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Carrefour: Financial Ratios and Inventory Holding Period

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Carrefour was founded in 1959 in France. Marketing itself as a one-stop-shop providing a wide range of products at a low cost, it is now the second largest retailer in the world and the largest in Europe. In 2012, the company continued expanding their international footprint by adding an additional 283 retail points in France, Europe and Latin America. As of December 31, 2012, the Group was operating 9,994 retail outlets in 33 countries conducting all transactions in Euros. According to the Carrefour’s 2011 Annual Activity Report, the Group now features four major retail formats: Hypermarkets, Supermarkets, Convenience Stores and Cash & Carry Stores. Formerly, Carrefour also carried hard discount format stores but this was discontinued in 2010, on top of which Dia sub-group was also eliminated in 2011. Carrefour continues to expand their multi-channel retail forums (Carrefour Drive & e-commence) in certain strategic locations. The following highlights the breakdown of store formats used:

Above retail formats offer different and diversified product mix combining choices, quality and low prices to end-consumers – with product mainly categorized into: Daily Products, Fresh Products and Non-food Products. By end of 2011, nearly 50% of Carrefour retail outlets were located in France while the other 50% were operating in Europe, Latin America and Asia. Major markets for Carrefour in terms of strategising are France and Europe (Spain, Italy and Belgium). Despite attempts to lead in Asian markets, Carrefour is facing government and tax regulations. Globally speaking, 53% of stores were under the Convenience Store format in 2011.

Performance Overview (2009-2011)
In 2009, Carrefour introduced a new CEO and CFO while launching the ‘transformation plan’ in an attempt to improve business, brand image, business strategy etc. reducing costs by 590Mil Euros and improving inventory turnover by 2 days. Carrefour has wanted to overtake Wal-Mart as the leading retailer in Asia. There has been aggressive expansion into Chinese and Indian markets as well as shutting down the non-profit Russian operation. 80% of daily products are Carrefour owned brands offered at discount prices to improve margins and have a competitive differentiation within the market.

In 2010 non-food sales in China were unsuccessful and resulted in income declining by 9.9%. The overall performance decreased from 6% to 1% in their major markets. The only success was seen in emerging markets like Latin America, Argentina and Asia. In 2011, Carrefour sold their Thailand operations to Big C supermarket under Casino group in France for 816Mil Euros. Furthermore, Carrefour Dia discount unit stores were dissolved and they began reformatting hypermarkets in Europe resulting in lowered cash flow compared to 2010. As a France-based Company, 43% of net sales are generated domestically; meanwhile other European regions contribute to nearly 30%. Hypermarkets represented their main retail format – which accounts for 63% of net sale:

Building Block Analysis
In the following Building Block analysis, we will study the key financial ratios and identify their core implications. In the summary, we will evaluate the overall performance of the Carrefour over a 3 year period and determine how symmetrical their current financial position is compared with their core business objectives.

1. Return on Asset
Return on asset (ROA) percentage indicates how profitable a company’s assets are in generating revenue. The larger the ratio is, the more a company is utilizing their assets. Generally, companies that require huge initial investment, generate low ROA. Return on Assets (ROA) =

ROA (2009) = 276 + [(606) x (1-0.6)] / 51,818 = 0.010
ROA (2010) = 434 + [(648) x (1-0.58)] / 52,602 = 0.013
ROA (2011) = 371 + [(757) x (1-0.8)] / 50,791 = 0.010

Implication: The ROA in 2011 decreased from the previous year due to the combination of the Net income being lower while interest expenses and tax rates were higher due to Carrefour financing more money and extending loan payments over a longer period of time thus increasing interest rates. The Net income was affected by the Non-recurring charges of which 2,162Mil Euros lined to impairment charges, mostly for Italy. The current operating income also dropped 19.2% from 2010 negatively impacted by the French hypermarkets and Greek store operation performance.

2. Return on Equity
Return on equity (ROE) percentage indicates how profitable the shareholder’s equity (investment funds) is in generating revenue. The larger the ratio is, the more efficient a company is at generating profits from every unit of shareholder’s equity.

Return on Equity (ROE) =

ROE (2009) = 276 / 10,117 = 0.027
ROE (2010) = 434 / 9829 = 0.044
ROE (2011) = 371 / 8,100 = 0.046

Implication: The 2011 ROE is increasing slightly from the previous year. Although the Net income has decreased from 434 to 371 Mil Euros the average common equity figure has significantly decreased from 9,829 8,100 allowing Carrefour to improve the ROE since 2009.

In order to have a lowered average common equity, Carrefour committed to buying back 17,709,754 shares under the equity swap for a total of 446Mil Euros recorded as a financial liability during 2011. Additionally, Carrefour borrowed money which included their business financial strategy in 2010 included a loan of 1 billion Euros made payable in 2021.

Practically, this type of ratio increment is not a healthy trend for an expanding company – possibly implying decline in revenue, retaining earnings and/or shareholders’ investment in the company. This type of ratio increment does not necessarily equal to actual growth or benefit of the company.

3. DuPont Model
DuPont Model (or strategic profit model) is a way to break down the ROE into three important components. It helps to better understand how the ROE is generated over time – by studying the company’s net margin, asset turnover and financial leverage contribution to ROE. In short, a higher ROE could be caused by: 1) higher net margin (every sales brings in more profit) 2) higher asset turnover (more sales generated for every unit of assets) and 3) higher leverage (use more debt financing relative to equity financing). ROE= Net Profit Margin X Asset Turnover X Total Leverage = X X

ROE (2009) = 0.027 = 0.003 X 1.674 X 5.122
ROE (2010) = 0.044 = 0.005 X 1.556 X 5.352
ROE (2011) = 0.046 = 0.004 X 1.630 X 6.270
*Numbers may not total due to rounding

The DuPont model in 2011 was the most successful driven by the total leverage increase from 5.35 to 6.27 as a result of Carrefour’s financial rearrangement. They bought back 26,433,816 shares from the market to improve the earning per share.

This approach is relatively more risky since high leverage company tends to face high financial pressure during bad earning years.

4. Margin Analysis & Common Sized Income Statement
Gross Margin
Gross Margin implies the different between revenue and cost of goods sold. It represented the value of incremental sales.

Gross Margin =

Gross Margin (2009) = 86,753 – 67,626 / 86,753 = 0.220
Gross Margin (2010) = 81,840 – 63,969 / 81,840 = 0.218
Gross Margin (2011) = 82,764 – 64,912 / 82,764 = 0.216
*Numbers may not total due to rounding

Implication: The declining trend from 2009 to 2011 indicates that the market is more competitive and the cost of the supplier has increased (COGS). The margin erosion is consistent with the figures that can be found in a convenient store. Convenient stores typically sell daily products, fresh food etc which have relatively lower margins compared to hypermarket stores.

Commercial margins, as a percentage of sales, dropped dramatically in France, Italy and Greece and pressure on sales prices in a cont4ext of strong rises in commodity prices and no purchasing gains.

EBIT Margin
The EBIT margin shows the profit margin after deducting the cost of goods, SG&A expenses, depreciation and amortization from sales.

EBIT Margin =
EBIT Margin (2009) = 2,720 / 86,753 = 0.031
EBIT Margin (2010) = 2,702 / 81,840 = 0.033
EBIT Margin (2011) = 2,182 / 82,764 = 0.026
*Numbers may not total due to rounding

Implication: 2011 experienced the lowest EBIT margin. Earnings before interest and tax dropped significantly from 2010 to 201. That may be due to higher income tax as well as SG&A being relatively high in 2011 due to the transformation plan being aggressively implemented. Additionally there was a high restructuring cost for the hypermarket stores in France, Italy and Spain. There are also high income expenses to the bank and higher tax expenses. Total EBIT margin still is facing downturn which is aligned with the margin erosion.

Common Sized Income Statement
Each “common size %” is the field amount expressed as a percentage of net revenue. Expressing all the items under the income statement in percentage ratio can reveal how the company is financially structured and how each component affects profit. Trends can be found when comparing the statement with previous years.

Fiscal Year End (MM/DD/YYYY)| 12/31/2009| 12/31/2010| 12/31/2011| Sales (Net)| 100.00%| 100.00%| 100.00%|
Cost of Goods Sold| -78.00%| -78.20%| -78.40%|
Gross Profit| 22.00%| 21.80%| 21.60%|
SG&A Expense| -16.80%| -16.50%| -16.90%|
Depreciation & Amortization| -2.10%| -2.00%| -2.10%| EBIT| 3.10%| 3.30%| 2.60%|
Interest Expense| -0.70%| -0.80%| -0.90%|
Non-Operating Income (Loss)| -1.20%| -1.20%| -3.20%|
EBT| 1.20%| 1.30%| -1.50%|
Income Taxes| -0.70%| -0.70%| -1.20%|
Minority Interest in Earnings| -0.10%| -0.20%| 0.00%|
Other Income (Loss)| 0.00%| 0.00%| 0.10%|
Net Income Before Ext. Items| 0.40%| 0.40%| -2.70%|
Ext. Items & Disc. Ops.| -0.10%| 0.10%| 3.10%|
Net Income (available to common)| 0.30%| 0.50%| 0.40%|

Implication: Two important trends were found in the statements over 3 years. 1) Several expenses, (goods, interest and tax) are constantly rising over the past 3 years. 2) High impairment on non- operating income (loss) occurred in 2011. The gross profit dropped 0.2% which is aligned with the cost of goods increasing by 0.2% from 2010-2011. SG&A expense increased by 0.4% due to the employee benefit expenses programs introduced in 2011 and the Transformation plan since 2009. Non-operating income (loss) went from -1.2% to -3.2% which is a dramatic loss due to huge restructuring costs and the accelerated depreciation of hypermarkets converted to the Carrefour Planet concept meant one-off charges reached 884Mil Euros.

Minority interests were down 76% from 33Mil vs. 135Mil in 2011 due to the decrease of profitability in Greece from -0.2% to 0.00%. Income tax expenses for 2011 include 268Mil Euros provision set aside for a tax reassessment in Spain and valuation allowances recorded on deferred tax assets following the downgrading of the group’s business plan projections in Italy and Greece for a total of 151Mil Euros. Net income before external items went from 0.4% to -2.7% due to the combination of sales performance, cost of goods sold and expenses. External Items and Disc. Ops. has increased from 0.1% to 3.1% due to the net gain from selling the Thailand operations for 666Mil Euros and the distribution of the Dia shares and the Dia contribution to the Net income of 1,909Mil Euros

5. Turnover Analysis

Total asset turnover
Total asset turnover is used to analyse how well a company can utilize its assets to generate sales or revenue. The higher the ratio is, the better the asset turnover performance is within that period.

Financial Year End Date| 12/31/2009| 12/31/2010| 12/31/2011| Total Asset Turnover| 1.674 | 1.556 | 1.630|
Net Working Capital Turnover| (15.141)| (14.995)| (16.149)| Avge Days to Collect Receivables| 23.517 | 25.758 | 26.825| Avge Inventory Holding Period| 36.427 | 38.803 | 38.917| Avge Days to Pay Payables| 92.348 | 95.271 | 90.616|

PP&E Turnover| 5.814 | 5.397 | 5.695|

Total Asset Turnover =

Total Asset Turnover (2009) = 86753/51818 = 1.674
Total Asset Turnover (2010) = 81840/52602 = 1.556
Total Asset Turnover (2011) = 82764/50791 = 1.630

Implications: Between the fiscal year of 2009 and 2010, Carrefour’s sales decreased by 5.7% while the average total assets increased by 1.5% resulting in the ratio decline. However, between the year of 2010 and 2011, sales went up by 1.1% while the total assets decreased by 3.4% which pushed the total asset turnover ratio to an incline. The increased ratio represents an improvement in utilizing its assets to generate sales for the company.

Total Asset Turnover has improved in 2011 but it was still not as good as 2009

The Net working capital turnover went from 14,995 in 2010 to 16,149Mil Euros. This implies that Carrefour has borrowed more money.

The average days to collect receivables went from 25.7 days to 26.8 days perhaps due to the credit card payment received. Commercial receivable was longer due to franchisees fee.

Inventory holding period is longer caused by the merchandise mix and higher inventory levels to serve convenient and express store format

Accounts payable is 5 days shorter and this could be due to two reasons 1)Carrefour has been improving their supply relationship or/ 2) Suppliers have demanded more prompt payment due to economy

Net working capital turnover
Net working capital is not necessarily common among retail business however in the case of Carrefour the Net working capital turnover is used to measure the investment and the sales generated from investment operations. The higher the ratio means the amount of sales are exceeding the amount of investment and a better performance within a company.

Net working capital turnover =

Net working capital turnover (2009) =
Net working capital turnover (2010) =
Net working capital turnover (2011) =

Implications: Between 2009 and 2010, the net working capital turnover ratio for Carrefour increased which means the amount of sales exceeded their investment. However, between 2010 and 2011, sales increased while the average net working capital decreased which led the ratio declining. This indicates the company may need to borrow money to sustain its business especially if the ratio continues to decline over the following years.

In 2011 the major trend was convenient store formats which focus on fresh food sales and daily products. With fresh food products there can be negative working capital as cash is generated faster than payment is made to the supplier for example if Carrefour orders 500,000 boxes of milk and they are suppose to pay the supplier within 30 days. Carrefour sells fresh milk at a faster rate than the payment is due therefore they are relying on someone else’s cash capital to run their business.

Average days to collect receivables
Average days to collect receivables show the period of time between the actual sales and the days it takes for a company to redeem cash. A smaller ratio is the better for the company. Average days to collect receivables =

Average days to collect receivables (2009) =
Average days to collect receivables (2010) =
Average days to collect receivables (2011) =

Implications: The average days to collect receivables have been increasing from 23.517 to 26.825 days while average receivable is increasing however, on the other hand, sales between 2010 and 2011 are not as good as 2009 which indicate Carrefour’s poor efforts in collecting debts from different customers and partners.

Carrefour has launched a loyalty card and vouchers to maintain the market innovation; however, this is delaying collecting money from consumers and business partners.

Average inventory holding period
Average inventory holding period is a helpful tool for making buying decisions and knowing which inventory need to be promoted. Average
inventory holding period is a good way to measure how well and efficient a company can manage and handle its inventory.

Average inventory holding period =

Average inventory holding period (2009) =
Average inventory holding period (2010) =
Average inventory holding period (2011) =

Implications: Over 3 years, Carrefour’s inventory holding period increased from 36.427 to 38.917 which represents a lack of inventory control. That could be because the lack of communication and management between stores and vendors. Carrefour does not use the distribution centre to manage inventory which mainly relies on suppliers to deal with stores directly. Additionally, store and merchandise trends adapted to suit the consumer buying patterns.

Average days to pay payables
Average days to pay payables measure how long a company needs to pay its payables to other companies.

Average days to pay payables =

Average days to pay payables (2009) =
Average days to pay payables (2010) =
Average days to pay payables (2011) =

Implications: Between 2009 and 2010, Carrefour had pay approximately 3 days earlier to supplies and between 2010-2011 an additional 5 days less was added to settle payables. This could be due to the economic situation that forced the creditors to request early payment.

PP&E turnover
PP&E turnover indicates how well a company can generate its sales in relation to its fixed assets, property, plants and equipment. The higher the ratio, the more capability a company has to generate more sales from the
fixed assets.

PP&E turnover =

PP&E turnover (2009) =
PP&E turnover (2010) =
PP&E turnover (2010) =

Implications: Ratios are between 5.4 and 5.8 over the 3 year period, which is considered quite stable.

6. Risk (Current and Quick Ratios with Implications)

Current ratio
Current ratio measures and indicates how capable a company is to pay its short term liabilities. The higher the ratio means a greater ability a company has to pay its short term debt.

Current ratio =

Current ratio (2009) = 19289 / 27184 = 0.710
Current ratio (2010) = 20211 / 28481 = 0.710
Current ratio (2011) = 19254 / 26108 = 0.737

Implications: The overall trend is considerably stable with an uprising trend in 2011. The Group may have slightly better capabilities to pay off its short term obligations throughout these three years.

Liabilities were lower in 2011 therefore liquidity was better. This could be due to changing current liability to longer term liabilities through negotiations with business partners and/or banks.

Quick ratio
There are situations when companies are over estimating current ratio because inventory is counted as a current asset when there are times companies cannot liquidate inventory into cash in a short period of time. Compared to current ratio, quick ratio is a much more conservative way to measure a company’s ability to pay its short-term obligations as inventory will be excluded from the current asset. The higher the ratio, the more stable a company is.

Quick ratio =

Quick ratio (2009) = (3300 + 5552) / 27184 = 0.326
Quick ratio (2010) = (3271 + 5999) / 28481 = 0.325
Quick ratio (2009) = (3849 + 6166) / 26108 = 0.384

Implications: Between 2009 and 2011, Carrefour’s quick ratio has increased from 0.326 to 0.384. This may imply that Carrefour is improving its position from being able to manage its short term obligations.

7. Debt to Equity and EBIT Interest Coverage

Debt to equity ratio
Debt to equity ratio compares a company’s total debt to the total equity in order to indicate how a company is financing its assets and what the proportion is.

Debt to equity ratio =

Debt to equity ratio (2009) = (2158 + 9794) / 10073 = 1.187
Debt to equity ratio (2010) = (2715 + 10365 / 9584 = 1.365
Debt to equity ratio (2008) = (2159 + 9513) / 6671 = 1.764

Implications: Based on the debt and equity ratios from 2009 to 2011, we can see Carrefour’s financial proportions are all above one.

Interest expenses are higher as Carrefour borrows more money from the bank or financial institution. This uprising trend implies that, the company is relying more and more on debt financing.

EBIT interest coverage
EBIT interest coverage measures a company’s ability to make enough profit to pay its interest expense. The higher the ratio, the more ability the company has to pay its interest expenses.

EBIT interest coverage =

EBIT interest coverage (2009) = 2720 / 606 = 4.488
EBIT interest coverage (2010) = 2702 / 648 = 4.170
EBIT interest coverage (2011) = 2182 / 757 = 2.882

Implications: Carrefour’s EBIT interest coverage has decreased by 1.606 since 2009. The earnings before interest tax has been increasing however, there are higher interest expenses through borrowing more money therefore the company sales performance is less promising in 2011 than 2010.

8. Cash Flows Analysis
Cash ratio measures a company’s liquidity to determine how fast and capable a company can pay off its short term debt. The ratio maybe requested by lenders when they decide how much they are going to extend the debt to a company.

Cash flows from operations divided by average current liabilities: (2009) = 741 / 27808 = 0.027
(2010) = 2570 / 27833 = 0.092
(2011) = 2268 / 27295 = 0.083

Cash flows from operations divided by average total liabilities: (2009) = 741 / 41702 = 0.018
(2010) = 2570/ 42773 = 0.060
(2011) = 2268 / 42690 = 0.053

Implications: In 2009 cash flows were low compared to the following 2 years at 741Mil Euros due to heavy expansion into China and Brazil while beginning

India operation. The cash flow ratio dropped in 2011 meaning Carrefour had less cash inflow to the company and therefore less ability and longer duration to pay off its short-term obligations.

Based on the building blocks analysis, we can summarize that, year 2011 was not a very prosperous year for Carrefour Group. The followings are the core insights to support our point:

* Net Sales dropped in major European markets (e.g. Spain and Italy) * The growth in the Asian market was not as fast as anticipated * Net income & margins dropped due to high expenses and competitive markets * Debt financing (leverage) was used more often compared to the previous year * Account receivable was longer and Account payable was shorter which has negative operation performance implications as there is less on-hand cash flow * Inventory holding ratio increased implying a decline of overall product depletion rate * Non-operating loss was a serious concern due to impairments on investment

The data & ratios reflected in the building blocks analysis matched the key trends which we stated in our introduction. The worsening economy in Europe as well as the global expense increment in 2011 became a threat to Carrefour’s global business.

Referring to the business strategy of the company, based on the retail expansion rate and investment involved in 2011, we believe that their ambition is strong. However, based on the actual business performance of the year, it is reasonable to believe that Carrefour did not strike hard enough to execute their Transformation Plan while expanding their retail business.

In 2012, it is their top priority to maintain strict financial disciplines – to significantly reduce their operation expenses and avoid any investment losses by all means in order to cope with the challenging business environment. The Group shall foresee the underlying threats in 2011 before putting the esteemed company at risk.

Traditionally, Carrefour uses pricing tenders to have suppliers compete on pricing to gain the Carrefour deal however this makes it difficult to maintain good supplier relationships or have the supplier that supports good quality. In the future, Carrefour needs to extend their supplier relationships in order to maintain product quality to compete with competitors.

Carrefour’s major markets are located in Europe despite higher income tax and slow growth rate. In order to sustain the business Carrefour may need to spend more on marketing. The labour costs in Europe are also significantly higher therefore Carrefour should focus on emerging markets with lower income taxes and lower labour costs as this will have the greatest growth potential over the next 5 years.

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