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Analysts assess Carrefour's challenges as the French retailer's shares fall

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Analysts assess Carrefour's challenges as the French retailer's shares fall

Carrefour SA's shares tumbled Aug. 31, a day after the retail giant reported disappointing results for the first half of 2017 and reigned in its guidance for the year.

In Paris trading, Carrefour's stock closed down 13.1%, or €2.56, at €16.94, after the retailer shone a spotlight on the competitive landscape in the French retail market that dented its financial performance. The shares of rival Casino Guichard-Perrachon SA fell 2.8%, or €1.40, to €47.76.

The magnitude of the challenge facing Chairman and CEO Alexandre Bompard, who succeeded Georges Plassat in July, was not lost on analysts. "The new management team must decide where they want Carrefour to be long term and figure out the route there," analysts at HSBC said in a research note.

Bompard, who was recruited from French retailer Groupe Fnac SA, faces many of the same problems as his predecessor — namely intense competition, structural issues and lack of momentum.

He also has a more difficult starting point: In its results statement released after the stock market closed Aug. 30, the Paris-based retailer reported its operating margin in the first half slipped to 1.6% year over year from 1.9%. In France, Carrefour's largest market by revenue, the picture was much gloomier as operating margin slumped 70 basis points, or 0.7 percentage point, year over year to 1.1%.

The company blamed a strongly competitive and promotional market in France, where Carrefour competes with rival hypermarket and supermarket operator E. Leclerc SA, a cooperative whose lower-price offerings have resonated with shoppers. It also cited increased losses at its ex-DIA stores.

Carrefour faces challenges in its international markets, too. In Argentina, Carrefour highlighted a difficult consumption environment marked by pressure on volumes and high inflation. Like-for-like sales in China fell 6.6% year over year in the first half. "Clearly all strategic options for the Chinese business are on the table," noted analysts at AllianceBernstein.

Tesco Plc's turnaround could offer a blueprint for Carrefour, according to analysts at HSBC. The U.K.'s leading supermarket operator has prioritized sales while cutting costs, helping the company return to a normalized margin of about 4% while still investing in its offering.

"We believe Carrefour eventually needs to outline something similar," the HSBC analysts noted. "But Carrefour faces a much more difficult task. Scale is critical in food retail and while Tesco was in poor health when the current management team inherited it, the existence of a significant scale advantage enabled them to build a successful turnaround strategy and recover. Carrefour no longer enjoys such an advantage."

Bompard told analysts that Carrefour needed to accelerate its push into digital and breathe new life into its hypermarkets. He also suggested a need to simplify the business. Bompard is expected to deliver a strategy update before the end of 2017.

His most demanding challenge could be raising profitability and improving cash flow.

Carrefour on Aug. 30 reported that recurring operating income in the six-month period ended June 30 declined 12.1% to €621 million from €706 million in the same period a year earlier. Net sales increased 6.2% year over year to €38.53 billion from €36.29 billion.

The retailer reduced its estimate for sales growth in 2017 to a range of 2% to 4% at constant exchange rates from its previous forecast of 3% to 5% growth in sales.

"Patience may be required," noted the analysts at HSBC.