Grupo Comercial Chedraui (CHEDRAUIB.MX, $2.18 USD) Reports Q4, 2021 Results.

(all prices reported in USD at a conversion rate of $1 US = 20.313 MX pesos unless otherwise specified)

Grupo Chedraui reported fourth quarter 2021 sales of $3.2 billion US.

EBITDA for the quarter was $227.2 million US for an overall EBITDA margin of 7.1%. Net profits were $47.7 million.

By way of comparison, in Q4, 2020, revenues were $1.92 billion US and EBITDA was $137.4 million US for an overall EBITDA margin of 7.2%. Net profits in Q4, 2020 were $40 million.

The year over year increase in sales was 66.6%. The increase in EBITDA was 65.4% and the increase in net profits was 19.3%.

Fourth quarter 2021 EBITDA and net profits were negatively impacted by a $7 million inventory charge on the Smart & Final division. Quarter over quarter comps were also impacted in 2021 by the lack of an extra selling week in 2021 vs Q4 2020.

In the fiscal year ended December 31st, 2021, net revenues totaled $9.28 billion.

EBITDA was $688.3 million and net profits were $169.6 million.

At year end, net liabilities – current assets were $3.71 billion. Using today’s equity price, the enterprise value is $5.8 billion and the trailing EV/EBITDA ratio is 8.43.

The 4th quarter report was largely as I anticipated.

My original view was that the EBITDA margin indicated by the Smart & Final seller was of dubious merit. The 2021 proforma calculations offered up by management were more a guess than a guideline. Such skepticism appears to have completely borne out; the EBITDA margin contribution by Smart & Final in Q4, 2021 was $68.7 million US, or 6.2% of sales. A $7 million inventory charge was assessed against the division in that quarter. Absent the write-off, EBITDA margins would have been 6.8%. Management went so far as to indicate the following in their report:

In the United States, the acquisition of Smart & Final tested our ability to execute”

Such terse phrasing typically fills analysts and investors with dread; I was pleasantly surprised to read a report that indicated, for now, Smart & Final is not the lowest EBITDA margin contributor in the divisional breakdown. The Fiesta Mart operation, primarily located in Texas, remains the worst banner performer from the perspective of EBITDA margin contribution as a percentage of sales. “Executional tests” signal issues that are primarily operational instead of structural. Operational issues can be generally fixed by a competent set of managers. Structural issues, such as attempting to maintain market share against competitors with preferable locations or that are better capitalized, these are seldom resolved for the ultimate benefit of shareholders.

There are cultural penchants with Latin American businesses I follow; management of most companies tend to greatly understate bad news and modestly embellish the good. Grupo Chedraui is, in my view, an exception to that norm; their business management style is no-nonsense and the delivery of information is practically Nordic in cadence measure. This is consistent with a company that requires no external funding and that doesn’t particularly care about embellishing results, in efforts to placate impatient analysts.

There seems no hint of buyers remorse on Smart & Final thus far and to me, this suggests the acquisition may lean towards offering some upside, beyond my model.

My base case assessment was for the purchase to be a real challenge and while a write-down was immediately taken; no doubt with more discoveries to be unearthed in the year to come, the present opportunity might well outweigh the challenges required to convert Smart & Final into a core asset. At the price paid, I was fully prepared to settle for a Smart & Final division earning similar margins to El Fiesta; that bar may, for now, be too low. This is my sense; do not presume it to be my declaration.

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