Brazil’s Wal-Mart Counterpart To Benefit From Rising Incomes

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With the economies in both Brazil and China slowing down, foreign investors have finally begun to look beyond the BRICs—Brazil, Russia, India and China—for growth opportunities. However, they run the risk of throwing the baby out with the bathwater, because these slowdowns often create attractive opportunities.

Brazil is an excellent case in point.

Over the past year, Brazil’s gross domestic product (GDP) growth has slowed markedly, falling from 7.5 percent to almost nothing in the second quarter of 2012, largely because of a drop off in raw materials exports and industrial output. The simmering European debt crisis and weakened Chinese demand are largely to blame.

However, the slowdown in Brazil’s economic growth has yet to significantly affect the average Brazilian. Unemployment in the country remains at a record low of 6 percent, with more than 1 million jobs created so far this year, which has maintained upward pressure on wages.

So far, the Brazilian government and central bank have effectively deployed stimulus measures—such as slashing interest rates and investing heavily in infrastructure—to at least keep the economic engine warm. As a result, an investment bet on the newly expanding middle class in the country is looking attractive.

Companhia Basileira de Distribuicao (NYSE: CBD), which does business as Grupo Pao de Acucar, is Brazil’s largest retailer, operating a huge chain of more than 1,500 supermarkets, department stores and hypermarkets throughout the country. Think of it as the Brazilian counterpart to Wal-Mart (NYSE: WMT). The company also has a sizable real estate operation as a result of developing sites for its growing store footprint.

Despite Brazil’s slowing economy, retail sales in the country have been growing by an average of 7 percent per month for the better part of three years. That’s largely thanks to rising incomes. Brazilian incomes have grown by about 11 percent over the past decade, which has generated a large and growing consumer class that’s eager to enjoy the fruits of a higher standard of living.

That’s created a boom for Companhia Basileira de Distribuicao, which has seen sales and revenues consistently rise for more than 4 years. The retailer’s gross sales rose by 8.4 percent in the first half of the year to BRL27.1 billion. Same-store sales grew by 7.6 percent compared to the same period last year.

Earnings rose by 48.3 percent to BRL331 million, while net margin softened slightly to 1.4 percent largely because of price deflation in goods such as fresh produce. However, the company’s solid same-store sales growth is a clear indication that domestic demand has held up well in the country.

As a result, management has remained largely sanguine in its business outlook, opting to continue working its BRL1.8 billion investment program for this year. Already holding a sizable book of properties in the areas in which the company plans to expand, most of that investment will be made in construction.

Pushing forward is probably a wise decision given that in late August Brazil’s central bank lowered its benchmark overnight rate, known as the Selic rate, to a record low 7.5 percent, a 500 basis point drop over the past year. Although that’s a clear signal that the government is trying to stave off further weakness in the economy, the move will radically drop Companhia Basileira de Distribuicao’s already low borrowing costs.

Companies that can afford to expand in weak times enjoy a greater share of the boom in a recovery. As the ranks of shoppers in Brazil continue to swell, Companhia Basileira de Distribuicao will be right next door to accept their reals. For several more emerging market stock picks, check out my free report.