Carrefour established the concept of hypermarket
Carrefour established the concept of hypermarket and is one of the major food retailers globally. Carrefour Hypermarket has a maximum one 23000 square meters and minimum ones 2400 square meters. In the hypermarkets, the company sells different household products. The hypermarkets have a wide variety of non-food products and a wide selection of food items. Some of the food items in the hypermarkets include school material, cloths, and electric products and decorative products and many others.
The company has 1366 hypermarkets across the globe; the branches are distributed through Europe, South America, and Asia. The majority of the hypermarkets are found in Europe with more than 750 hypermarket majority of the in France where the headquarters of Carrefour is located.
Carrefour was established more than five decades ago, all this year’s hypermarkets have been the main source of income for the company. More than 60% of the company revenue is generated from these types of stores.
Supermarket
Carrefour has also established 1000 and 4000 square meters units in small towns and rural areas which mainly deal with the sale of food items, however, the stores also sell nonfood products. Almost 95 percent of Carrefour supermarkets are established in Europe. With strict regulatory affairs and increased commutation, it has become difficult for Carrefour to establish a new hypermarket. As a result of this Carrefour has opted to start opening supermarkets and convenience stores.
Medium size supermarkets play a key role in rural towns as well as small cities where population flow is low.
Convenience Stores
The convenience stores are the current concept that involves opening small tore in residential areas and large cities to satisfy the needs of all the consumers. They are strategically located to serve all the consumers. The convenience stores are convenient for consumers who are busy and sometimes find it difficult to visit supermarkets and hypermarkets just to purchase a few items.
Unlike supermarkets and hypermarkets, convenience stores generate small annual revenue; however, Carrefour has continued to expand its operation. Convenience stores represent 50 percent of the total stores. Most of the convenience stores are established through the franchise. It is also good to note that 95% of the store in Europe is established through the franchise.
For this analysis, the researcher also used multiple valuation models. Applying several ratios in businesses from the same sector or market or with specific peers it is possible to get the value of the company. in this analysis model, it is possible to find the value of the company based on benchmarking with other companies with similar capital structure. Multiples consider each company dimension and use their values to conclude company valuation. Investors, shareholders, and managers use this type of valuation to make investment decisions. They compare the value of the company against that of its peers. Though the relative valuation model it is possible for investors to verify the growth potential as well as identify the company risk. Many multiples are applied to measure the value of the firm.
Stocks can be valued either by the use of a discounted cash flow or ratio analysis method. In most cases, the estimate of value will differ. The ratio analysis is based on the present value of the industry. On the other hand, discounting free cash flow applies historical, present, and future projections to value stocks. The ratio method assumes that all companies are identical, and hence, they will be no difference in performance. DCF recognizes that every business is unique, and hence, different companies perform differently. Businesses will have their unique opportunities and threats, thus making the estimates to vary. The difference between the multiple variations can be attributed to the future growth rate of the company and predicted cash flows. The comparable may have errors in the financial statement, which leads to overstatement or understatement of shares. In such a case, the P/E ratio may not give the right image of the industry.
Discounted cash flow considers growth rate, reinvestment rate, cost of equity, and the weighted average cost capital. DCF method uses the intrinsic value of the stock. The method applies free cash flows to estimate corporate value. Free Cash Flows (FCF) are more suitable in measuring the corporate value since it eliminates subjective accounting policies involved in financial reporting. The method takes into consideration the effect of taxation on corporate value. DFCF method is recommended in measuring the value of the company. The method considers the value of money and focuses on wealth maximization, unlike profit maximization. The method is more accurate than the ratio analysis method. We obtained an intrinsic value of 127 compared to the market value of 13.9. We recommend investment in Carrefour SA as future cash flows exceed the initial investment.
The purpose of this is to find the global value on Carrefour, one of the largest global food retailers, using the discounted cash flow model as well as relative or multiple valuations.
Carrefour operates on three continents and more than 15 countries. This study will, therefore, involve analyzing the historical performance of the company to get the future value of the firm hence recommending whether to invest or not. The main operations of the company are based in France and hence more focus will be put on its operation in French.
The corporate concept behind its global expansion as well as a cultural influence that was adopted in different countries through Carrefour business strategy was important in this valuation.
Based on the discounting cash flow model we were able to compute the future financial projection for the period from 2020-2024. The assumption for this study is that the company’s cost of capital will remain constant throughout the period. It was also assumed that all cash flows generated by the company will be reinvested. Based on the DCF model, we recommended a BUY decision.
However, based on multiple valuations, it was observed that Carrefour SA is below its peers based on key performance indicators. Under this method of equity valuation, it is assumed that the company will have the same value as its peers. When compared with companies operating in the food retail industry, the Group also presented lower multiple except for price-earnings ratio PE. This indicates that Carrefour is undervalued.
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