Financial Analysis of Carrefour

Chapter 5 Carrefour S. A. Teaching Note Version: March 2007 Introduction The Carrefour case is a financial analysis case. Carrefour S. A. is one of the world’s largest retailers. During the first half of the 2000s, the company’s share prices steadily declined, despite the fact that the company reported above-average returns on equity. Students are asked to analyze Carrefour’s financial statements and segment data to find explanations for the company’s poor share price performance and to make recommendations for the future. The discussion of the financial analysis is preceded by a discussion of Carrefour’s strategy and accounting.Both the accounting analysis and the financial analysis are affected by Carrefour’s switch from French GAAP reporting to IFRS reporting in 2005 but specialist knowledge of French GAAP and IFRS (and first-time adoption) is not required. Questions for students 1. 2. Analyze Carrefour’s competitive and corporate s trategy. What are the key risks of the company’s strategy? Analyze Carrefour’s accounting (including the effects of Carrefour’s switch to IFRS-based financial reporting). Are any adjustments to Carrefour’s financial statements necessary?Analyze Carrefour’s operating management, financial management and investment management during the years 2001 to 2005, making use of both financial statement data and segment data. What are the primary drivers of the company’s poor share price performance? Summarize the key findings of the financial analysis and provide recommendations for improvement to Carrefour’s management. What actions could management take to regain the confidence of Chrystelle Moreau and her fellow investors? 3. 4. Case analysis Question 1 Key characteristics of Carrefour’s strategy and the associated risks are the following: – Competing on price and product.Carrefour follows a strategy that combines some elements of a differentiation strategy with elements of a cost leadership strategy, especially in its hypermarkets. Specifically, the hypermarkets differentiate themselves from competitor supermarkets (1) by offering a much broader assortment (more product categories (food and non-food) as well as a wider choice of brands within one product category (including its own brands)) and (2) investing in customer loyalty programs (e. g. , the â€Å"Pass† card). This strategy is backed up by a strong marketing campaign.At the same time, however, Carrefour realizes that—especially during economic downturns—its customers have low switching costs and are relatively price – sensitive. The company therefore wishes to keep the prices in its hypermarkets at economic levels. The way in which the company can achieve this is by: o Keeping a close eye on what consumers want (through customer surveys and building a â€Å"customer behavior database† using data gathered through , for example, the company’s customer loyalty card) and by timely adjusting its assortment and pricing to changes in consumers’ preferences. Having a well developed logistics network. This keeps turnover high and helps to control costs. o Benefiting from economies of scale, not only in logistics but also in purchasing of supplies (aggregation of purchasing; international negotiations with suppliers). o Selling low-priced products under Carrefour’s own brand name. An important risk of following a combination of strategies is that Carrefour’s hypermarkets become â€Å"stuck in the middle. † The planned changes that Jose Luis Duran—the new CEO—announced after replacing Daniel Bernard suggest that this happened during the first half of the 2000s.While many of Carrefour’s competitors, such as Leclerc, Auchan, Aldi, and Lidl, were able to aggressively lower their prices during the economic downturn, according to Duran Carrefour had f ocused too much on differentiation and improving its margins per square meter of store space (which mixes percentage margins and asset turnover). Consequently, the company lost its competitive edge to price discounters (by losing its reputation for low prices), which slowed down Carrefour’s growth and harmed its domestic market share. International growth.When large companies such as Carrefour start to obtain a dominant position in their domestic markets, they may be â€Å"forced† to expand overseas or enter other industries. Carrefour’s corporate strategy is to expand overseas rather than diversify. More importantly, as indicated above, achieving growth is an essential part of Carrefour’s strategy because (international) growth helps the company to obtain economies of scale in purchasing, logistics and the development of Carrefourbranded products. For example, Carrefour sells its own branded products in the same packaging worldwide (of course printed in different languages).The company’s overseas retailing operations are, however, more risky than its domestic operations. First, to some extent retailing remains a local business because consumers’ tastes differ substantially across countries. Profitable expansion outside Carrefour’s domestic market is only possible if the company has good knowledge about local customers’ preferences and tastes. Consequently, a slightly safer way to expand abroad is to acquire local supermarket chains. A disadvantage of this strategy is, however, that acquisition premiums have to be paid, which can also drive down profits.Second, many of Carrefour’s â€Å"intercontinental† hypermarkets are located in countries where the economic environment is risky: consumers in economically less developed countries are likely to be more price sensitive; East Asian and South American countries tend to have more bureaucracy and stronger government protection of local firms. Th ird, in several countries, Carrefour has to compete with other multinationals such as Tesco and Wal Mart, who are trying to gain a strong market position (mostly through severe price competition).In sum, Carrefour’s overseas operations tend to be in countries where consumers are likely more price sensitive, several multinationals engage in severe price competition, and the economy is less stable. Note, for example, that Carrefour generated 10 percent of its fiscal 2005 profits (before interest and taxes) in South America and East Asia, although the company generated close to 15 percent of its fiscal 2005 sales in these areas. Question 2 In 2005, Carrefour changed its accounting policies from French GAAP to IFRS.This change affected the company’s financial statements and, consequently, could affect the analysis of Carrefour’s historical performance. More specifically, to improve comparability across years the analyst must assess how Carrefour’s pre-2004 pe rformance and financial position would have been under the newly adopted accounting standards. When doing so, the following changes are important to consider: – Under French GAAP, Carrefour was required to amortize goodwill. IFRS does not allow goodwill amortization but requires companies to regularly test goodwill for impairment.The elimination of goodwill amortization increased Carrefour’s net profit in 2005 by close to 25 percent (and ROA by 0. 8 percentage points). Pre-2004 earnings figures might be understated because of goodwill amortization charges. However, amortization charges may have replaced/prevented impairment charges in these years. Hence, the net effect on net profits is likely to be (significantly) less than 0. 8 percent of total assets. – French GAAP based earnings did not include an expense for stock option grants to Carrefour’s employees.Because such a grant imposes costs on Carrefour’s shareholders, IFRS requires that the Black & Scholes value (or the value from another accepted option valuation model) of these option grants is recognized as expense in the income statement during the vesting period. In 2005, Carrefour’s stock option expense had a negative effect on net profit of 1. 4 percent (and a negligible effect on ROA). – The switch from French GAAP to IFRS has resulted in negative adjustments to both inventories and cost of sales in 2004.The reason for these adjustments (which was not explicitly mentioned in Carrefour’s 2005 financial report) is that under IFRS, inventories include amounts for (inventory-related) services that Carrefour billed to its suppliers. That is, instead of recognizing the amounts as revenues in the period of billing (as the company did under French GAAP), Carrefour now delays the recognition of these to the period in which the associated inventories are sold. This change of treatment reduced end-of-year inventories in 2004 by 10. 2 percent (and equity by 5. 7 percent).In addition, cost of sales in 2004 increased because the amounts billed for services related to the beginning-of-year inventories were smaller than those related to the end-of-year inventories. More specifically, the adjustment reduced net profit by 3. 3 percent. During years in which Carrefour’s inventories (as well as the services that Carrefour provides to its suppliers) increase, the IFRS treatment will most likely result in higher cost of sales than the French GAAP treatment. In the 3 years immediately prior to 2004, inventories decreased by fairly small amounts.It is therefore unlikely that during these years the French GAAP treatment of inventories had created significant differences between reported net profits and net profits that would have been reported under IFRS. The French GAAP treatment did, however, result in higher inventories (and equity and deferred tax liabilities) than those that would have been reported under IFRS. Assuming that during the se years, the overstatement of inventories due to the immediate recognition of revenues from services provide to suppliers has been around â‚ ¬500 million, the overstatement of equity has been in the range of 4-5 percent.Under IFRS Carrefour has to recognize (slightly) greater employee benefit obligations and classify (slightly) more leases as finance leases (hence reported on the balance sheet) than under French GAAP. In 2004, employee benefits have resulted in a negative adjustment of end-of-year equity (by close to 4 percent) and a positive adjustment of end-of-year non-current liabilities (by close to 3 percent). Financing lease adjustments affected primarily non-current assets and current liabilities.In addition to the changes mandated by IFRS, Carrefour made one voluntary change in its estimates of the economic useful lives of buildings: the company increased the depreciation period from 20 to 40 years. Assuming that this change was justified, depreciation of buildings prio r to 2004 was overstated. In particular, Note 15 indicates that the difference between restated accumulated depreciation and â€Å"original† accumulated depreciation on buildings at the end of 2004 was â‚ ¬158 million. This suggests that depreciation in 2004 was initially overstated by â‚ ¬158 million, resulting in an understatement of ROA of close to 0. percentage points (all under the assumption that the new policy is correct). In summary, under French GAAP, return on (total) assets may have been â€Å"understated† by, at maximum, 1. 2 percentage points because of â€Å"overstated† goodwill amortization and buildings depreciation. In addition, under French GAAP equity may have been â€Å"overstated† by at maximum 8 percent because of its accounting for inventories and employee benefits, but, at the same time, may have been â€Å"understated† because of (an unknown amount of) â€Å"overstated† goodwill amortization.Note that the adjus tments that Carrefour made to its financial statements because of the change in estimates are not the same as the adjustments that an analyst would make if he/she would assume that Carrefour had always depreciated its buildings over a period of 40 years. Carrefour does not â€Å"restrospectively† adjust its financial statements, but uses the new 40-year depreciation period only for 2004 and later fiscal years. At the end of 2005, Gross Buildings equaled â‚ ¬8,031 million.Unfortunately, the carrying value of Net Buildings is not disclosed, making it impossible to derive the average age of Carrefour’s buildings and forcing the analyst to make a crude assumption. Under the assumption that the average age of Carrefour’s buildings is 5 years, the carrying value of Net Buildings would have to be increased by an amount of â‚ ¬1,004 million ((5/20 – 5/40)x8,031) to retrospectively adjust Carrefour’s financial statements.Similarly, under the assumptio n that the average age of Carrefour’s buildings is 10 years, the carrying value of Net Buildings would have to be increased by an amount of â‚ ¬2,008 million ((10/20 – 10/40)x8,031) to retrospectively adjust Carrefour’s financial statements. In addition to the overly conservative depreciation rate on buildings, Carrefour’s noncurrent assets may be understated because the company has operating leases. At the end of 2005, Carrefour had large operating lease commitments. Exhibit TN-1 estimates the net present value of these commitments.The estimated NPV of Carrefour’s operating lease payments is approximately â‚ ¬3. 1 billion, which is equivalent to slightly more than 48 percent of Carrefour’s net non-current debt in 2005 (3,121/[10,443 – 226 – 3,773]) and implies an understatement of Carrefour’s non-current tangible assets by approximately 18 percent (3,121/[13,864 + 3,121). The use of operating leases is not abnorma l in the retailing industry. For example, at the end of the fiscal year ending on February 26, 2006 (labeled fiscal 2005), Tesco, one of Carrefour’s U. K. based competitors had operating leases for an estimated amount of ? 2,718 million, which was equivalent to slightly less than 75 percent of Tesco’s net non-current debt in 2005 (2,718/[4,958 – 1,325]) and implied an understatement of Tesco’s non-current tangible assets of approximately 15 percent (2,718/[15,882 + 2,718). – In summary, Carrefour’s non-current tangible assets appear to be understated by an amount in the range of â‚ ¬4 – 5 billion (or 22 – 27 percent (versus 15 percent for Tesco)). Question 3 Carrefour versus Tesco Exhibit TN-2 displays a set of ratios for Carrefour and Tesco.The ROE decomposition indicates that Carrefour has lower operating profit margins than Tesco but higher asset turnover. The net effect is that Carrefour has a moderately lower operating ROA than Tesco. Although Carrefour’s Operating ROA is lower than Tesco’s, Carrefour has a higher return on equity than Tesco, both in 2005 and 2004. The reason for this is that Carrefour is more leveraged than Tesco. Note that operating returns on assets are substantially greater than returns on assets. This is because both Carrefour and Tesco make much use of vendor financing, which makes their working capital negative.This emphasizes the importance of recasting the financial statements and using the alternative approach to ROE decomposition. The differences in the components of ROE between Carrefour and Tesco may find their origin in the strategic differences between both companies. However, they may also reflect differences in the effectiveness of operating management, investment management and financing decisions. We will discuss each of these sources below. Strategic differences. – Carrefour focuses more on creating a reputation for low prices and engages m ore in price competition with discounters than Tesco.Consequently, Carrefour’s profit margins are likely to be smaller at the benefit of higher asset turnover. – Tesco has a lower presence in non-European markets (such as Asia and South America) than Carrefour. Especially in these markets, entering multinational retailers such as Carrefour, Tesco and Wal Mart strongly compete on price to become the dominant market player. Operating management. – As indicated, Carrefour’s net operating profit margin is lower than Tesco’s, possibly because Carrefour engages in price competition more than Tesco. The ratio Cost of materials/sales indeed confirms this.In 2005, this ratio was 3. 6 percentage points higher for Carrefour than for Tesco, which illustrates the margin-reducing effect of price competition. Possibly because Carrefour competes less on product and services than Tesco, its personnel expenses as a percentage of sales were 1. 2 percentage point lowe r than Tesco’s. Depreciation and amortization charges as a percentage of sales are approximately equal for both competitors. Investment management. – The PPE/Sales ratio suggests that Tesco has invested a substantially larger amount in property, plant and equipment.There are various reasons for this difference: o Part of the difference between Carrefour and Tesco is due to the fact that Carrefour has a slightly greater proportion of its PP&E financed under operating lease agreements. Tesco’s decision to sell and leaseback a substantial proportion of its property suggests that Tesco’s management believes that Tesco does not yet optimally benefit from lease financing. In addition, Carrefour’s depreciation of buildings has been overly conservative in the years prior to 2004. Consequently, Carrefour’s understatement of non-current – – angible assets is estimated to be approximately 10 percent greater than Tesco’s (see also q uestion 2). o Statistics disclosed in the notes to the financial statements suggest that Tesco owns significantly more expensive stores (possibly at significantly more expensive locations) than Carrefour. In particular, the cost price of Tesco’s land and buildings per square meter equals ? 2,778 p. sq. m. (14,247/5. 129), or â‚ ¬4,086 p. sq. m. , whereas the same statistic equals â‚ ¬1,005 p. sq. m. (11,141/11. 08) for Carrefour (in fiscal 2005). o Sales per average square meter in fiscal 2005 was â‚ ¬6,850 (76,496/[0. x11. 08 + 0. 5Ãâ€"10. 671]) for Carrefour versus ? 8,140 p. sq. m. (39,454/[0. 5Ãâ€"5. 129 + 0. 5Ãâ€"4. 565]), or â‚ ¬11,972 p. sq. m. , for Tesco. Hence, although Carrefour’s square meters of store space are substantially less expensive, Carrefour needs, on average, more square meters than Tesco to generate a euro of sales. Although Carrefour’s PPE/Sales ratio is substantially lower than Tesco’s, the companies’ net no n-current asset/sales ratios are almost equal. (Note that part of the remaining difference is explained by the fact that Carrefour’s non-current assets are more understated than Tesco’s. The explanation for this is that Carrefour has a much greater amount of goodwill recognized on its balance sheet. This amount of goodwill has primarily arisen from the acquisitions of Compoirs Modernes (1998/99: â‚ ¬2,356m), Promodes (1999: â‚ ¬3,032m), GS (2000: â‚ ¬3,136m), and GB (2000: â‚ ¬1,128m). The negative effect of goodwill on asset turnover illustrates that Carrefour (past) strategy of growth through acquisitions has a downside: organic growth is typically more profitable than growth through acquisitions (see also question 2). Carrefour’s working capital turnover is substantially lower than Tesco’s.More specifically, it takes Carrefour approximately twice as much time as Tesco to sell its inventory. For a retailer, this is important because inventor ies comprise a large proportion of the company’s assets. This may be due to a difference in strategies: the company that sells relatively more non-food products will also have lower inventory turnover. Historically, Carrefour has been the European leader in selling a mix of food and non-food products. During the past decade Tesco has added more and more nonfood products to its assortment.Although both companies are not very open about their reliance on non-food sales, there are some (older) statistics available. In 2004, about 46 percent of Carrefour’s hypermarket sales came from dry grocery, 16 percent from fresh food, 17 percent from consumer electronics, 7 percent from apparel, and 14 percent from general merchandise. In comparison, 22 percent of Tesco U. K. sales came from non-food sales in 2004. Under the assumptions that (1) Carrefour sold its non-food products only in hypermarkets (which generated 8 percent of total 2004) and (2) Tesco sold a similar percentage of non-food products in its non-U.K. markets, the contribution of non-food products to the companies’ total sales is fairly comparable: 22 percent (0. 58 x [7% + 17% + 14%]) versus 22 percent. Carrefour’s trade receivables turnover is also substantially lower than Tesco’s. An important reason for this difference is that Carrefour’s financing company provides consumer credit to Carrefour’s customers. This credit has been extended to Carrefour’s customers through point-of-sale financing (offering a credit facility that enables customers to amortize the cost of their purchases over a longer period) or private credit cards.The short-term portion of this credit has been classified as trade receivables. Point-of-sale financing and private credit cards were common especially in Carrefour’s domestic market, France. Carrefour may therefore need to supply these financial services in order to effectively compete with its French industry peers. F inancial management. – Carrefour is more leveraged than Tesco. Carrefour’s degree of leverage is, however, not abnormal for a retailer. This is illustrated by the fact that Tesco has planned to sell and leaseback a substantial amount of property (more than ? billion) and return the proceeds of this transaction to its shareholders. The net effect of these transactions will be that Tesco’s leverage will get closer to Carrefour’s. In addition, Carrefour’s interest coverage ratios are—although lower than Tesco’s—sufficient, indicating that Carrefour experiences no problems to meet its interest obligations. Carrefour’s performance over time When analyzing Carrefour’s financial performance over time, the analysts has to take into account that Carrefour applied IFRS for the first time in 2005.A pragmatic approach to account for this is analyze year-to-year changes in ratios that are based on the same accounting standards (change in 2005 = IFRS-based change from 2004 to 2005; change in 2004 = French GAAP-based change from 2003 to 2004). Exhibit TN-3 displays the year-to-year changes in various ratios. The following changes are noteworthy: – Operating management. Both personnel expenses and cost of materials as a percentage of sales have increased during the past two years. As indicated, this most likely illustrates the margin-decreasing effect of severe price competition. – Investment management.In 2004, Carrefour managed to increase asset turnover, which mitigated the negative effect of the operating margin decrease on operating return on assets. In 2005, both margin and turnover decreased, suggesting that Carrefour has been unable to effectively compete on price. – Financial management. Leverage (as well as Carrefour’s financial leverage gain) decreased for three consecutive years. This seems inefficient because Carrefour’s spread is still positive and its intere st coverage is still sufficient. On the other hand, Carrefour’s financial spread, and with that the benefits of leverage, has decreased over the past two years.Analysis of Carrefour’s segment information Exhibit TN-4 displays several ratios that have been calculated using Carrefour’s segment information. Based on the segment analysis (at least) the following conclusions can be drawn: – The comparison of Carrefour’s with Tesco’s asset turnover illustrated that Carrefour’s sales per square meter of store space was substantially less than Tesco’s. The segment analysis shows that this difference in turnover is primarily caused by the underperformance of Carrefour’s stores outside France: o In 2005, sales per square meter was â‚ ¬10. 6 thousand in France versus â‚ ¬5. 90 thousand, â‚ ¬3. 13 thousand, and â‚ ¬3. 55 thousand in the Rest of Europe, South America, and Asia, respectively. o In 2005, fixed asset turnove r was 4. 51 in France versus 2. 18, 2. 62, and 2. 59 in the Rest of Europe, South America, and Asia, respectively. – EBIT margins were also much lower in Carrefour’s foreign markets than in its domestic market. However, like turnover, Carrefour’s profit margins declined in its domestic market after 2003. – There has been a strong decline in sales per square meter in France after 2002.This decline can possibly be attributed to Carrefour’s loss of market share in its domestic market. – During the first half of the 2000s, Carrefour primarily invested outside France. – It is puzzling that sales per square meter is substantially lower in hard discount stores (where one would expect low margins and high turnover) than in hypermarkets. Analysis of Carrefour’s cash flow performance Exhibit TN-5 displays Carrefour’s standardized cash flow statements. Between 2002 and 2005, Carrefour’s operating cash flow before working cap ital investments ranged from â‚ ¬3. 6 billion (in 2005) to â‚ ¬3. 9 billion (in 2003).In 2006, Carrefour will have (at least) the following uses of its cash flows: – Carrefour’s management announced in the company’s 2005 financial report that capital expenditures in the years 2006-2008 would be close to â‚ ¬3. 3 billion per year (on average). – Dividend payments equaled â‚ ¬758 million in 2005. Given the pattern of dividend increases over time, dividend payments in 2006 are likely to exceed â‚ ¬800 million. If in 2006 operating cash flow before working capital investments will be similar to historical values, Carrefour will need additional sources of cash to finance its investments and dividends.The question therefore arises as to what sources of cash flow might be available to the company: – Carrefour’s management is likely resist cutting dividends or raising new equity as this may put further pressure on the company’s share prices. – Like in previous years, the amount of net investments in non-current assets will be less than the amount of capital expenditures. This is so because Carrefour will divest stores that are underperforming. However, as restructuring progresses cash inflows from divestments can be expected to decrease. This illustrates the necessity for Carrefour to improve its cash flow from operations.As argued above, possible ways to do this is by improving margins outside France or by regaining market share in France. In addition, the company may reduce its investments in inventories either by improving logistics or by improving knowledge of customer preferences. Question 4 Analyst Chrystelle Moreau could use the following summary of key issues (and potential recommendations) arising from the analysis of Carrefour’s (and Tesco’s) financial statements: 1. The analysis suggest that Carrefour’s management should take actions to improve operations management. In particular: a. Carrefour’s low inventory turnover (relative to Tesco’s) suggests that the company needs to improve logistics. This would improve asset turnover, improve cash flow from operations and help the company to more effectively compete on price. b. Carrefour could also make better use of vendor financing. The company’s trade payables turnover is relatively high compared to Tesco’s. Vendor financing may help the company in lowering its net debt (and interest expense). 2. Compared to Tesco’s, Carrefour’s sales per square meter is too low: a.The decrease in France suggests that management should take action to regain market share in France (in accordance with its announced intentions). b. The observation that sales per square meter (and margins) are especially low in Carrefour’s foreign markets suggests that in those markets operations need to be improved. 3. It is questionable whether a focus on growth by adding stores is the most appropriate strategy for the near term. Given the low level of sales per square meter, a less expensive way of growing might be to focus on improving sales levels in Carrefour’s current stores.In addition, as indicated, asset turnover could be improved by improving logistics and, consequently, increasing inventory turnover. Finally, a substantial proportion of Carrefour’s net assets consists of goodwill. Adding more goodwill would probably have a further negative effect on the company’s abnormal profitability. One way to provide a powerful positive signal to investors about Carrefour’s future cash flow generating ability is to follow Tesco’s example in selling and leasing back a substantial proportion of the company’s property. (Analysts estimate Carrefour’s property to be worth â‚ ¬25 billion. The proceeds from this transaction could then be used to return cash to investors. Because future lease payments discipline managemen t’s actions and forces management to improve operating performance (see cash flow analysis), the transaction would signal management’s confidence in Carrefour’s future performance and has the potential to put an end to the company’s share price decline. Subsequent developments Carrefour continued the refocusing of its growth strategy under the adagio of â€Å"more square meters in fewer countries†. Carrefour expanded its store network primarily in Europe (especially outside France).The company disposed of its stores in underperforming markets, such as Mexico, Japan, Czech Republic, Slovakia, and South Korea and increased its store space in well-performing markets such as Poland, Italy, Turkey, Romania, Brazil, China and Taiwan. For example, in December 2006, Carrefour acquired all of Ahold’s Polish supermarkets and hypermarkets for the amount of â‚ ¬375 million. In September 2006, Carrefour announced its earnings for the first half year o f 2006. Both sales and net profit had increased relative to the first half of 2005. In particular, net profits had increased from â‚ ¬637 million to â‚ ¬706 million.The increase in net profits was, however, lower than analysts expected. On January 12, 2007, Carrefour announced that its fourth-quarter sales in 2006 had decreased by 1. 5 percent in comparison with fourth-quarter sales in 2005. Following this announcement, Carrefour’s share price decreased by 5 percent to â‚ ¬44. 50. On March 8, 2007, Carrefour’s President of the Supervisory Board (and protege of the company’s primary shareholder, the Halley Family), Luc Vandevelde, resigned, possibly as a result of a disagreement with the Halley Family. Vandevelde was replaced by Robert Halley.On the same day, private equity investor Bernard Arnault and US Fund Colony Capital acquired a 9. 8 percent stake in Carrefour. Analysts expected that they were planning to force Carrefour to sell (and lease back) i ts valuable property (estimated to be worth â‚ ¬25 billion). – – – – Exhibit TN-1 (1) Calculating the interest rate implicit in finance leases (implicit rate = 9. 6%) and (2) calculating the present value of operating lease payment using the implicit rate of 9. 6% Year Reported Payment finance leases â‚ ¬52 196 in 5 y. 196 in 5 y. 196 in 5 y. 196 in 5 y.PV Assumed PV PV Reported Assumed Payment factor finance Payment Payment operating finance leases operating operating leases leases leases leases â‚ ¬52 0. 9552 49. 7 751 751 717. 4 39. 2 39. 2 39. 2 39. 2 39. 2 39. 2 39. 2 39. 2 39. 2 39. 2 39. 2 39. 2 39. 2 39. 2 39. 2 39. 2 39. 2 39. 2 39. 2 8. 2 0. 8715 0. 7952 0. 7255 0. 6620 0. 6040 0. 5511 0. 5028 0. 4588 0. 4186 0. 3819 0. 3485 0. 3180 0. 2901 0. 2647 0. 2415 0. 2204 0. 2011 0. 1834 0. 1674 0. 1527 34. 2 1780 in 5 y. 31. 2 1780 in 5 y. 28. 4 1780 in 5 y. 26. 0 1780 in 5 y. 23. 7 1780 in 5 y. 21. 6 2670 in 7. 5 y. 19. 7 2670 in 7. 5 y. 18. 0 2670 in 7. 5 y. 6. 4 2670 15. 0 2670 13. 7 2670 12. 5 2670 11. 4 2670 10. 4 9. 5 8. 6 7. 9 7. 2 6. 6 1. 3 372. 6 in in in in in 7. 5 7. 5 7. 5 7. 5 7. 5 y. y. y. y. y. 356 356 356 356 356 356 356 356 356 356 356 356 178 310. 3 283. 1 258. 3 235. 7 215. 0 196. 2 179. 0 163. 3 149. 0 136. 0 124. 1 113. 2 51. 6 2006 2007 2008 2009 2010 2011 196 in 5 y. 2012 and 557 in 14. 2 y. subsequent (557/39. 2) 557 in 14. 2 y. 557 in 14. 2 y. 557 557 557 557 557 557 557 557 557 557 557 557 in in in in in in in in in in in in 14. 2 14. 2 14. 2 14. 2 14. 2 14. 2 14. 2 14. 2 14. 2 14. 2 14. 2 14. 2 y. y. y. y. y. y. y. y. y. y. y. y. 3,132. 1Exhibit TN-2 Carrefour versus Tesco 2005 IFRS Traditional Decomposition of ROE Net profit margin (ROS) Asset turnover =Return on assets xFinancial leverage =Return on equity (ROE) 1. 9% 1. 61 3. 1% 5. 52 17. 1% 2004 IFRS 2. 2% 1. 73 3. 8% 6. 06 22. 9% Carrefour 2004 2003 French French GAAP GAAP 1. 9% 1. 86 3. 6% 5. 16 18. 4% 2. 3% 1. 80 4. 2% 5. 51 23. 0% Tesco 2002 French GAAP 2. 0% 1. 77 3. 5% 5. 88 20. 7% 2001 French GAAP 1. 8% 1. 60 2. 9% 5. 89 17. 2% 2005 IFRS 4. 0% 1. 75 7. 0% 2. 41 16. 7% 2004 IFRS 4. 0% 1. 68 6. 7% 2. 34 15. 6% Distinguishing Operating and Financing Components in ROE Decomposition Net operating profit margin 2. % 2. 6% 2. 3% xNet operating asset turnover 3. 55 3. 91 4. 65 =Operating ROA 8. 1% 10. 1% 10. 9% Spread 6. 0% 7. 7% 7. 0% xFinancial leverage 1. 50 1. 67 1. 07 =Financial leverage gain 9. 0% 12. 8% 7. 5% ROE = Operating ROA + Financial leverage gain 17. 1% 22. 9% 18. 4% Asset Management Ratios Operating working capital/Sales Net non-current assets/Sales PP&E/Sales Operating working capital turnover Net non-current asset turnover PP&E turnover Accounts receivable turnover Inventory turnover Accounts payable turnover Days' accounts receivable Days' inventory Days' accounts payable . 8% 4. 37 12. 4% 8. 3% 1. 28 10. 6% 23. 0% 2. 7% 4. 09 10. 9% 6. 4% 1. 54 9. 9% 20. 7% 2. 6% 4. 00 10. 5% 4. 9% 1. 35 6. 7% 17. 2 % 4. 2% 2. 69 11. 3% 9. 6% 0. 56 5. 4% 16. 7% 4. 2% 2. 56 10. 9% 8. 8% 0. 54 4. 8% 15. 6% -9. 2% 37. 3% 18. 6% -10. 9 2. 7 5. 4 12. 8 9. 6 7. 0 28. 1 37. 5 51. 5 -10. 1% 35. 7% 18. 0% -9. 9 2. 8 5. 5 15. 2 10. 1 8. 2 23. 7 35. 5 43. 8 -11. 7% 33. 2% 17. 7% -8. 5 3. 0 5. 6 23. 8 9. 1 7. 5 15. 2 39. 7 48. 1 -10. 0% 32. 9% 17. 4% -10. 0 3. 0 5. 8 22. 2 9. 6 7. 7 16. 3 37. 5 46. 7 -9. 5% 33. 9% 18. 0% -10. 5 2. 9 5. 5 21. 8 9. 3 8. 0 16. 38. 7 44. 8 -10. 3% 35. 3% 19. 6% -9. 7 2. 8 5. 1 23. 6 9. 1 7. 3 15. 3 39. 5 49. 3 -8. 3% 45. 5% 40. 3% -12. 0 2. 2 2. 5 44. 2 20. 2 3. 2 8. 1 17. 8 113. 9 -9. 2% 48. 3% 42. 9% -10. 9 2. 1 2. 3 44. 0 19. 3 2. 9 8. 2 18. 6 122. 6 Exhibit TN-3 Carrefour’s performance over time 2003 to 2004 2004 to French 2005 GAAP IFRS Common-sized Income Statement: percentage point changes in†¦ Sales 0. 0% 0. 0% – Cost of Sales -0. 2% -0. 3% – SG -0. 1% 0. 1% – Depreciation and Amortization 0. 3% 0. 0% – Other Operating Income, Ne t of Other Operating Expenses -0. 4% -0. % – Net Interest Expense or Income 0. 0% 0. 1% – Investment Income 0. 0% 0. 0% – Tax Expense 0. 0% 0. 0% – Minority Interest 0. 0% 0. 0% Net Profit -0. 3% -0. 4% Pro forma income statement items: percentage point changes in†¦ – Cost of Materials (nature) -0. 2% -0. 3% – Personnel Expenses (nature) -0. 5% -0. 2% – Depreciation and Amortization 0. 3% 0. 0% 2002 to 2003 French GAAP 0. 0% -0. 1% 0. 3% 0. 1% -0. 1% 0. 2% -0. 1% -0. 1% 0. 1% 0. 3% 2001 to 2002 French GAAP 0. 0% 0. 2% 0. 3% 0. 1% -0. 2% 0. 1% 0. 0% -0. 2% 0. 0% 0. 2% -0. 1% -0. 1% 0. 1% 0. 2% 0. 1% 0. 1%Distinguishing Operating and Financing Components in ROE Decomposition: percentage (point) changes in†¦ Net operating profit margin -0. 3% -0. 5% 0. 2% 0. 0% xNet operating asset turnover -9. 1% 6. 6% 6. 7% 2. 2% =Operating ROA -2. 0% -1. 5% 1. 5% 0. 4% Spread -1. 7% -1. 3% 1. 9% 1. 5% xFinancial leverage -10. 4% -16. 4% -16. 9% 13. 5% =Financial leverage gain -3. 8% -3. 2% 0. 7% 3. 2% ROE = Operating ROA + Financial leverage gain -5. 8% -4. 6% 2. 2% 3. 6% Asset Management Ratios: percentage (point) changes in†¦ Operating working capital/Sales 0. 9% Net non-current assets/Sales 1. 6% PP/Sales 0. % Operating working capital turnover 10. 1% Net non-current asset turnover -4. 4% PP turnover -3. 1% Accounts receivable turnover -15. 7% Inventory turnover -5. 5% Accounts payable turnover -14. 9% Days' accounts receivable (change in days) -1. 2 Days' inventory (change in days) 4. 4 Days' accounts payable (change in days) 2. 1 -1. 8% 0. 4% 0. 4% -15. 2% -1. 1% -2. 0% 7. 2% -5. 6% -2. 8% -1. 1 2. 2 1. 3 -0. 5% -1. 1% -0. 6% -4. 8% 3. 2% 3. 6% 1. 7% 3. 3% -4. 0% -0. 3 -1. 2 1. 9 0. 9% -1. 4% -1. 6% 9. 1% 4. 1% 8. 9% -7. 6% 1. 9% 10. 0% 1. 3 -0. 7 -4. 5 Exhibit TN-4 Segment analysis France 4. 1% 5. 50% 6. 00% 5. 88% 5. 55% 5. 16% 3. 62% 4. 51 5. 09 5. 23 5. 17 4. 95 4. 57 4. 11 2. 22% 2. 45% 2. 29% 1. 73% 2. 26% 2. 00% 4. 04% Rest of Europe 4. 22% 3. 94% 3. 73% 3. 37% 3. 31% 3. 69% 2. 15% 2. 18 2. 31 2. 19 2. 01 1. 93 1. 55 1. 88 4. 40% 3. 72% 4. 58% 5. 18% 6. 49% 6. 10% 14. 00% Latin America 2. 62% 1. 06% 0. 28% 0. 43% 0. 63% 2. 47% 3. 48% 2. 62 2. 33 2. 26 2. 48 2. 16 1. 73 1. 44 4. 89% 4. 89% 6. 39% 5. 13% 4. 38% 5. 19% 19. 25% Asia 3. 22% 2. 92% 3. 08% 3. 04% 2. 93% 2. 49% 1. 54% 2. 59 2. 56 2. 44 2. 37 2. 20 2. 19 1. 50 6. 63% 6. 59% 9. 40% 7. 65% 6. 96% 9. 02% 23. 10%EBIT margin 2005 2004 2003 2002 2001 2000 1999 2005 2004 2003 2002 2001 2000 1999 2005 2004 2003 2002 2001 2000 1999 Fixed asset turnover CAPX to sales Exhibit TN-4 Segment analysis (continued) France Sales per sq. m. 2005 2004 2003 2002 2001 2000 1999 10. 96 11. 69 12. 23 12. 62 12. 64 12. 62 NA Rest of Europe 5. 90 6. 36 6. 39 5. 70 5. 90 5. 84 NA NA Latin America 3. 13 2. 55 2. 43 3. 00 4. 73 5. 58 NA Asia 3. 55 3. 41 3. 78 4. 41 5. 08 5. 21 Hypermarket 6. 18 6. 12 6. 39 6. 56 7. 23 7. 40 7. 49 Supermarket 5. 71 5. 64 5. 57 5. 80 6. 38 6. 59 5. 65 Hard discount 3. 85 3. 97 3. 93 5. 03 4. 8 5. 01 4. 58 Sales per store 2005 2004 2003 2002 2001 2000 1999 21. 38 23. 41 24. 66 26. 49 26. 41 19. 80 20. 50 6. 61 7. 09 7. 08 6. 94 6. 95 5. 64 4. 83 6. 21 5. 52 5. 67 7. 72 12. 98 16. 72 18. 98 13. 55 15. 00 23. 30 37. 72 43. 50 43. 99 32. 47 52. 21 53. 08 55. 45 57. 60 62. 40 67. 04 66. 83 8. 73 8. 75 8. 63 8. 63 10. 29 10. 26 10. 20 1. 49 1. 35 1. 41 1. 74 1. 66 1. 67 1. 46 Sq. m. per store 2005 2004 2003 2002 2001 2000 1999 1. 95 2. 00 2. 02 2. 10 2. 09 1. 57 NA NA 1. 12 1. 12 1. 11 1. 22 1. 18 0. 96 NA 1. 98 2. 17 2. 34 2. 57 2. 74 3. 00 NA 3. 82 4. 40 6. 17 8. 54 8. 56 8. 45 . 45 8. 67 8. 68 8. 78 8. 64 9. 06 8. 93 1. 53 1. 55 1. 55 1. 49 1. 61 1. 56 1. 81 0. 39 0. 38 0. 36 0. 35 0. 34 0. 33 0. 32 Exhibit TN-5 Cash flow analysis 2005 IFRS Net profit Profit before taxes minus Taxes paid After-tax net interest expense (income) Non-operating losses (gains) Non-current operating accruals Operating cas h flow before working capital investments Net (investments in) or liquidation of operating working capital Operating cash flow before investment in non-current assets Net (investment in) or liquidation of non-current operating assets Free cash flow available to debt nd equity After-tax net interest expense (income) Net debt (repayment) or issuance Free cash flow available to equity Dividend (payments) Net share (repurchase) or issuance Net increase (decrease) in cash balance 2004 IFRS 2004 French GAAP 1,509. 1 2003 French GAAP 1,737. 6 2002 French GAAP 1,539. 4 2001 French GAAP 1,438. 5 1,943. 0 263. 6 (206. 0) 1,564. 0 3,564. 6 175. 0 3,739. 6 (2,617. 0) 1,122. 6 (263. 6) 428. 0 1,287. 0 (758. 0) 88. 0 617. 0 1,723. 0 279. 7 (103. 0) 1,939. 0 3,838. 7 875. 0 4,713. 7 (2,148. 0) 2,565. 7 (279. ) (1,723. 0) 563. 0 (677. 0) (368. 0) (482. 0) 317. 7 (117. 9) 2,102. 2 3,811. 1 841. 2 4,652. 3 (2,146. 6) 2,505. 7 (317. 7) (1,675. 0) 513. 0 (608. 9) (367. 6) (463. 5) 368. 9 (253. 7) 2,066 . 0 3,918. 8 323. 0 4,241. 8 (1,966. 2) 2,275. 6 (368. 9) (855. 4) 1,051. 3 (522. 5) 17. 3 546. 1 453. 4 (344. 6) 1,950. 0 3,598. 2 (149. 0) 3,449. 2 (3,163. 7) 285. 5 (453. 4) (1,541. 1) (1,709. 0) (475. 5) 300. 4 (1,884. 1) 550. 3 (1,193. 9) 2,537. 8 3,332. 7 837. 9 4,170. 6 (1,005. 6) 3,165. 0 (550. 3) (559. 4) 2,055. 3 (424. 6) 183. 7 1,814. 4