PARIS Carrefour (CARR.PA), the world's second-largest retailer, reported a sharp improvement in profitability at its core French business as a turnaround plan started to pay off, raising hopes it can do the same in ailing southern Europe.
Carrefour has struggled for years in Europe, partly due to a reliance on the hypermarket format it pioneered as time-pressed customers shop more locally and online and buy non-food goods from specialists.
Chief Executive Georges Plassat, who joined in May 2012, has responded in the group's home market of France by cutting costs, renovating ageing stores, improving price competitiveness and simplifying product offerings.
Europe's largest retailer said on Thursday its first-half recurring operating profit rose 4.9 percent to 766 million euros ($1 billion), just below the average forecast of 771 million in a Reuters poll of six analysts.
That included a 75.4 percent leap in operating profit in France, where the group makes more than 40 percent of sales.
"The market will be delighted by the surge in French profitability," wrote Citi analysts Alastair Johnston and Pradeep Pratti in a note. "The improvement in France gives much credibility to the bull-case."
Carrefour shares, which are up 48 percent since Plassat's arrival and trade at a premium to France's Casino (CASP.PA) and Britain's Tesco (TSCO.L), were 4 percent higher at 0715 GMT (2:15 EDT), helping lift the European retail sector .SXRP 1 percent.
France, the euro zone's second-biggest economy, saw a bigger-than-expected rebound in the second quarter but could be shrinking again, a survey showed last week, with jobless claims rising every month over the last 27 months.
"Our French business continues to show encouraging signs," Chief Financial Officer Pierre-Jean Sivignon told reporters, adding Carrefour's price image with consumers was improving and profitability was "good" in all store formats.
He stuck with comments made in July that he was comfortable with the market consensus for 2013 earnings before interest and taxes of around 2.2 billion euros, provided there is no big swing in Latin American currencies.
That is good news for top shareholder Blue Capital, controlled by LVMH (LVMH.PA) CEO Bernard Arnault and U.S. investment fund Colony Capital.
SPAIN, ITALY STRUGGLE
The operating margin in France improved by 120 basis points to 2.8 percent of sales, helping to lift the group margin slightly to 2.1 percent, although that still lagged a peer median of 3.4 percent, according to Thomson Reuters data.
A stronger France helped counter a 120 basis points drop in the profitability of the rest of Europe, which accounts for a quarter of sales and was dragged down by austerity-hit Spain and Italy to 0.4 percent of sales, Sivignon said.
"Many will say 'if they can fix France then they can fix Italy' and thereby not worry too much about the decline in profitability at this business unit," the Citi analysts said.
Many retailers across Europe are struggling as consumers' disposable incomes are squeezed by rising prices, muted wages growth and government spending cuts.
However, Dutch grocer Ahold AHLN.AS beat forecasts for quarterly operating profit last week as cost cuts and market-share gains in the Netherlands offset a weak performance in the United States, its largest market.
Earlier this month, the world's largest retailer Wal-Mart Stores Inc (WMT.N) reported a surprise decline in quarterly same-store sales in the United States and cut its outlook for the full year.
To raise cash to defend positions in key markets of western Europe, China and Brazil and strengthen its balance sheet, Carrefour has been exiting several non-core countries such as Colombia, Malaysia and Indonesia.
This helped cut net debt by 3.7 billion euros to 5.9 billion euros at end-June and boost free cash flow by 243 million euros.
(Editing by Emma Thomasson and Mark Potter)