Analyst Chrystelle Moreau of Leblanc Investissements, a small Paris-based investment

Transcription

1 CASE Analyst Chrystelle Moreau of Leblanc Investissements, a small Paris-based investment firm, glanced through the annual report of Groupe Carrefour for the fiscal year 2011 that she had just received. The past year had been a worrisome year for Carrefour s shareholders; during the year the company s share price had decreased by close to 43 percent. The analyst was considering various European large cap stocks for possible inclusion in her firm s high-dividend yield fund. Although Carrefour s management had proposed a reduction in dividends per share from E1.08 in 2010 to E0.52 in 2011, the recent decline in the company s market capitalization could make Carrefour an attractive addition to the fund. In fact, Moreau estimated that even if dividends would remain at 52 cents in 2012, Carrefour s dividend yield would still be close to a respectable level of 3 percent. In January 2012, Lars Olofsson had stepped down as Carrefour s Chairman and Chief Executive Officer (CEO) to make place for Georges Plassat, the former Chairman and CEO of France-based apparel company Vivarte. Olofsson had led Carrefour for close to three years, during which his main task had been to turnaround the company s growth and financial performance. Carrefour s core strengths had long been its low prices, its wide product offering, and the convenience of finding all of its products in one place, i.e., in its hypermarkets. 1 However, the company s business model had gradually become outdated, also as a result of the increasing popularity of shopping on the internet where the selection of low-priced (non-food) products was still growing and potentially limitless. Carrefour also lost market share in the food segment of the retail market, presumably because, as some analysts argued, the company s relatively expensive hypermarkets prevented it from being sufficiently price competitive. Olofsson s expertise in marketing and consumer behavior and his experience at Nestlé, where he had helped building the success of Nespresso, potentially made him the right person to develop a new strategy that would win back customers to Carrefour s hypermarkets. During the 1990s, Carrefour had been one of Moreau s favorite shares. The company had created a great reputation for its broad assortment and low prices, and had shown an outstanding share price performance. During the first half of the 2000s, however, Carrefour s share price had fallen from about E80 to E40, despite the fact that the company had consistently earned returns on equity in excess of 17 percent. In 2005, Jose Luis Duran took over from Daniel Bernard as the CEO of Carrefour, planning to put an end to Carrefour s over-aggressive expansion abroad and its incoherent pricing strategy in France. 2 However, in 2008, soon after the privately-held investment firm Colony Capital and French billionaire Bernard Arnault had acquired a 14 percent stake in Carrefour (and 20 percent of the voting rights), they forced out Duran and welcomed Olofsson as the new CEO in an effort to speed up the company s change process. Two pillars of Olofsson s turnaround plan were the offering and marketing of competitive low prices and the realization of cost savings, as the new CEO discussed in Carrefour s 2008 annual report: In 2009, we are tailoring our plan to the current economic climate because the year may not be easy. For that reason, we have three top priorities: customers, costs, and Professor Erik Peek prepared this case. The case is intended solely as the basis for class discussion and is not intended to serve as an endorsement, source of primary data, or illustration of effective or ineffective management. 1 See Bread, Cheese, New Boss? The Economist, January 14, See Carrefour at Crossroads, The Economist, October 20,

2 224 PART 2 BUSINESS ANALYSIS AND VALUATION TOOLS cash. In this environment, we must, more than ever, have a close relationship with our customers. We plan to invest E600 million in our retail business, in our price competitiveness, including its promotion to customers, and in our Carrefour brand offering, with a 40 percent increase in products. That is our strategy for gaining market share. At the same time, we intend to reduce our operating costs by E500 million as part of our transformation plan. That means we ll save three times more than we did in 2008, and the savings should increase over time to ensure our competitive advantage and improve our profitability. We will continue to generate cash through sound management, particularly by reducing our stock levels from 37 to 35 days to free up the resources we need for growth. Our 2009 objectives are clear, but I will remain vigilant and ready to respond as the situation demands. In addition, Olofsson introduced a new store concept, labeled Carrefour Planet, and developed plans to streamline the company, resulting in, for example, the spin-off the retailer s hard discount division (Dia) in Olofsson s actions did, however, not help to improve Carrefour s financial performance. During the fiscal years 2009 through 2011 the retailer s share price decreased by 26 percent (adjusted for the Dia spinoff). Having seen the value of their investment more than halve since acquisition, Arnault and Colony Capital intervened and replaced Olofsson with Plassat early Being aware of these developments, a few questions arose for the analyst. In particular, she wanted to get a better understanding of what had caused Carrefour s performance decline during the past years as well as the company s current financial position. Further, she wanted to find out what could have driven Carrefour to cut its dividends for 2011, also with an eye on future dividend decisions. Company background France-based food and non-food retailer Carrefour was established in 1959 by the Fournier and Defforey families and opened its first hypermarket in Sainte-Geneviéve-de-Bois in The hypermarket concept was the store concept that Carrefour would eventually become most famous for. The typical characteristic of such hypermarkets is that they offer a wide assortment of food as well as nonfood products at economic prices and are of a much greater size than the traditional supermarkets. Specifically, the size of hypermarkets can range from 2,400 to 23,000 square meters. In comparison, Carrefour s regular supermarkets, operating under the name Carrefour Market, and convenience stores, such as the Carrefour City and Carrefour Express stores, have sales areas ranging from 90 to 4,000 square meters. In 1979 Carrefour opened its first hard discount stores under the Ed banner in France and under the Dia banner in Spain. The hard discount stores sold a much smaller variety of products than the hypermarkets (on average 800 products versus 20,000 to 80,000) on a much smaller store space (between 200 and 800 square meters) at discount prices. Some of the discount products were sold under own brand names, such as the Dia brand name. After having transformed its Ed stores into Dia stores at the end of the 2000s, Carrefour spun off its hard discount division in To achieve this, the company paid out a special dividend of one Dia share for each ordinary Carrefour share on July 5, 2011, leading to a decrease in the company s market capitalization by close to E2.3 billion (or 12 percent). During the 1970s and 1980s, Carrefour expanded across the oceans and established hypermarkets in, for example, Brazil (1975), Argentina (1982), and Taiwan (1989). The international and intercontinental expansion of Carrefour took off especially in the 1990s when Carrefour opened a large number of hypermarkets in southern Europe (Greece, Italy, and Turkey), eastern Europe (Poland), Asia (China, Hong Kong, Korea, Malaysia, Singapore, and Thailand), and Latin America (Mexico, Chile, and Colombia). The company s intercontinental expansion primarily occurred through the opening of hypermarkets. Most of Carrefour s smaller supermarkets were located throughout Europe. Exhibit 1 provides information about Carrefour s operations by geographic segment and by store format. In addition to its traditional food and nonfood retailing activities, the company soon offered traveling, financial, and insurance services to its customers in Brazil, France, and Spain. For example, Carrefour has its own payment card, the Pass card, which it introduced in the early 1980s. In the beginning, the Pass card offered customers priority at store check-outs and allowed them to pay their bills in installments. Later, the card became linked to a credit card and customers could borrow money for out-of-store purchases. By the end of 2011, Carrefour s financial services unit had E5.6 billion in credit outstanding throughout the world.

3 CHAPTER 5 FINANCIAL ANALYSIS 225 One of the key events in Carrefour s history took place in 1999, when it merged with Promodès, a large French food retailer that owned the Champion supermarket chain. At the time of the merger, Carrefour and Promodès were, respectively, the sixth and ninth largest retailers in the world and held market shares of around 18 and 12 percent in France. After the merger, the combined company, which continued under the name Carrefour, became Europe s largest retailer, the world s second largest retailer, and the world s most international supermarket chain. An important trigger for the merger was that in the late 1990s, US-based Wal-Mart, the world s largest retailer, was expanding its operations to Europe and posed a potential threat to the French retailer s strong position in their home market. The integration of the operations of Promodès and Carrefour went slowly and the merger of the two retailers was the start of a difficult period. Immediately following the merger, Carrefour acquired a few other supermarket chains, such as Norte in Argentina, GS in Italy, and GB in Belgium, emphasizing its desire to aggressively expand its operations and become the leading international retailer. However, over the years, competition in the food retailing industry substantially increased and all retailers came under pressure to cut prices. Carrefour s sales growth in its home market suffered from the competition of France-based Leclerc and Auchan, which focused their strategy on cutting prices and gaining market share. Although Carrefour did join its French rivals in cutting prices, the company aimed much more at improving its margins than increasing sales volumes. Only in 2003, when Carrefour s sales growth in France approached zero, did the company start to put more emphasis on competing on price, gaining market share, and stimulating customer loyalty. Between 2005 and 2008, Carrefour s then-ceo Jose Luis Duran managed to restore the retailer s (organic) sales and profit growth. During this period, Carrefour redesigned its store layout, further widened its product offering, and expanded its assortment of Carrefour-branded products. Carrefour also abandoned its multi-banner strategy and gradually brought all store concepts under the Carrefour banner, with the exception of the retailer s hard discount division, to improve branding. Further, the retailer withdrew operations from some of its less profitable geographic segments. However, being unsatisfied with the speed of change and Carrefour s profitability, the company s primary shareholders, Arnault and Colony Capital, forced out Duran at the end Carrefour had been listed on the Paris Stock Exchange (Euronext) since The company s stock price performance during the years 2005 through 2012 is summarized in Exhibit 2. Carrefour from 2009 to 2011 In 2009, Lars Olofsson took over as the CEO of Carrefour and introduced a new three-year transformation plan. The transformation plan involved increasing customers awareness of Carrefour s price competitiveness. Furthermore, the plan aimed at achieving significant cost savings, gradually reducing days inventories (by seven days), and revitalizing the hypermarket concept. To achieve the latter, Carrefour launched the Carrefour Planet concept in Carrefour Planet stores were redesigned, more spacious hypermarkets organized in distinct product areas: market, organic, frozen, beauty, fashion, baby, home, and leisure-multimedia. The primary goals of this redesign were to provide a more focused offering of non-food products, improve the hypermarkets attractiveness, win back customers, and improve store traffic. After a successful pilot with the conversion of two hypermarkets in 2010, Carrefour decided to convert around 250 additional hypermarkets into Carrefour Planet stores between 2011 and At the end of 2011, Carrefour had opened 81 Carrefour Planet stores, of which 29 and 39 were located in France and Spain, respectively. In 2009, 2010, and 2011, Carrefour realized costs savings of E590, E495, and E449 million (excluding Dia s cost savings), respectively, although part of these cost savings were offset by the effect concurrent cost inflation. The retailer maintained the amount that it spent on expansion. In particular, capital expenditures for expansion were E665 million (excluding Dia) and E660 million in 2010 and 2011, respectively. In contrast, amounts spent on remodeling and maintenance increased from E838 million in 2010 to E1,303 million in Further, IT spending increased from E329 million (excluding Dia) in 2010 to E367 million in In March 2011, Carrefour s management announced its intention to spin off its hard discount unit Dia. Management argued that Dia s business model was significantly different from Carrefour s, which reduced the synergies from combining the two companies. In addition, management revealed its plans to spin off its property into a separate publicly listed entity. However, while Carrefour did complete the spin-off of Dia on July 5, 2011, the retailer decided to postpone its property spin-off plans under pressure from activist investors who feared that the spin-off would be too costly and value-destroying.

4 226 PART 2 BUSINESS ANALYSIS AND VALUATION TOOLS Carrefour in 2012 In its 2011 financial statements Carrefour s management disclosed the following outlook for 2012: In 2012, the Group intends to maintain strict financial discipline in response to a still challenging business environment. It will pursue initiatives deployed since the introduction of the Transformation Plan in 2009 with the goal of reducing costs by approximately 400 million euros. The Group has also set an objective of reducing inventory turnover by two days. Expenditure for the deployment of the new Carrefour Planet hypermarket concept will be sharply reduced in 2012, with priority going to expanding the store network in key growth markets. Investments for the year will total between 1,600 million euros and 1,700 million euros. For comparison, in 2011 investments in tangible and intangible fixed assets had amounted to E2,330 million, of which E369 million had resulted from remodeling expenditures incurred for the development of Carrefour Planet hypermarkets in Europe. Because the performance of the Carrefour Planet stores had been lower than expected in 2011, management decided to significantly scale down the investment in hypermarket conversions. In fact, it planned to convert only 11 hypermarkets into Carrefour Planet stores (compared with 81 in 2011) and put a further roll out of the conversion plan on hold, or, alternatively, lower the conversion costs before any further roll out. Some of the other strategic actions that management planned to take in 2012 were to further improve Carrefour s price positioning, revamp a large selection of Carrefour-branded products, accelerate cost savings and investments in e-commerce, including the expansion of the number of Drives where customers can pick up their online orders, and increase the number of (smaller) convenience stores. At the beginning of 2012, Carrefour also disclosed that its expected payout policy for 2012 was to pay out approximately 45 percent of net group income (adjusted for exceptional items) as dividends, with a maximum cash payout of E340 million. Casino One of Carrefour s French competitors was Groupe Casino. Though being significantly smaller than Carrefour in terms of revenues (E34.4 billion sales in 2011), the retailer was fairly comparable in terms of strategy. In particular, like Carrefour, Casino had adopted a multi-format strategy, operating hypermarkets (Géant), supermarkets (Casino and Monoprix), convenience stores (Petite Casino and Franprix), and discount stores (Leader Price). More than 80 percent of Casino s stores were located in France, where Casino was the third largest food retailer; however, in 2011 the retailer earned 55 percent of its revenues outside France. The retailer s key international markets were Brazil, Colombia, Thailand, and Vietnam. In 2011, Casino s hypermarkets accounted for 30 percent and supermarkets for 19 percent of the company s revenues. Casino held a 50.4 percent equity stake in Mercialys, a publicly listed real estate investment company that owned the Casino group s 120 shopping centres, and a controlling interest in banking subsidiary Banque Casino, which helped the company to offer financial services through its stores. Although retailing was its primary focus, Casino aimed to create additional value by developing a valuable real estate portfolio through its subsidiary Mercialys and other property development subsidiaries. In 2011, Casino s return on equity was 8.4 percent. Exhibit 7 shows a summary of Casino s financial performance in fiscal years 2009 through Tesco One of Carrefour s European industry peers was UK-based Tesco, one of the world s largest retailers, together with Carrefour and Wal-Mart. The strategies of Carrefour and Tesco exhibited some similarities. Particularly, both retailers engaged in international expansion and reserved a substantial amount of store space for nonfood products. Tesco s operations were less international than Carrefour s. In 2011, 57 percent of Carrefour s revenues came from outside France, whereas 41 percent of Tesco s revenues were earned outside the UK. Like Carrefour, Tesco offered financial services, such as banking and insurance services, to its customers. Tesco also operated a successful online grocery store, with sales over 2 billion.

5 CHAPTER 5 FINANCIAL ANALYSIS 227 The company had different store formats, which all operated under the Tesco banner. Tesco Express and Metro stores were the smallest type of stores (with up to 5,000 square meters) and focused on selling food products. Tesco s Superstores occupied between 7,000 and 16,000 square meters and offered both food and nonfood products. Since 1997, Tesco also operated Extra stores, which offered a wide range of food and nonfood lines, including electrical equipment, clothing, and health and pharmaceutical products. These stores had store spaces of approximately 20,000 square meters. Tesco s Superstores and Extra stores were thus comparable, at least in size and assortment, to Carrefour s Hypermarkets. In the fiscal year ending on February 25, 2012, Tesco s return on equity was 17.6 percent. Exhibit 7 shows a summary of Tesco s financial performance in fiscal years 2009 through 2011.

6 228 PART 2 BUSINESS ANALYSIS AND VALUATION TOOLS EXHIBIT 1 Carrefour s operations by geographic segment and store format (in E millions) Fiscal year France Rest of Europe Latin America Asia Hard discount Net sales ,179 23,699 15,082 7, ,907 24,597 13,919 6,923 9, ,266 25,058 10,598 6,441 9, ,150 26,674 9,560 5,955 9,629 Recurring operating income , , ,469 1, Tangible and intangible fixed assets ,677 5,110 3,453 1, ,604 5,224 3,510 1,417 1, ,488 5,362 3,092 1,437 1, ,528 5,724 2,508 1,401 1,655 Capital expenditures Depreciation and amortization expense Sales area of consolidated stores (in square meters, thousands) ,093 4,469 2,340 2, ,126 4,467 2,304 2,459 1, ,103 4,499 2,203 2,517 2, ,055 4,334 2,113 2,210 2,101

7 CHAPTER 5 FINANCIAL ANALYSIS 229 EXHIBIT 2 Carrefour s stock price and the MSCI Europe price index from December 1995 to December 2011 (price on December 31, 1995 ¼ 100) December-95 December-99 January-02 MSCI Europe Index January-05 January-08 Groupe Carrefour January-11

8 230 PART 2 BUSINESS ANALYSIS AND VALUATION TOOLS EXHIBIT 3 Carrefour s consolidated income statements, balance sheets, and cash flow statements, 2006 to 2011 (in E millions) IFRS E millions 2011 Consolidated Income Statements 2010 (restated, excluding Dia) 2010 (original, including Dia) Net sales 81,271 80,511 90,099 85,366 86,967 82,149 Loyalty program costs (816) (774) (774) (602) (626) Other revenue 2,309 2,103 2,187 1,990 1,899 1,147 Total revenue 82,764 81,840 91,512 86,754 88,240 83,296 Cost of sales (64,912) (63,969) (71,640) (67,626) (68,719) (64,609) Gross margin from recurring operations 17,852 17,871 19,872 19,128 19,521 18,686 Labour costs (7,843) (7,699) (8,493) (8,290) (8,307) (7,988) Other sales, general and administrative expenses (6,126) (5,795) (6,486) (6,269) (6,045) (5,685) Depreciation of tangible fixed assets (1,427) (1,427) (1,664) (1,645) (1,651) (1,517) Amortization of intangible fixed assets (267) (232) (240) (214) (198) (183) Depreciation investment properties (18) (19) (19) (20) (20) (18) Allocations and reversals of provisions (5) Recurring operating income 2,181 2,701 2,972 2,721 3,309 3,291 Net gains (losses) on sales of assets Impairment losses (2,161) (135) (223) (761) (396) (23) Restructuring costs (209) (346) (415) (237) (72) (92) Other non-recurring items (547) (571) (498) (67) (52) 162 Operating income (481) 1,703 1,836 1,656 2,789 3,338 Finance income Finance costs (666) (614) (617) (638) (713) (628) Changes in the fair value or gains/losses on sales of financial assets (171) (81) (116) Income before taxes (1,238) 1,055 1,179 1,050 2,228 2,812 Income tax expense (1,002) (610) (697) (635) (740) (807) Net income from companies accounted for by the equity method Income attributable to non-controlling interests (33) (135) (135) (110) (266) (180) Net income from continuing operations (2,209) ,274 1,869 Net income from discontinued operations 2, (67) (5) 431 Net income ,269 2,299

9 CHAPTER 5 FINANCIAL ANALYSIS 231 IFRS E millions 2011 Consolidated Balance Sheets 2010 (original, including Dia) ASSETS Inventories 6,848 6,994 6,607 6,867 6,867 6,051 Commercial receivables 2,781 2,555 2,336 3,226 3,424 3,620 Consumer credit granted by the financial services companies short term 3,384 3,444 3,215 2,708 2,713 2,586 Other current financial assets 911 1,811 2, Tax receivables Other receivable and prepaid expenses , Loans Cash and cash equivalents 3,849 3,271 3,300 5,316 4,164 3,697 Assets held for sale Total current assets 19,254 20,210 19,290 20,242 19,376 17,347 Goodwill 8,740 11,829 11,473 11,363 11,674 10,852 Other intangible assets 966 1,100 1,075 1,050 1,173 1,038 Tangible fixed assets 13,770 15,299 15,031 14,793 14,751 13,735 Other non-current financial assets 1,433 1,542 1,310 1,306 1,119 1,111 Investments in companies accounted for by the equity method Deferred tax assets Investment property Consumer credit granted by the financial services companies long term 2,236 2,112 2,005 2,097 1,959 1,656 Total non-current assets 28,677 33,440 32,263 32,067 32,556 30,186 Total assets 47,931 53,650 51,553 52,309 51,932 47,533 EQUITY AND LIABILITIES Short-term borrowings 2,149 2,715 2,158 2,785 3,247 2,474 Suppliers and other creditors 15,362 16,796 16,800 17,544 17,077 16,450 Consumer credit financing short term 4,482 4,527 4,061 4,044 3,989 3,427 Tax payables 1,319 1,298 1,325 1,467 1,193 1,172 Other payables 2,785 2,824 2,747 2,875 3,114 2,910 Liabilities related to assets held for sale Total current liabilities 26,097 28,481 27,184 28,740 28,847 26,446 Long-term borrowings 9,523 10,365 9,794 9,505 8,276 7,532 Post-employment benefit obligations Other provisions 2,946 2,411 1,927 1,709 2,147 2,256 Deferred tax liabilities Consumer credit financing long term Total liabilities 14,208 14,606 13,498 12,757 11,315 10,584 Shareholders equity attributable to non-controlling interests 1, ,107 1,017 Share capital 1,698 1,698 1,762 1,762 1,762 1,762 Consolidated reserves and (loss)/income for the year 4,919 7,886 8,311 8,261 8,901 7,724 Shareholders equity group share 6,617 9,584 10,073 10,023 10,663 9,486 Total shareholders equity and liabilities 47,931 53,650 51,553 52,309 51,932 47,533

10 232 PART 2 BUSINESS ANALYSIS AND VALUATION TOOLS IFRS E millions 2011 Consolidated Cash Flow Statements 2010 (restated, excluding Dia) 2010 (original, including Dia) (Loss)/Income before taxes (1,238) 1,055 1,179 1,052 2,228 2,812 Depreciation and amortization expense 1,795 1,740 2,033 1,965 1,946 1,790 Taxes (712) (589) (678) (618) (624) (660) Capital gains/losses on sales of assets (155) (74) (30) 8 (225) (139) Change in provisions and impairment 2, Dividends received from companies accounted for by the equity method Impact of discontinued operations (1) (12) 10 Change in working capital requirement (117) (730) (598) (89) Impact of discontinued operations (111) Change in consumer credit granted by the financial services companies (229) (84) (84) (256) (111) 43 Net cash from operating activities 2,119 2,737 2,737 3,430 4,887 3,912 Acquisitions of property and equipment and intangible assets (2,330) (1,832) (2,122) (2,074) (2,908) (3,069) Acquisitions of financial assets (30) (46) (48) (38) (143) (101) Acquisitions of subsidiaries (41) (97) (97) (116) (296) (1,388) Proceeds from the disposal of subsidiaries Proceeds from the disposal of property and equipment and intangible assets Proceeds from disposals of investments in non-consolidated companies Other cash flows from investing activities 151 (274) (284) (215) (171) (50) Impact of discontinued operations 1,329 (320) (25) (115) (23) (105) Net cash used in investing activities (398) (2,307) (2,307) (2,376) (2,596) (3,491) Proceeds from share issues Acquisitions and disposals of investments without any change of control (13) Dividends paid by Carrefour (parent company) (708) (740) (740) (741) (740) (722) Dividends paid by consolidated companies to non-controlling interests (103) (124) (124) (161) (202) (106) Change in treasury stock and other equity instruments (126) (943) (943) 1 (404) (507) Change in current financial assets (1,860) (233) Issuance of bonds 500 1,978 1, Repayments of bonds (1,442) (1,000) (1,000) (1,000) Other changes in borrowings (190) (71) (53) ,298 Impact of discontinued operations (13) 69 Net cash used in financing activities (1,170) (344) (344) (3,102) (1,028) 46 Effect of changes in exchange rates 27 (115) (115) 31 (110) Net change in cash and cash equivalents 578 (29) (29) (2,017) 1, Cash and cash equivalents at beginning of period 3,271 3,300 3,300 5,316 4,164 3,697 Cash and cash equivalents at end of period 3,849 3,271 3,271 3,300 5,317 4,164

11 CHAPTER 5 FINANCIAL ANALYSIS 233 EXHIBIT 4 Excerpts from Carrefour s annual report for the fiscal year ending December 31, 2011 Note 2: Summary of significant accounting policies 2.2 Segment information IFRS 8 Operating Segments requires the disclosure of information about an entity s operating segments extracted from the internal reporting system and used by the entity s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. Based on the IFRS 8 definition, the Group s operating segments are the countries in which it conducts its business through consolidated stores. These countries have been combined to create four geographical segments: France; Rest of Europe: Spain, Italy, Belgium, Greece, Poland, Turkey, and Romania; Latin America: Brazil, Argentina, and Colombia; Asia: China, Taiwan, Malaysia, Indonesia, India, and Singapore. The hard discount operating segment for which information was disclosed in 2010 no longer exists following the loss of control of the Dia sub-group on July 5, Banking activities To support its core retailing business, the Group offers banking and insurance services to customers through its subsidiary Carrefour Banque. Due to its specific financial structure, this secondary business is presented separately in the Consolidated Financial Statements: consumer credit granted by the financial services companies (payment card receivables, personal loans, etc.) is presented in the statement of financial position under Consumer credit granted by the financial services companies long-term and Consumer credit granted by the financial services companies short-term as appropriate; financing for these loans is presented under Consumer credit financing long-term and Consumer credit financing short term as appropriate; revenues from banking activities are reported in the income statement under Other revenue ; cash flows generated by banking activities are reported in the statement of cash flows under Change in consumer credit granted by the financial services companies Non-current assets and disposal groups held for sale and discontinued operations A discontinued operation is a component of an entity that has been either disposed of or classified as held for sale, and: represents a separate major line of business or geographical area of operations; and is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or is a subsidiary acquired exclusively with a view to resale. It is classified as a discontinued operation at the time of sale or earlier if its assets and liabilities meet the criteria for classification as held for sale. When a component of an entity is classified as a discontinued operation, comparative income statement and cash flow information are restated as if the entity had met the criteria for classification as a discontinued operation on the first day of the comparative period. In addition, all the assets and liabilities of the discontinued operation are presented on separate lines on each side of the statement of financial position, for the amounts at which they would be reported at the time of sale after eliminating intra-group items Other revenue Other revenue, corresponding mainly to sales of financial services and travel, rental revenues and franchise fees, is reported on a separate line below Net sales in the income statement. Financial services revenues correspond mainly to bank card fees and arranging fees for traditional and revolving credit facilities, which are recognized over the life of the contract. Note 3: Significant events of the year Economic environment The Group operated in a challenging macro-economic environment in 2011, particularly in Southern Europe. In response to the deepening crisis in the second half and the introduction of successive austerity plans in the various European countries, the Group revised its business plan projections to reflect the new environment. The downgrading of the Group s growth forecasts in Greece and Italy led to the recognition of significant impairment losses on goodwill, in the

12 234 PART 2 BUSINESS ANALYSIS AND VALUATION TOOLS amounts of 188 million euros and 1,750 million euros respectively, representing total non-recurring expense for the year of 1,938 million euros. Distribution of Dia shares The Shareholders Meeting of June 21, 2011 approved the distribution on July 5, 2011 of 100 percent of Dia s share capital to Carrefour shareholders, in the form of a special dividend in kind. At that date, there were 679,336,000 Carrefour shares outstanding and the same number of Dia shares, so that shareholders received one Dia share for each Carrefour share held. Also on July 5, 2011, Dia SA was listed on the Madrid Stock Exchange at an IPO price of 3.40 euros per share. [...] Consequently, in the interim financial statements at June 30, 2011, the dividend was recognized by recording a liability towards shareholders. In the absence of a more reliable indicator at June 30, 2011, the fair value of Dia shares at that date was considered as being equal to the initial fair value of 3.40 euros per share, corresponding to the July 5, 2011 IPO price. In the financial statements at December 31, 2011, the Group recorded: in shareholders equity Group share, the dividend recorded in Carrefour SA s accounts, i.e. 2,230 million euros (unchanged from June 30, 2011); in cash and cash equivalents, the proceeds from the sale of Dia shares held in treasury stock at the time of the distribution (79 million euros); in net income from discontinued operations, the 1,909 million euros capital gain corresponding to the difference between the fair value of the Dia shares (2,309 million euros) and their carrying amount, including disposal costs and the tax effect (400 million euros). Dia and its subsidiaries were consolidated by Carrefour up to the date when control of the companies was lost, on July 5, In accordance with IFRS 5, the following reclassifications were made in the 2011 annual financial statements: Dia s net income for the period up to the date when control was lost (32 million euros) was included in the carrying amount at June 30 and therefore presented under Net income from discontinued operations as part of the 1,909 million euros capital gain referred to above. To permit meaningful comparisons, Dia s 2010 net income was also reclassified to this line; in the statement of cash flows, all of Dia s cash flows for the first half of 2011 were presented on the lines Impact of discontinued operations. Its 2010 cash flows were reclassified accordingly. Disposal of operations in Thailand Pursuant to an agreement signed on November 15, 2010, on January 7, 2011 Carrefour sold its operations in Thailand to Big C, a subsidiary of the Casino Group, for a total of 816 million euros net of transaction costs. The capital gain on the transaction, in the amount of 667 million euros, is reported in the 2011 income statement under Net income from discontinued operations. Other significant events On December 27, 2011, the Group sold a portfolio of 97 supermarket properties owned by Carrefour Property for 365 million euros. The supermarkets will continue to be operated under the Carrefour Market banner under long-term fixed rent leases with an indexation clause. The transaction qualifies as a sale-and-leaseback transaction under IAS 17 Leases. The leases with the new owner of the properties, for an initial term of 12 years with multiple renewal options, fulfill the criteria for classification as operating leases, as substantially all the risks and rewards incidental to ownership of the asset are retained by the lessor. The properties were sold at market price and the capital gain, net of transaction costs, was recognized in full in the 2011 income statement in the amount of 229 million euros. Note 14: Net income from discontinued operations Net income from discontinued operations in 2011 comprises: the net gain on the sale of operations in Thailand, for 667 million euros; the net gain on the sale of the Dia entities and their contribution to consolidated income for the period up to the sale date, for 1,909 million euros. Net income from discontinued operations in 2010 comprises: the contribution to 2010 consolidated income of operations in Thailand, for 44 million euros; the contribution to 2010 consolidated income of the Dia subsidiaries, for 38 million euros; the contribution to 2010 consolidated income of the Russian subsidiary, for a negative 3 million euros; the reversal of a provision set aside at the time of the 2005 sale of the out-of-home dining business, for 11 million euros.

13 CHAPTER 5 FINANCIAL ANALYSIS 235 Note 19: Investment property Investment property consists mainly of shopping malls located adjacent to the Group s stores. (in millions of euros) 12/31/ /31/2010 Investment property at cost Depreciation (195) (173) Total Rental revenue generated by investment property, reported in the income statement under Other revenue, totaled million euros in 2011 (2010: 100 million euros). Operating costs directly attributable to the properties amounted to 12.1 million euros in 2011 (2010: 14.7 million euros). The estimated fair value of investment property was 1,346 million euros at December 31, 2011 (December 31, 2010: 1,343 million euros). Note 22: Inventories (in millions of euros) 12/31/ /31/2010 Inventories at cost 7,150 7,282 Impairment (302) (289) Inventories net 6,848 6,994 Note 23: Commercial receivables (in millions of euros) 12/31/ /31/2010 Commercial receivables 1,446 1,263 Impairment (240) (259) Commercial receivables, net 1,207 1,004 Receivables from suppliers 1,575 1,551 Total 2,782 2,555 Commercial receivables correspond for the most part to amounts due by franchisees. Receivables from suppliers correspond to rebates and supplier contributions to marketing costs. Note 35: Other payables (in millions of euros) 12/31/ /31/2010 Accrued employee benefits expense 1,615 1,702 Due to suppliers of non-current assets Deferred revenue Other payables Total 2,785 2,824 Note 42: Subsequent events Guyenne & Gascogne On December 12, 2011, the Group announced that it planned to file a cash offer with a stock alternative for Guyenne & Gascogne, its historical partner in southwestern France. The offer terms are as follows: cash offer: one Guyenne & Gascogne share (cum dividend) for euros in cash (as adjusted for any dividend payment in addition to the interim dividend described below); alternative stock offer: one Guyenne & Gascogne share for 3.90 Carrefour shares (cum dividend). The stock alternative will be available for a maximum of 4,986,786 Guyenne & Gascogne shares. Guyenne & Gascogne has stated that it will pay an interim dividend of seven euros before the close of the offer period. This interim dividend has been taken into account in determining the offer price. Guyenne & Gascogne operates six Carrefour hypermarkets and 28 Carrefour Market supermarkets under franchise agreements. In 2011, these stores generated sales of 623 million euros including VAT. Guyenne & Gascogne is also a 50/50 shareholder of Sogara alongside Carrefour, which exercises management control. Sogara owns and operates 13 hypermarkets, which generated sales of 1.6 billion euros including VAT in 2011 and also holds an 8.2 percent stake in Centros Comerciales Carrefour, the holding company for Carrefour s operating activities in Spain. Carrefour s draft information memorandum was filed with France s securities regulator, Autorité des Marchés Financiers (AMF), on February 14, It was approved by the AMF on February 28 under visa no New financial services partnership in Brazil On April 14, 2011, the Group announced that it had signed an agreement for the sale to Itaù Unibanco of 49 percent of BSF Holding, the company that controls Carrefour s financial services and insurance operations in Brazil. The partnership with Itaù Unibanco will enable Carrefour to bolster its financial services and insurance businesses by leveraging the major potential synergies between the two groups and expanding its financial product and service offering. On June 30, 2011, Carrefour notified Cetelem, its current partner in BSF Holding, that it intended to exercise its call option on Cetelem s 40 percent interest at a total price of million euros. The buyout of its current partner and the sale of shares to Itaù Unibanco are subject to the usual regulatory provisions, including the requirement to obtain an authorization from the Brazilian central bank. On completion of the transactions, Carrefour will hold a 51 percent majority stake in BSF Holding along with the 315 million euros proceeds from the sale of the 49 percent interest. The deal is expected to close during the first half of 2012.

14 236 PART 2 BUSINESS ANALYSIS AND VALUATION TOOLS EXHIBIT 5 Carrefour s operating leases, post-employment benefit obligations, and other revenues during the fiscal years 2006 through 2011 Future minimum operating lease payments E millions Within one year 957 1,081 1, In one to five years 1,888 1,850 2,183 2,076 1,626 1,905 Beyond five years 1,714 2,231 3,014 2,928 2,473 2,704 Total future minimum lease payments 4,559 5,162 6,199 5,863 4,899 5,397 Present value of future minimum lease payments 3,150 Minimum lease payment made during the period 1,015 1,287 1,167 1,152 1, Post-employment benefit obligations defined benefit plans E millions Fair value of plan assets Defined benefit obligation (1,119) (1,105) (990) (835) (918) (950) Funding status (905) (877) (756) (612) (626) (642) Other revenue by nature E millions (restated, excluding Dia) 2010 (original, including Dia) Financing fees 1,292 1,184 1,184 1,125 1,055 NA Rental revenue Revenue from sub-leases Other revenue ,309 2,103 2,187 1,990 1,899 1,147 Note: Financing fees are revenues generated by the financial services companies. Other revenues are mainly franchise fees, business lease fees, and related revenue. In 2007, other revenues include financing fees. Other information Statutory tax rate 34.40% 34.40% 34.40% 34.40% 34.40% 34.40% Average number of employees 407, , , , , ,205 Number of employees at the end of the period 412, , , , , ,295 Note: In 2010, Carrefour s average (end-of-year) number of employees excluding Dia s employees was 419,063 (419,417).

15 CHAPTER 5 FINANCIAL ANALYSIS 237 EXHIBIT 6 Assets and liabilities of Distribuidora Internacional de Alimentación, S.A. (Dia) in fiscal year 2010 E millions 2010 ASSETS Property, plant, and equipment 1,597.4 Goodwill Other intangible assets 45.4 Investments accounted for using the equity method 0.1 Non-current financial assets 51.7 Consumer loans by finance companies 3.2 Deferred tax assets 29.3 Non-current assets 2,141.5 Inventories Trade and other receivables Consumer loans by finance companies 5.6 Current tax assets 38.4 Other current financial assets 21.6 Other assets 11.1 Cash or cash equivalents Current assets 1,111.9 Total assets 3,253.4 LIABILITIES AND EQUITY Equity attributable to equityholders of the parent Non-controlling interests (7.8) Non-current borrowings 28.0 Provisions Deferred tax liabilities 10.4 Non-current liabilities Current borrowings Trade and other payables 1,726.1 Refinancing of consumer loans 0.5 Current tax liabilities Current income tax liabilities 23.5 Other financial liabilities Liabilities directly associated with non-current assets held for sale 2.5 Current liabilities 2,608.1 Total equity and liabilities 3,253.4 Source: 2011 financial report Distribuidora Internacional de Alimentación, S.A.

16 238 PART 2 BUSINESS ANALYSIS AND VALUATION TOOLS EXHIBIT 7 Summary of industry peers accounting performance in the fiscal years 2009 to 2011 a Casino Tesco Panel A: ROE decomposition Net operating profit margin 2.4% 2.4% 2.2% 5.0% 4.8% 4.6% Net operating asset turnover ¼ Return on Operating Assets 6.3% 5.8% 5.3% 8.4% 8.4% 8.5% Return on Operating Assets 6.3% 5.8% 5.3% 8.4% 8.4% 8.5% (Operating Assets/Business Assets) þ Return on Investment Assets 6.1% 7.5% 6.3% 5.8% 5.5% 9.2% (Investment Assets/Business Assets) ¼ Return on Business Assets 6.2% 6.3% 5.6% 8.0% 7.8% 8.6% Spread 1.8% 2.2% 1.4% 5.4% 5.3% 5.1% Net financial leverage ¼ Financial leverage gain 2.1% 2.5% 1.5% 9.5% 10.6% 8.6% ROE ¼ Return on Business Assets þ Financial leverage gain 8.4% 8.7% 7.1% 17.4% 18.5% 17.2% Panel B: Other ratios Personnel expense 12.1% 11.7% 11.7% 10.6% 11.0% 10.9% Cost of materials 72.3% 73.4% 72.7% 75.8% 74.7% 74.7% Operating working capital/sales 7.5% 6.9% 7.2% 5.4% 5.0% 5.0% Net non-current assets/sales 45.9% 48.5% 49.1% 65.0% 62.8% 59.1% PP&E/Sales 23.2% 25.5% 25.7% 58.7% 56.2% 54.6% Days receivables Days inventories Days payables Current ratio Quick ratio Cash ratio Debt-to-equity Debt-to-capital Interest coverage (earnings based) a Source: Reuters Fundamentals and author s own calculations. The ratios in this table have been calculated (a) using the average balances of balance sheet items, (b) after adjusting the financial statements for off-balance operating lease and pension commitments, and (c) after excluding other income and expense from NOPAT and net income.

17 CHAPTER 4 ACCOUNTING ANALYSIS: ACCOUNTING ADJUSTMENTS 169 value of equity was negative and the amount of goodwill that EM.TV recognized on the investment was E2.07 billion. The rationale of capitalizing this amount of goodwill on EM.TV s balance sheet is that it could truly represent the future economic benefits that EM.TV expects to receive from its investment but that are not directly attributable to the investment s recorded assets and liabilities. However, the analyst should consider the possibility that EM.TV has overpaid for its new investments, especially in times where its managers are flush with free cash flow. At the end of the fiscal year, when EM.TV s share price had already declined to E5.49, the company was forced to admit that it had overpaid for its latest acquisitions. Goodwill impairment charges for the year ending in December 2000 amounted to E340 million for the Jim Henson Company and E600 million for Speed Investment. In its annual report, EM.TV commented that the salient factor for the write-offs was that, at the time of the acquisitions, the expert valuation was determined by the positive expectations of the capital markets. This was particularly expressed through the use of corresponding multiples. Despite the large write-offs, a considerable amount of goodwill, related to the acquisition of Speed Investment, remained part of EM.TV s assets. This amount of E1.41 billion was equal to 170 percent of EM.TV s book value of equity. Given the questionable financial health of Speed Investment, did the initial E2.07 billion of goodwill ever represent a true economic asset? Was it reasonable to expect to receive E2.07 billion in future economic benefits from a firm that had not been able to earn profits in the past? If not, was the E600 million write-down adequate? 1 What balance sheet adjustments should an analyst make if she decided to record an additional write-down of E1.41 billion in the December 2000 financials? 2 What effect would this additional write-down have on EM.TV s depreciation expense in 2001? (Assume that the adjustments to EM.TV s balance sheet are in conformity with current IFRSs.) Problem 3 Audi, BMW and Skoda s research and development Car manufacturers Audi, BMW Group and Skoda Auto spend considerable amounts on research and development and capitalize a proportion of these amounts each year. Each manufacturer systematically amortizes development cost assets, presumably using the straight-line method, following the start of the production of a developed car model or component. In the notes to their financial statements, the firms report the following (average) estimated product lives: n Audi: five to nine years; n BMW: typically seven years, n Skoda: two to ten years, according to the product life cycle. In 2011 (2010), close to 99 (70) percent of Skoda s capitalized development expenditures capitalized concerned development costs for products under development (i.e., models or components that are not yet in production). Audi and BMW both focus their activities on the premium sector of the automobile market. Skoda operates primarily in the lower segments of the market. Both Audi and Skoda are majority owned by Volkswagen Group and share car platforms and production facilities with their major shareholder. BMW is publicly listed and independent (from other car manufacturers). The following table displays the firms research and development expenditures and the amount capitalized and amortized during the years BMW Group Research and development 3,610 3,082 2,587 2,825 2,920 2,544 2,464 2,334 expense (E millions) Amortization and impairment 1,209 1,260 1,226 1,185 1, Development costs capitalized in ,087 1,224 1,333 1,536 1,396 1,121 the current year Total R&D expenditure 3,373 2,773 2,448 2,864 3,144 3,208 3,115 2,818 Capitalized development costs (asset) at the end of the year 4,388 4,625 4,934 5,073 5,034 4,810 4,146 3,495