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Initiation of Coverage: Almacenes Exito: A new era of retail - Initiate with Underperform - Credicorp Capital

A new era of retail - Initiate with Underperform

Price: COP 25,980; Target Price: COP 29,000

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February 27, 2014 ( newswire) We are initiating our coverage of Almacenes Éxito with a December 2014 target price of $29,000 and an Underperform recommendation. Our thesis is grounded in valuation, which, in our view, has fully internalized attractive domestic growth in Colombia while not fully reflecting a more competitive retail environment and lower sales and EPS growth expectations versus peers.

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Historical dominance is being challenged. New competition and increases in land and store development costs are challenging the company's growth profile. Such an environment will make margin improvements and increased scale more difficult.

Important store conversion process, which has allowed the retailer to consolidate under 3 principal banners in Colombia, has led to a minimized SKU count, translating into less stock-outs, tighter focus on product performance, more flexibility in vendor-level considerations, and improved retail margins and sales.

However, the company needs to remain focused on ROIC improvement, which we believe can be done through higher sales/m2, margin improvement via other businesses, and better gross margins in Uruguay.

Premium valuations. Exito's shares have historically traded at a steep premium to Latam peers, despite returns below global averages. In our view, the “rarity” aspect of such premium will become less relevant going forward. The company is trading at 2014e FWD P/E and FWD EV/EBITDA of 25x, and 10x respectively. Both are above Latam peers, despite lower than expected growth (14-16 CAGR EPS 9% vs.18% peer avg.)

For charts, tables and the full report, see the attached file.

Credicorp Capital

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