London/Paris, July 1 - Carrefour's huge 4.5-billion-euro ($6.3 billion)savings programme buys Europe's No.1 retailer time to turn itself around, but investors may want more details on strategy before pushing the shares much higher.
The French group, hit hard in the recession by its exposure to weak western European markets and a reliance on discretionary non-food ranges, reported promising results from a string of new initiatives at an analyst day on Tuesday.
These included a discount range of products, revamped convenience and discount stores, and a move to a single banner name across its hypermarkets and supermarkets.
But Carrefour also announced a third profit warning in 12 months, due largely to the cost of cutting prices, and said it still hadn't come up with a blueprint for its troubled hypermarkets, underscoring the size of the task ahead.
"While the potential profit upside is exciting, investors are still being asked to take a lot on trust," Execution analysts said in a research note.
With Carrefour shares already trading at about 13.5 times forecast earnings -- above French rival Casino on 10.3 and Britain's Tesco on 11.9, according to Reuters data -- they advise against giving the firm the benefit of the doubt.
Carrefour shares, which have lagged the DJ STOXX European retail index by about 5 percent over the past year, leapt as much as 5.7 percent to 32.14 euros on Wednesday as investors welcomed the bigger-than-expected savings plan.
The group, which employs around 490,000 people in more than 15,000 stores in 30 countries, said it would cut costs by 2.1 billion euros by 2012 and save 1 billion euros by improving purchasing terms in its main western European markets of France, Spain, Belgium and Italy. It also plans to save 1.4 billion euros by cutting inventory times by a week.
The plan, from new Chief Executive Lars Olofsson, who took the helm on Jan. 1, is bigger than most analysts hoped for and dazzled some.
"The cultural shift within Carrefour is self-evident and the potential efficiency gains are so material that we believe the presentation should continue to sustain hopes of a meaningful recovery," said UBS's Matthew Taylor, who estimates the boost to operating profit in 2012 could reach 1.1 billion euros.
CHALLENGES
However, others were more wary, particularly as Carrefour also warned operating profit would fall to 2.7-2.8 billion euros this year, from 3.3 billion in 2008 and against analysts' average forecast of 3.1 billion, according to Reuters Estimates.
"Carrefour's experience year-to-date has been investing more in prices than it has saved in costs, and moreover the industry structure in France with a high degree of private ownership, and high hard discount penetration could require Carrefour to reinvest much of the benefit of its cost cutting to deliver sales growth," Bernstein analyst Chris Hogbin warned.
While welcoming Olofsson's plans, Hogbin noted that they were little different from those of his predecessor, Jose Luis Duran, who struggled to deliver change.
He said Casino shares offered better value, while Tesco offered better growth prospects, with its big push into international markets and financial services.
Some analysts were also concerned that Carrefour hasn't come up with a plan for its hypermarkets -- long an Achilles' heel. It aims to have proposals ready by the end of this year for testing in 2010, but a rollout is unlikely before 2011.
"Management sound like they have lost confidence in their non-food retailing skills (suggesting downsizing, and possibly letting space to specialists to help cope with the e-commerce threat)," the Execution analysts said, noting the group also hadn't developed a turnaround plan for its Belgian business.
JP Morgan analysts said finding a solution for hypermarkets was the number one priority.
"We like very much the Carrefour Market (unified banner stores), Carrefour City (convenience stores) and Dia (discount stores) initiatives in France, but what we believe will move the needle is getting the hypermarkets right," they said.
"The other bad news is the cost of the transformation," they added. Carrefour said its plans would require total capital expenditure of 500 million euros and entail one-off expenses of about 1 billion between 2009 and 2012.