While the top three retailers in Chile have a stronghold on the industry, the next two largest players are trending in the opposite direction. RNG has considerably downgraded both Supermercados SMU and Ripley. In Chile, SMU is now forecasted to grow 2.9% CAGR 15E-18E, 3% pts lower than previously estimated and down from an 11-14E CAGR of 19.5%, and Ripley will grow 3.9% CAGR 15E-18E, 1.9% pts lower than our previous forecast.
SMU has experienced a number of well-documented issues. The company has been burdened by massive debt, making them unable to pay their suppliers in certain cases and causing them to breach numerous debt covenants. Ultimately, late last year, the retailer announced it would close 70 stores and lay off 7,000 employees. These issues are largely attributable to an overambitious expansion plan for its two Express banners that overextended the company. RNG does not anticipate SMU will return to consistent same-store sales growth in the near-term.
Ripley’s downgrade, however, was caused by the company’s disappointing results in 2013 and the first quarter of 2014. After consistently growing sales in Chile above market average since 2010, Ripley only saw 2.8% growth in 2013, accompanied by negative growth in mature stores. This continued into the first quarter of this year, which showed flat SSS growth, and while the company generated double digital growth year-over-year in the second quarter of this year, its 2Q2013 sales comparison base was very low, and RNG worries that much of the company’s success in the second quarter is attributable to the World Cup.
It is troubling that Ripley suffered such a severe decline in sales/store in 2013 ($33.9m down from $35.1m), especially for a retailer that doesn’t open many stores, and it appears as though Ripley is being hit by the economic slowdown in Chile. RNG views Ripley as more susceptible to economic downturns than its main competitors, since it only operates in a cyclical segment that involves largely discretionary purchases. While Cencosud and Falabella are also prominent Department Store players, they also have established food-selling banners, which are less affected by poor consumer environments.
See the links below for other highlights from our Chile update: