Financial Analysis of Carrefour

Chapter 5 intersection S. A. Teaching Note Version March 2007 Introduction The crossbreeding case is a mo dineroary abbreviation case. crossroad S. A. is unity of the worlds mountainousst retailers. During the first half of the 2000s, the companys divide determines steadily declined, despite the fact that the company describe above-average returns on equity. Students ar asked to break down crosss pecuniary statements and segment tuition to find explanations for the companys poor sh atomic number 18 price performance and to make recommendations for the future. The discussion of the fiscal outline is preceded by a discussion of crosswalks st dictategy and accounting.Both the accounting analysis and the financial analysis are affected by intersections switch from cut generally accepted accounting principles 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. Analy ze crossroads competitive and corporate strategy. What are the key risks of the companys strategy? Analyze crosswalks accounting (including the effects of crosss switch to IFRS-based financial reporting). Are any alterments to hybridizings financial statements necessary?Analyze interbreedings run management, financial management and enthronisation management during the years 2001 to 2005, making use of both financial statement data and segment data. What are the primary drivers of the companys poor grapple price performance? Summarize the key findings of the financial analysis and provide recommendations for improvement to Carrefours management. What actions could management take to regain the confidence of Chrystelle more(prenominal)(prenominal)au and her oath investors? 3. 4. Case analysis Question 1 Key characteristics of Carrefours strategy and the associated risks are the fol humbleing Competing on price and product.Carrefour fol low-toneds a strategy that combines nearly 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 diverseness (more product categories (food and non-food) as soundly as a wider choice of brands within genius product category (including its own brands)) and (2) investing in customer truth programs (e. g. , the Pass card). This strategy is backed up by a strong marketing campaign.At the same time, however, Carrefour realizes thatespecially during economic downturnsits customers obligate low permutation costs and are comparatively price sensitive. The company therefore wishes to keep the prices in its hypermarkets at economic levels. The focusing in which the company can strive this is by o Keeping a close eye on what consumers want (through customer surveys and building a customer behavior database using data gathered through, for exam ple, the companys customer loyalty card) and by timely adjusting its assortment and pricing to changes in consumers preferences. Having a well developed logistics mesh topologywork. This keeps derangement luxuriously and helps to control costs. o Benefiting from economies of scale, not tho in logistics but to a fault in purchasing of supplies (aggregation of purchasing international negotiations with suppliers). o Selling low-priced products below Carrefours own brand name. An important risk of following a combination of strategies is that Carrefours hypermarkets become stuck in the middle. The planned changes that Jose Luis Duranthe sore CEO inform after replacing Daniel Bernard suggest that this happened during the first half of the 2000s.While many of Carrefours competitors, such(prenominal) as Leclerc, Auchan, Aldi, and Lidl, were able to aggressively lower their prices during the economic downturn, according to Duran Carrefour had focuse too much on differentiation and improving its rims per true musical rhythm of monetary fund spot (which mixes shareage margins and addition turn all over). Consequently, the company lost its competitive edge to price discounters (by losing its reputation for low prices), which slowed down Carrefours 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 forced to expand afield or enter other industries. Carrefours corporate strategy is to expand overseas rather than diversify. More importantly, as indicated above, achieving growth is an essential erupt of Carrefours 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 package worldwide (of course printed in different languages).The companys overseas sell tr ading operations are, however, more risky than its domestic operations. First, to some extent retailing remains a local business because consumers tastes differ considerably across countries. advanceable expansion outside Carrefours 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 harm of this strategy is, however, that acquisition premiums have to be gainful, which can also drive down gelt.Second, many of Carrefours intercontinental hypermarkets are located in countries where the economic environment is risky consumers in economically less developed countries are presumable to be more price sensitive East Asian and South American countries tend to have more bureaucracy and stronger government protection of local firms. Third, in several countries, Carrefour has to compete with other multinationals such as Tesco and Wal g rocery store, who are trying to gain a strong market position ( close toly through severe price competition).In sum, Carrefours 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 per centum of its fiscal 2005 breads (before intimacy and taxes) in South America and East Asia, although the company generated close to 15 percentageage 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 companys financial statements and, consequently, could affect the analysis of Carrefours historical performance. More specifically, to improve comparability across years the analyst must assess how Carrefours pre-2004 performance and financial position would have been under the bare-assedly adopted accounting standards. W hen doing so, the following changes are important to consider Under French GAAP, Carrefour was required to pay off goodwill. IFRS does not allow goodwill amortisation but requires companies to regularly test goodwill for impairment.The elimination of goodwill amortization increased Carrefours net meshing 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 winnings is likely to be (significantly) less than 0. 8 percent of total summations. French GAAP based earnings did not include an disbursement for stock option lets to Carrefours employees.Because such a grant imposes costs on Carrefours shareholders, IFRS requires that the Black & Scholes value (or the value from another accepted option valuation model) of these option grants is recognized as expen se in the income statement during the vesting check. In 2005, Carrefours 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 designer for these adjustments (which was not explicitly mentioned in Carrefours 2005 financial report) is that under IFRS, inventories include unions for (inventory-related) services that Carrefour billed to its suppliers. That is, instead of recognizing the numerates as revenues in the completion 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 interference 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-yea r 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 Carrefours inventories (as well as the services that Carrefour provides to its suppliers) increase, the IFRS treatment will most likely result in high 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 these years, the overstatement of inventories due to the immediate recognition of revenues from services provide to suppliers has been around 500 million, the overstatement of equity has been in the range of 4-5 percent.Under IFRS Carrefour has to recognize (slightly) greater employee pull ahead obligations and classify (slightly) more shoots 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 chiefly 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 prior to 2004 was overstated. In fortuneicular, Note 15 indicates that the difference between restated collect depreciation and original accumul ated depreciation on buildings at the end of 2004 was 158 million. This suggests that depreciation in 2004 was initially overstated by 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 understated by, at maximum, 1. 2 percentage points because of overstated goodwill amortization and buildings depreciation. In addition, under French GAAP equity may have been overstated by at maximum 8 percent because of its accounting for inventories and employee benefits, but, at the same time, may have been understated because of (an unknown amount of) overstated goodwill amortization.Note that the adjustments 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 peri od of 40 years. Carrefour does not 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 8,031 million.Unfortunately, the carrying value of realize Buildings is not disclosed, making it impossible to derive the average age of Carrefours buildings and forcing the analyst to make a crude assumption. Under the assumption that the average age of Carrefours buildings is 5 years, the carrying value of Net Buildings would have to be increased by an amount of 1,004 million ((5/20 5/40)x8,031) to retrospectively adjust Carrefours financial statements.Similarly, under the assumption that the average age of Carrefours buildings is 10 years, the carrying value of Net Buildings would have to be increased by an amount of 2,008 million ((10/20 10/40)x8,031) to retrospectively adjust Carrefours financial statements. In addition to the overly conservative depreciation rate on buildings, Carrefours 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 Carrefours operating lease payments is approximately 3. 1 billion, which is equivalent to slightly more than 48 percent of Carrefours net non-current debt in 2005 (3,121/10,443 226 3,773) and implies an understatement of Carrefours non-current tangible assets by approximately 18 percent (3,121/13,864 + 3,121). The use of operating leases is not defective in the retailing industry. For example, at the end of the fiscal year ending on February 26, 2006 (labeled fiscal 2005), Tesco, one of Carrefours 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 Tescos net non-current debt in 2005 (2,718/4,958 1,325) and implied an understatement of Tescos non-current tangible assets of approximately 15 percent (2,718/15,882 + 2,718). In summary, Carrefours non-current tangible assets appear to be understated by an amount in the range of 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 Carrefours operating(a) ROA is lower than Tescos, Carrefour has a higher return on equity than Tesco, both in 2005 and 2004. The reason for this is that Carrefour is more supplementd than Tesco. Note that operating returns on assets are considerably 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 importan ce of recasting the financial statements and using the substitute 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 more in price competition with discounters than Tesco.Consequently, Carrefours 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. run management. As indicated, Carrefours net ope rating profit margin is lower than Tescos, 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 lower than Tescos. 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 authenticly 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. Tescos decision to sell and lease back a substantial proportion of its property suggests that Tescos management believes that Tesco does not yet optimally benefit from lease financing. In addition, Carrefours depreciation of buildings has been overly conservative in the years prior to 2004. Consequently, Carrefours understatement of non-current angible assets is estimated to be approximately 10 percent greater than Tescos (see also question 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 Tescos land and buildings per square meter equals ? 2,778 p. sq. m. (14,247/5. 129), or 4,086 p. sq. m. , whereas the same statistic equals 1,005 p. sq. m. (11,141/11. 08) for Carrefour (in fiscal 2005). o Sales per average square meter in fiscal 2005 was 6,850 (76,496/0. x11. 08 + 0. 510. 671) for Carrefour versus ? 8,140 p. sq. m. (39,454/0. 55. 129 + 0. 54. 565), or 11,972 p. sq. m. , for Tesco. Hence, although Carrefours 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 Carrefours PPE/Sales ratio is substantially lower than Tescos, the companies net non-current asset/sales ratios are almost equal. (Note that part of the remaining difference is explained by the fact that Carrefours non-current assets are more understated than Tescos. 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 2,356m), Promodes (1999 3,032m), GS (2000 3,136m), and GB (2000 1,128m). The negative effect of goodwill on asset turnover illustrates that Carrefour ( previous(prenominal)) strategy of growth through acquisitions has a downside organic growth is typically more profitable than growt h through acquisitions (see also question 2). Carrefours working capital turnover is substantially lower than Tescos.More specifically, it takes Carrefour approximately twice as much time as Tesco to sell its inventory. For a retailer, this is important because inventories comprise a large proportion of the companys 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 Carrefours 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. Carrefours trade dues turnover is also substantially lower than Tescos. An important reason for this difference is that Carrefours financing company provides consumer credit to Carrefours customers. This credit has been extended to Carrefours customers through point-of-sale financing (offering a credit rapidness 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 w ere common especially in Carrefours domestic market, France. Carrefour may therefore need to run these financial services in order to efficaciously compete with its French industry peers. Financial management. Carrefour is more leveraged than Tesco. Carrefours 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 Tescos leverage will get closer to Carrefours. In addition, Carrefours interest reporting ratios arealthough lower than Tescossufficient, indicating that Carrefour experiences no problems to meet its interest obligations. Carrefours performance over time When analyzing Carrefours financial performance over time, the analysts has to take into account that Carrefour applied IFRS for the first time in 2005.A pragmatic appro ach 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 Carrefours financial leverage gain) decreased for three consecutive years. This seems inefficient because Carrefours spread is still positive and its interest coverage is still sufficient. On the other hand, Carrefours financial spread, and with that the benefits of leverage, has decreased over the past two years.Analysis of Carrefours segment information Exhibit TN-4 displays several ratios that have been calculated using Carrefours segment information. Based on the segment analysis (at least) the following conclusions can be drawn The comparison of Carrefours with Tescos asset turnover illustrated that Carrefours sales per square meter of store space was substantially less than Tescos. The segment analysis shows that this difference in turnover is primarily caused by the underperformance of Carrefours stores outside France o In 2005, sales per square meter was 10. 6 thousand in France versus 5. 90 thousand, 3. 13 thousand, and 3. 55 thousand in the Rest of Europe, South America, and Asia, respectively. o In 2005, fixed asset turnover 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 Carrefours foreign markets than in its domestic market. However, like turnover, Carrefours 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 Carrefours 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 Carrefours immediate payment time period performance Exhibit TN-5 displays Carrefours standardized cash flow statements. Between 2002 and 2005, Carrefours operating cash flow before working capital investments ranged from 3. 6 billion (in 2005) to 3. 9 billion (in 2003).In 2006, Ca rrefour will have (at least) the following uses of its cash flows Carrefours management announced in the companys 2005 financial report that capital expenditures in the years 2006-2008 would be close to 3. 3 billion per year (on average). Dividend payments equaled 758 million in 2005. Given the pattern of dividend increases over time, dividend payments in 2006 are likely to excel 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 Carrefours management is likely resist cutting dividends or raising new equity as this may put further pressure on the companys 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 foray 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 Carrefours (and Tescos) financial statements 1. The analysis suggest that Carrefours management should take actions to improve operations management.In particular a. Carrefours low inventory turnover (relative to Tescos) suggests that the company needs to improve logistics. This would improve asset turnover, improve cash flow from operations and help the compan y to more effectively compete on price. b. Carrefour could also make better use of vendor financing. The companys trade payables turnover is relatively high compared to Tescos. marketer financing may help the company in lowering its net debt (and interest expense). 2. Compared to Tescos, Carrefours 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 Carrefours 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 Carrefours current stores.In addition, as indicated, asset turnover could be improved by improvin g logistics and, consequently, increasing inventory turnover. Finally, a substantial proportion of Carrefours net assets consists of goodwill. Adding more goodwill would probably have a further negative effect on the companys abnormal profitability. One way to provide a powerful positive manifestation to investors about Carrefours future cash flow generating ability is to follow Tescos example in selling and leasing back a substantial proportion of the companys property. (Analysts estimate Carrefours property to be worth 25 billion. The proceeds from this transaction could then be used to return cash to investors. Because future lease payments discipline managements actions and forces management to improve operating performance (see cash flow analysis), the transaction would orient managements confidence in Carrefours future performance and has the potential to put an end to the companys share price decline. Subsequent developments Carrefour continued the refocusing of its growth strategy under the adagio of 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 Aholds Polish supermarkets and hypermarkets for the amount of 375 million. In September 2006, Carrefour announced its earnings for the first half year of 2006. Both sales and net profit had increased relative to the first half of 2005. In particular, net profits had increased from 637 million to 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 200 5. Following this announcement, Carrefours share price decreased by 5 percent to 44. 50. On March 8, 2007, Carrefours President of the Supervisory Board (and protege of the companys 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 formulation to force Carrefour to sell (and lease back) its valuable property (estimated to be worth 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 account earnings finance leases 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 opera ting finance leases operating operating leases leases leases leases 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 5 57 557 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% extend 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 Carrefours 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 amortisation 0. 3% 0. 0% Other Operating Income, Net 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 fraction 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 tu rnover 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 cash 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 26 3. 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