems questionable
whether management will succeed in improving turnover in the near future. This
raises the question as to whether future performance improvements should instead
result from improvements in the retailer’s margins (operating efficiency and pricing
decisions)—a question that will be addressed next.
- The analysis underlines the importance of the retailer’s Asian and Latin American
operations as a source of growth.
Operating margin1
During the past decade Carrefour has struggled to be price competitive. Consequently, the
retailer has been perceived as relatively expensive by European consumers and its European
market share has been under pressure (refer to the discussion of Carrefour’s operating asset
turnover). The analysis of Carrefour’s operating margin shows, however, that the company
has little room to cut prices, as its operating profit margin has approached zero during the
past few years. The decomposition of Carrefour’s operating margins could therefore focus
on identifying ways to reduce operating expenses and, consequently, increase Carrefour’s
ability to compete on price.
The instructor could start the discussion of Carrefour’s operating margin by asking
students the following question: Given Carrefour’s operating asset turnover, at what
operating margin would the retailer earn a “normal” return on its 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. Using the
ratios of Casino and Tesco as a benchmark, the normal return on operating assets for a
retailer such as Carrefour is likely between 6.5 – 8.5 percent. Given the retailer’s operating
asset turnover of 3.5, an operating margin of around 2 – 2.5 percent would help Carrefour to
earn a return on operating assets of between 7 and 8.75 percent.
Next, the instructor could ask students how much Carrefour’s operating margin
should improve to reach its “normal” level of 2 – 2.5 percent. In 2011, Carrefour’s NOPAT
margin was -1.0 percent. However, because this margin was negatively affected by an
unusually high tax expense (of 1.2 percent of sales) a more sensible approach would be to
estimate an adjusted NOPAT margin using a normalized tax rate. In 2011, net operating
expenses (excluding non-recurring items) amounted to 98.9 percent of sales, yielding a net
operating margin before taxes of 1.1 percent. Given an average effective (and statutory) tax
rate of about 35 percent, Carrefour’s 2011 normalized NOPAT margin (adjusted for
1
Note: cost of sales includes cost of financing products sold. This may have a (small) positive effect on the cost
of sales-to-sales ratio and explain part of the differences in gross margins between Carrefour and its peers.
exceptional taxes) can be estimated at close to 0.7 percent. This implies that Carrefour must
increase its operating margin by approximately 1.3 – 1.8 percent of sales to reach its
“normal” return on operating assets.
The required percentage increase in operating margin is equivalent to an amount of
€1.0 – €1.4 billion (after tax) based on Carrefour’s 2011 sales level. Hence, Carrefour’s
planned cost savings of €400 million will be insufficient 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 increase the spread between its revenues and operating expenses by
€1.0 – €1.4 billion:
- Reduce price promotions. Between 2009 and 2011 Carrefour’s cost of sales as a
percentage of sales increased by 0.9 percentage point. This increase reflects the
effect of the retailer’s price promotions, aimed at maintaining asset turnover.
Students may suggest that Carrefour could reduce the intensity of its price
promotions, especially when the European economy recovers. Although this is a valid
point to make, it is reasonable to expect that in such case Carrefour will replace its
irregular price promotions with an “every-day-low-prices” strategy, thus making it
unlikely that future pricing decisions will positively affect margins, at least not much
in the near term.
- Personnel cost. One of the primary components of Carrefour’s SG&A expenses is
personnel expense. Despite Carrefour’s variable sales level, personnel expense as a
percentage of sales remained flat during the past few years. This suggests that the
company’s personnel expenses are relatively variable (rather than sticky) and/or
keep pace with changes in employee productivity. The following three ratios provide
more insight into the factors underlying recent changes in Carrefour’s personnel
expense:
Ratio
Personnel expense per employee
(thousands)
Percentage change in personnel
expense per employee
Employee productivity (sales per
employee)
Percentage change in employee
productivity
Avg. number of employees per
1000 sq.m. of avg. store space
Percentage change in employeeto-store space ratio
2011
2010
2010o
2009
18.86
18.36
18.19
17.48
4.1%
-1.1%
191.31
178.69
7.1%
-2.7%
32.43
33.56
2.7%
193.52
190.19
1.7%
33.40
-1.7%
33.98
-3.4%
These ratios jointly illustrate that Carrefour has managed to increase employee
productivity during the past two years, primarily through reducing the average
number of employees per unit of store space. This increase in employee productivity
has, however, not resulted in a significant reduction in the personnel expense to sales
ratio because the personnel cost per employee has kept pace with the change in
productivity. Overall, this example illustrates that one important factor affecting
Carrefour’s profit margins (and reducing the effectiveness of Carrefour’s cost saving
-
programs) is cost inflation. Cost inflation may well be caused by factors that are
beyond management’s control.
Spin-offs. Carrefour’s operating margins vary significantly across geographic regions,
as shown in the following table.
Operating
margin
2011
2010
2009
France
Rest of
Europe
Latin
America
Asia
Hard
discount
2.45%
3.68%
3.16%
2.14%
2.95%
3.21%
3.67%
3.17%
4.45%
3.53%
4.17%
3.79%
2.38%
1.78%
Carrefour’s margins tend to be lowest in Europe, especially in the Rest of Europe.
Consistent with this observation, Carrefour recently recognized write-offs on its
Italian and Greek operations. One possible strategy to improve profitability (and
generate cash) is to spin off poorly performing European subsidiaries/stores.
Summary and cash flows (Q4)
Overall, the financial analysis shows that Carrefour has not been able to improve asset
turnover and has limited possibilities to improve the margins of its current operations. One
way to improve margins would be to spin off underperforming assets.
To help students understand the relationship between Carrefour’s
underperformance and the decision to cut dividends, the instructor could ask students to
calculate Carrefour’s free cash flow to equity under the following (realistic) scenario:
1. Carrefour’s NOPAT margin is 1 percent (as in previous years).
2. Carrefour’s growth (in business assets) is zero and leverage is constant.
3. Finance costs and the return on investment assets remain equal to their historical
levels.
Under this scenario, Carrefour’s free cash flow to equity would be close to €1.3 billion:
NOPAT x Sales:
- Change in net assets:
- Finance cost (after tax)
+ Return on investments:
= FCF to equity
1% x 81,271
0
-666 x .66
10% x 9,410
813
0
-440
941
1,314
This amount is certainly sufficient to sustain a dividend payout of 740 million (i.e., as in
previous years). However, Carrefour’s future investment and financing decisions put
additional constraints on the company’s maximum cash dividends. That is:
1. Each percentage point growth in net assets reduces the company’s free cash flow by
about 268 million (1% x 26,828 [net operating assets]). This decrease is partly offset
by an increase in operating cash flow of 10 million (3.7 [asset turnover] x 1% [NOPAT
margin] x 268).
2. Each percentage point decrease in leverage (debt to capital) that Carrefour wishes to
realize decreases the company’s free cash flow by 310 million (1% x 31,028 [capital]).
In other words, Carrefour may generate insufficient cash flow to sustain its pre-2011
dividend payout if the company wishes to grow its investment base (at a modest rate)
and/or wishes to reduce leverage. Given the company’s high debt-to-capital ratio of 0.7
(which is close to the debt-to-capital ratios of speculative grade-rated companies), it is
recommendable that Carrefour’s management undertakes actions to reduce leverage.2 One
could thus conclude that at the company’s current profitability level, Carrefour’s dividend
payout policy is not sustainable in the long run.
As a follow up question the instructor could ask which decisions have helped Carrefour
to sustain its dividend policy during the most recent years. This question helps to elicit
alternatives ways of generating free cash flow:
- Excess cash. In 2009, Carrefour used the excess cash balance that it created in
previous years.
- Debt financing. In 2010, Carrefour raised additional long-term debt (bonds) in the
amount of 978 million.
- Asset sales. In 2011, Carrefour sold assets (e.g., the spin-off of Dia).
These alternative ways of generating cash could potentially help Carrefour to sustain its
dividend policy also in the near future. A question that therefore remains to be answered is
why Carrefour’s management decided to cut dividends at the beginning of 2012 rather than
await possible future improvements in performance. A brief class discussion will likely result
we may
in an obvious conclusion: It is not unlikely that the dividend cut was stirred by the CEO
notice that...
change in January 2012. That is, the new CEO may be signaling that the current dividend is
not sustainable in the near future and increase the cash flow available to fund corporate
restructuring, but time Carrefour’s dividend cut such that it can be effectively blamed on the
resigning CEO.
Question 5
This final question asks students to think about how management’s recent or planned
decisions may affect Carrefour’s near-term cash flows (and dividend policy). An easy
approach in answering this question is to start from last year’s operating cash flow and make
cash flow adjustments for, amongst other things, (a) expected changes in Carrefour’s
operations, (b) planned capital expenditures, (c) expected asset disposals, and (d) expected
financing decisions. Note that several issues discussed under the previous question are also
relevant to this question. For example, the instructor may reiterate at the beginning of the
discussion that excess cash or additional debt financing (i.e., ways to finance dividends in
2009 and 2010) are not (or not easily) available to Carrefour, thus increasing the relevance
of operating cash flows and proceeds from asset disposals.
Exhibit TN-5 shows one possible estimate of Carrefour’s 2012 free cash flow. The starting
point of the calculation is last year’s operating cash flow of €2,529.9 million.3The following
adjustments lead to a free cash flow estimate of €742.7 million:
- The after-tax effect of expected and announced cost reductions is €262.4 million;
- The after-tax effect of the expected and announced increase in inventory turnover is
€234.0 million;
2
Early 2012, Carrefour’s debt was rated at BBB (investment grade).
Note that the operating cash flow is different from that reported in Carrefour’s 2011 financial statements,
primarily because of a reclassification of interest paid.
3
-
Expected capital expenditures are €1,650.0 million;
Interest paid is equal to its value in 2011.
This calculation suggests that under the above scenario, Carrefour’s free cash flow to equity
would be close to the amount needed to pay out a dividend of €1.08 and more than
sufficient to pay out a dividend of €0.52. Various other scenarios are possible, however,
including several under which the company’s free cash flow would not be sufficient to
sustain the current dividend policy. Some factors that may reduce the free cash flow, for
example, are:
- The announced acquisition of Guyene and Gascogne;
- Failure to reduce costs and/or increase inventory turnover (refer to the discussion on
the ineffectiveness of management’s past efforts);
- Reductions in leverage;
- Cost inflation (cost inflation regularly offset cost reductions in previous years).
It is therefore not unlikely that next year’s free cash flow will not be sufficient. The instructor
can ask students what options are available for Carrefour, at least in the short run, to
guarantee a dividend payout of €0.52. Students may think of the following alternatives:
- Operating performance improvements
- A reduction in taxes paid
- New asset disposals (primarily focusing on the poorly performance segments)
Whereas new asset disposals would help in the short run, Carrefour cannot continue to spin
off divisions or segments. The above analysis shows that in the long run operating
performance improvements are necessary to sustain the current dividend policy.
Summary
In summary, the above analysis illustrates that in the near future it is likely that Carrefour
needs to rely on non-operating sources of cash to finance its dividends. In the long run,
Carrefour must improve its operating performance if the company wishes to increase its
dividends to their original level (or wishes to reduce leverage). Currently, Carrefour strongly
relies on the cash flows generated by its non-operating activities (investment assets, asset
disposals, increased borrowing). This does not seem to be a sustainable strategy for a
retailer.
Subsequent developments
In 2012, Carrefour’s recurring operating income was €2,140 million, down from €2,197
million in 2011. Carrefour increased its dividends from 52 to 58 cents. The following cash
flows contributed to Carrefour’s ability to pay out dividends:
- The sale of operations, including those in Colombia, Indonesia, Malaysia and Greece,
generated a cash flow of €1,833 million;
- The company issued bonds for an amount of €1,250 million, while repaying bonds for
an amount of €996 million;
- Carrefour offered its shareholders the option to receive dividends in shares rather
than cash. About 70 percent of the company’s shareholders made use of this option,
which helped Carrefour to significantly reduce cash dividends.
Exhibit TN-1 (1) Calculating the interest rate implicit in 2011 operating leases (implicit rate =
8.7%) and (2) calculating the 2006 – 2011 present values of operating lease payment using
the implicit rate of 8.7%.
Minimum operating lease payments
Within one year
In two to five years
Over five years
2011
957
1,888
1,714
2010
1,081
1,850
2,231
2010o
1,081
1,850
2,231
2009
1,049
2,356
3,395
2008
937
2,483
3,328
2007
800
1,626
2,473
2006
788
1,905
2,704
8.70%
1,015
34.40%
8.70%
1,287
34.40%
8.70%
1,287
34.40%
8.70%
1,167
34.40%
8.70%
1,152
34.40%
8.70%
1,039
34.40%
8.70%
891
34.40%
957.0
472.0
472.0
472.0
472.0
1,407.4
1,081.0
462.5
462.5
462.5
462.5
1,754.1
1,081.0
462.5
462.5
462.5
462.5
1,754.1
1,049.0
589.0
589.0
589.0
589.0
2,597.0
937.0
620.8
620.8
620.8
620.8
2,587.7
800.0
406.5
406.5
406.5
406.5
1,863.5
788.0
476.3
476.3
476.3
476.3
2,071.6
3,149.7
2,269.3
3,445.4
2,450.9
3,445.4
2,450.9
4,306.4
3,341.4
4,293.0
3,431.0
3,085.2
2,349.2
3,409.6
2,684.6
New lease commitments
Useful life
419.5
10.0
51.3
11.0
51.3
11.0
806.9
12.0
2,091.4
11.0
418.0
12.0
12.0
Depreciation expense
Interest expense
Lease repayment
715.2
299.8
715.2
912.3
374.7
912.3
912.3
374.7
912.3
793.5
373.5
793.5
883.6
268.4
883.6
742.4
296.6
742.4
Adjustments:
Non-current tangible assets
Non-current debt
Deferred tax liability
Equity
3,149.7
3,149.7
0.0
0.0
3,445.4
3,445.4
0.0
0.0
3,445.4
3,445.4
0.0
0.0
4,306.4
4,306.4
0.0
0.0
4,293.0
4,293.0
0.0
0.0
3,085.2
3,085.2
0.0
0.0
Cost of sales/SG&A (Lease expense)
Cost of sales/SG&A (Lease expense)
Interest expense
Tax expense
Net profit
1,015.0
-715.2
-299.8
0.0
0.0
1,287.0
-912.3
-374.7
0.0
0.0
1,287.0
-912.3
-374.7
0.0
0.0
1,167.0
-793.5
-373.5
0.0
0.0
1,152.0
-883.6
-268.4
0.0
0.0
1,039.0
-742.4
-296.6
0.0
0.0
Interest rate
Actual lease payment
Tax rate
1
2
3
4
5
6
Total present value
Present value Yr 2 -
3,409.6
3,409.6
Exhibit TN-2 Adjustments to Carrefour’s balance sheet for differences between the funded
status of the retailer’s pension plans and the carrying value of the retailer’s pension liability.
Pension obligation
Pension assets
Funding status
On-balance sheet asset
On-balance sheet liability
Tax rate
Adjustments:
Other Non-Operating Investments
Non-current debt
Deferred tax liabilities
Equity
2011
1,119
214
-905
2010
1,105
228
-877
2010o
1,105
228
-877
2009
990
234
-756
2008
835
223
-612
2007
918
292
-626
2006
0
777
34.40%
0
734
34.40%
0
734
34.40%
0
689
34.40%
0
668
34.40%
0
674
34.40%
0
707
34.40%
0.0
128.0
-44.0
-84.0
0.0
143.0
-49.2
-93.8
0.0
143.0
-49.2
-93.8
0.0
67.0
-23.0
-44.0
0.0
-56.0
19.3
36.7
0.0
-48.0
16.5
31.5
0.0
-65.0
22.4
42.6
950
308
-642
Exhibit TN-3 Dia’s standardized 2010 balance sheet.
STANDARDIZED BALANCE SHEET
ASSETS
Non-Current Tangible Assets
Non-Current Intangible Assets
Minority Equity Investments
Other Non-Operating Investments
Deferred Tax Assets
Derivatives - Asset
Total Non-Current Assets
2010
Inventories
Trade Receivables
Other Current Assets
Cash and Marketable Securities
Total Current Assets
539.3
179.0
76.7
316.8
1,111.9
Assets Held For Sale
Total Assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Ordinary Shareholders' Equity
Minority Interest - Balance Sheet
Preference Shares
Non-Current Debt
Deferred Tax Liabilities
Derivatives - Liability
Other Non-Current Liabilities (non interest bearing)
Non-Current Liabilities
Trade Payables
Other Current Liabilities
Current Debt
Current Liabilities
Liabilities Held For Sale
Total Liabilities and Shareholders' Equity
1,597.4
459.8
0.1
54.9
29.3
0.0
2,141.5
0.0
3,253.4
430.3
-7.8
0.0
212.4
10.4
0.0
0.0
222.8
1,726.1
341.5
540.5
2,608.1
0.0
3,253.4
Exhibit TN-4 Carrefour, Casino and Tesco
Carrefour
PANEL A ROE decomposition (after excluding other income/expense)
Ratio
2011
2010 2010o 2009
Net operating profit margin
-1.0%
1.0%
1.1%
1.0%
× Operating asset turnover
3.72
3.28
3.51
3.39
= Return on Operating Assets
-3.7%
3.4%
3.8%
3.5%
Return on Operating Assets
x (Operating Assets/Business
Assets)
+ Return on Investment Assets
x (Investment Assets/Business
Assets)
= Return on Business Assets
Casino
Tesco
2008
1.8%
3.44
6.2%
2011
2.4%
2.61
6.3%
2010
2.4%
2.40
5.8%
2009
2.2%
2.38
5.3%
2011
5.0%
1.68
8.4%
2010
4.8%
1.73
8.4%
2009
4.6%
1.85
8.5%
-3.7%
3.4%
3.8%
3.5%
6.2%
6.3%
5.8%
5.3%
8.4%
8.4%
8.5%
0.70
12.0%
0.71
10.2%
0.72
10.4%
0.73
10.1%
0.74
9.9%
0.65
6.1%
0.72
7.5%
0.71
6.3%
0.83
5.8%
0.81
5.5%
0.88
9.2%
0.30
1.0%
0.29
5.4%
0.28
5.7%
0.27
5.3%
0.26
7.2%
0.35
6.2%
0.28
6.3%
0.29
5.6%
0.17
8.0%
0.19
7.8%
0.12
8.6%
Spread
× Financial leverage
= Financial leverage gain
-1.7%
3.14
-5.3%
2.7%
2.44
6.5%
3.0%
2.41
7.3%
2.5%
2.21
5.5%
4.4%
2.18
9.6%
1.8%
1.19
2.1%
2.2%
1.10
2.5%
1.4%
1.10
1.5%
5.4%
1.75
9.5%
5.3%
2.01
10.6%
5.1%
1.70
8.6%
ROE = Return on Business Assets
+ Financial leverage gain
-4.2%
11.9%
13.0%
10.8%
16.8%
8.4%
8.7%
7.1%
17.4%
18.5%
17.2%
Carrefour
PANEL B Common-sized income statement and profitability ratios
2011
2010 2010o 2009
Line items as a percent of
sales
Sales
100.0% 100.0% 100.0% 100.0%
Net operating expense
-98.9% -98.0% -97.9% -97.9%
Other income/expense
-3.5% -1.4% -1.4% -1.3%
Net operating profit before tax -2.4%
0.7%
0.7%
0.8%
Investment income
2.0%
1.9%
1.7%
1.6%
Interest income
0.1%
0.1%
0.1%
0.0%
Interest expense
-1.2% -1.2% -1.1% -1.2%
Tax expense
-1.2% -0.8% -0.8% -0.7%
Net profit
-2.7%
0.6%
0.6%
0.5%
Operating expense line items as a percent of sales (by
function)
Cost of sales
-80.7% -80.2% -80.2% -79.8%
Selling, general, and admin.
expense
-19.1% -18.5% -18.5% -18.9%
Operating expense line items as a percent of sales (by
nature)
Personnel expense
-9.7% -9.7% -9.5% -9.8%
Cost of materials
-80.7% -80.2% -80.2% -79.8%
Depreciation and amortization -3.0% -3.2% -3.2% -3.2%
Other operating
income/expense
-5.4% -4.8% -5.0% -5.2%
Key profitability ratios
Gross profit margin
19.3% 19.8% 19.8% 20.2%
EBITDA margin
2.8%
5.9%
5.6%
5.6%
NOPAT margin
-3.3%
0.2%
0.2%
0.2%
Casino
2008
2011
2010
Tesco
2009
2011
2010
2009
100.0%
-97.3%
-0.5%
2.2%
1.5%
0.0%
-1.1%
-0.9%
1.8%
-79.6%
-18.4%
-9.6%
-79.6%
-3.2%
-4.9%
20.4%
7.0%
1.5%
-12.1% -11.7% -11.7%
-72.3% -73.4% -72.7%
-10.6% -11.0% -10.9%
-75.8% -74.7% -74.7%
Net profit margin
-2.7%
0.6%
0.6%
0.5%
1.8%
Carrefour
PANEL C Asset management ratios
Ratio
Operating working capital/Sales
Net non-current assets/Sales
PP&E/Sales
Operating working capital
turnover
Net non-current asset turnover
PP&E turnover
Trade receivables turnover
Days’ receivables
Inventories turnover
Days’ inventories
Trade payables turnover
Days’ payables
PANEL D Debt and coverage ratios
Ratio
Liabilities-to-equity
Debt-to-equity
Debt-to-capital
Interest coverage (earnings based)
Interest coverage (cash flow
based)
2010o
-7.3%
35.7%
21.0%
Casino
2009
-8.4%
37.9%
22.8%
Tesco
2011
-6.5%
33.3%
21.0%
2010
-6.9%
37.4%
21.5%
2008
-7.7%
36.8%
22.1%
2011
-7.5%
45.9%
23.2%
2010
-6.9%
48.5%
25.5%
2009
-7.2%
49.1%
25.7%
2011
-5.4%
65.0%
58.7%
2010
-5.0%
62.8%
56.2%
2009
-5.0%
59.1%
54.6%
-15.44
3.00
4.76
28.93
12.4
9.48
38.4
4.23
86.1
-14.41 -13.77 -11.94 -13.06
2.67
2.80
2.64
2.72
4.65
4.77
4.38
4.52
33.56 34.96 36.29 26.76
10.7
10.3
9.9
13.5
9.91
10.24 10.24 10.01
36.7
35.5
35.6
36.4
4.24
4.27
4.03
3.92
85.8
85.3
90.4
92.9
-13.33
2.18
4.31
-14.49
2.06
3.92
-13.89
2.04
3.89
-18.52
1.54
1.70
-20.00
1.59
1.78
-20.00
1.69
1.83
8.9
10.9
13.2
9.1
7.4
6.4
45.1
48.5
48.0
24.9
23.2
22.0
74.9
79.7
81.9
43.7
42.1
38.6
2011
5.81
3.14
0.76
-0.22
2010
4.39
2.44
0.71
2.10
2010o
4.49
2.41
0.71
2.22
2009
4.21
2.21
0.69
2.08
2008
4.26
2.18
0.69
3.32
2011
2010
2009
2011
2010
2009
1.19
0.54
2.32
1.10
0.52
2.77
1.10
0.52
2.58
1.75
0.64
4.78
2.01
0.67
4.46
1.70
0.63
3.98
7.63
9.30
9.21
8.71
10.04
Exhibit TN-5 Prediction of Carrefour’s 2012 Free Cash Flow
2011
2012E
Assumption
Operating Cash Flow
before Investment in NonOCF 2011 is the starting point of the
Current Assets
2,529.9
2,529.9 analysis
Adjustments to cash flow
from operations:
Expected cost
reductions(after tax)
Effect of inventory
turnover increase
262.4
234.0
Adjusted Operating Cash Flow before
Investment in Non-Current Assets
3,026.3
Expected capital
expenditures
-1,650.0
Operating Cash Flow before
Investment in Non-Current Assets
See page 226
1,376.3
Interest
-633.5
Free cash flow to equity
estimate
Assumed equal to interest paid in 2011
742.7
Factors that may reduce
FCF to equity in 2012
Announced acquisition of
Guyene & Gascogne
Failure to reduce operating
costs
Failure to increase
inventory turnover
Reduction in leverage
-400.0
Crude estimate of acquisition cost
-262.4
See page 226
-356.7
?
= 2 days x daily cost of materials in 2011
Note that in 2009 - 2011, the effect cost
inflation offset the effect of cost savings.
Cost inflation
Factors that may increase
FCF to equity in 2012
Announced disposal of 49 percent
stake in BSF (minus call option
exercise price)
Other disposals
Lower taxes paid
See page 226 (400 x (1-34.4%))
= 2 days x daily cost of materials in 2011 x
(1 - tax rate)
P 247
182.5
?
?
Taxes paid were unusually high in 2011.
Future taxes paid may decrease by an
amount up to 100 million euros.
Operating performance
improvements
?
See conclusions drawn in the financial
analysis.