- Trading at lowest spot in 15 years, 7x PE (45% disc. to peers) and 8% dividend yield (peers 4%)
- Buyout of minority holders in higher growth Brazilian business, likely part of the upcoming strategic review
- 12M 110% IV at 2YPc3, attractive opportunity to add Delta given the low price, depressed valuation and continued underlying growth in the core business
Carrefour has lost c.45% of its market cap over the last few years due to a combination of failed strategic deals and challenging market conditions, driven by intense competition and low margins, primarily within its core French market (45% of Group Revenue), while inflation pressures have weighed on profitability. Weakness followed the 4Q24 results, as management issued a disappointing 2025 outlook due to benign consumer demand, expecting minimal growth in FCF and EBITDA and that it will replace the EUR700mn buyback with a EUR150mn special dividend to fund the payout to Carrefour Brazil minority shareholders and French buyback tax.
Despite the disappointment on outlook and capital returns, the underlying business continued to improve, with group sales growing 2.6% in 2024, and +12.1% in 4Q24 alone. This was driven by increasing e-commerce gross merchandise value by +18% alongside a 38% growth in like-for-like sales in the LatAm region and continued market share gains in France and Spain. French EBIT and FCF also beat consensus by 5.1% and 24%, respectively.
The choice to allocate capital to buy out the minority share in Carrefour Brazil (Carrefour owns 67.4% of Carrefour Brazil - accounts for c.40% of group EBIT) appears to be a better use of capital as it is one of the faster-growing regions (Brazil +5% in 2024 sales vs. France -2%, Europe -1%), and the timing of the acquisition likely takes advantage of the weak Brazilian Real. The company is halfway through its 2026 strategy, and due to the current market environment management has announced a comprehensive strategic review of its business. Attaining full ownership of the Brazil business is likely the first step in focusing on higher growth areas. As well as the fast growth in the region, we see further upside risks to earnings from potential upcoming strength in the BRL.
In terms of valuation, it is currently trading at depressed 5x EV/EBITDA levels, a 40%+ discount to its European Food retail peers, and at 7x PE (45% discount to peers) while boasting a superior div. yield of 8% vs. the sector average of 4% and higher earnings growth. Spot is also trading at the lowest level in 15 years, where the share price has historically found a floor, and with 12M 110% IV at 2YPc3 it is very attractive to add delta via a limited loss structure. We propose Dec25 14 calls at a net cost of 2.8% of underlying. (Spot ref: 12.7, Fut. 12.3). We choose a longer-dated expiration as it is unclear when the company will reveal its updated strategic review. However, the combination of a price at historic lows, depressed valuation and very cheap upside volatility favour early positioning in the name.