Carrefour Reuters: CARR.PA Bloomberg: CA FP Exchange: PAR Ticker: CARR

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1 Company Global Markets Research Europe France Retail Retail-Food 26 June 2008 Carrefour Reuters: CARR.PA Bloomberg: CA FP Exchange: PAR Ticker: CARR Opportunities fade, headwinds increase; downgrade to Hold Ingrid Azoulay Research Analyst (+44) James G Collins Research Analyst (+44) [email protected] As two doors close...another door shuts Carrefour is not a cheap stock. Hence the main reasons to own the shares were potential restructuring benefits (Champion conversions and improved French non food performance in particular) and improved operating performance. Champion plans are now public and slightly underwhelming, and non-food format change plans have been shelved. Moreover it is clear that earnings growth is at risk, even from adjusted guidance levels. The valuation gap vs peers is not wide enough to reflect this relatively high forecast risk hence our downgrade to Hold from Buy. Restructuring benefits will take longer to deliver Carrefour retains some attractions as a restructuring/turnaround story. Over the next 2-3 years, we believe that the company will, in addition to focusing on Champion conversions move to rationalize non food ranges and space allocation more aggressively, more actively manage property assets and continue to improve capital discipline, driving a more efficient business model. However these are unlikely to alter the group s growth profile in the short to medium term, an issue for a market that is currently focused on delivery and less inclined to give the benefit of the doubt for longer-term potential. Gentle miss to FY08 guidance, but we believe numbers still at risk We have cut our EBIT forecast by 2.5% for % for 2009 and 4.2% for 2010 to reflect weak non food trends, impacted by the current consumer downturn in Carrefour s main markets, and less compensation from strong food growth than we saw in Q1. We are now expecting group EBIT to grow by 6.2% in FY08, a touch below the company s revised guidance of c7%. In light of recent negative food volume trends in France and the worsening of the Spanish market, we believe that there is further downside risk to forecasts. Downgrade to Hold, price target reduced to 45 Our new DCF valuation (7.3% WACC, 1.5% tgr), gives us a PT of 45. The main risk is a further deterioration of the competitive environment and macro environment in Carrefour s key markets. Carrefour is more prone to variations in consumer spending than most of its food retail peers due to its high non-food sales content. (See pages for details.) Forecasts and ratios Year End Dec A 2007A 2008E 2009E 2010E Revenue (EUR) 76,887 82,149 87,779 94, ,898 EBITA (EUR) 3,183 3,291 3,496 3,811 4,178 EPS (EUR) OLD EPS (EUR) % Change 0.0% 0.0% -3.1% -4.8% -5.1% P/E (DB EPS) (x) Source: Deutsche Bank estimates, company data Rating Downgrade Hold Price at 26 Jun 2008 (EUR) Price Target (EUR) week range (EUR) Key changes Rating Price/price relative Buy to Hold 6/05 12/05 6/06 12/06 6/07 12/07 Carrefour DJ (.STOXXE) (Rebased) Performance (%) 1m 3m 12m Absolute DJ (.STOXXE) Stock & option liquidity data Market cap (EUR)(m) 26,120.5 Shares outstanding (m) 690 Free float (%) 100 Option volume (und. shrs., 1M avg.) 148,500 Implied & Realized Volatility (3M) 50% 40% 30% 20% 10 % 0% Jun 05 Dec 05 Realized Vol Jun 06 Dec 06 Jun 07 Dec 07 Implied Vol (ATM) Implied Volatility (3M, ATM) vs. Peers TSCO.L MRW.L *STOXX 600 M EOG.DE AHLN.AS CARR.PA *Weighted-avg. of index components Data as of 25-Jun % 32.5% 31.5% 30.3% 30.1% 28.0% Event Calendar Event 1 <date> tentative Event 2 <date> tentative All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of DBSI in the United States at no cost. Customers can access this IR at or call to request that a copy of the IR be sent to them. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1

2 Model updated: 26 June 2008 Fiscal year end 31-Dec E 2009E 2010E Running the Numbers Europe France Retail-Non Food Carrefour Reuters: CARR.PA Buy Price (26 Jun 08) Target price week Range Market Cap Company Profile Bloomberg: CA FP 26,120m US$ 40,659m Carrefour is a French food retailer which operates chains of supermarkets and hypermarkets, along with hard discount, convenience, and cash and carry stores. The company is the second largest retailer worldwide and operates in Europe, South America and Asia under the names Carrefour, Champion, Dia, Ed, 8 a huit, Promocash, Shopi, Proxi, Norte, GB, GS, Puntocash, Marche plus, Ooshop, Boostores Di per Di, Docks market. 1yr Price Performance Jun-07 Sep-07 Dec-07 Mar-08 Margin Trends Growth & Profitability CARR.PA EURO STOXX PRICE (Rebased) E 09E 10E EBITDA Margin EBIT Margin E 09E 10E Sales growth (LHS) ROE (RHS) Financial Summary DB EPS ( ) Reported EPS ( ) DPS ( ) BVPS ( ) Weighted average shares (m) Average market cap ( m) Enterprise value ( m) Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement ( m) Sales revenue 73,060 76,887 82,149 87,779 94, ,898 Gross profit 15,579 16,475 17,540 18,654 20,041 21,543 EBITDA 4,582 4,740 5,014 5,358 5,790 6,290 Depreciation 1,394 1,512 1,677 1,812 1,929 2,062 Amortisation EBIT 3,153 3,183 3,291 3,496 3,811 4,178 Net interest income(expense) Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) Profit before tax 2,682 2,797 2,812 2,918 3,233 3,697 Income tax expense ,087 Minorities Other post-tax income/(expense) Net profit 1,798 1,858 1,868 1,941 2,159 2,458 DB adjustments (including dilution) DB Net profit 1,798 1,858 1,868 1,941 2,159 2,458 Cash Flow ( m) Cash flow from operations 3,509 4,587 4,587 4,674 5,098 5,567 Net Capex -2,899-3,290-3,069-3,082-3,101-3,399 Free cash flow 610 1,297 1,518 1,592 1,997 2,168 Equity raised/(bought back) Dividends paid ,008 Net inc/(dec) in borrowings Other investing/financing cash flows -74 1, Net cash flow , ,111 1,160 Change in working capital Balance Sheet ( m) Cash and other liquid assets 3,733 3,697 4,164 4,164 4,164 4,164 Tangible fixed assets 13,401 13,736 14,751 15,055 15,193 15,420 Goodwill/intangible assets 11,098 11,890 12,848 13,101 13,391 13,721 Associates/investments 2,104 1,983 2,055 2,211 2,382 2,570 Other assets 14,358 14,547 15,486 15,593 16,509 17,494 Total assets 44,694 45,853 49,304 50,124 51,638 53,369 Interest bearing debt 10,561 10,019 11,750 10,954 9,843 8,683 Other liabilities 26,303 27,010 28,412 26,068 27,226 28,468 Total liabilities 36,864 37,029 40,162 37,022 37,070 37,151 Shareholders' equity 8,385 9,486 10,663 11,870 13,198 14,693 Minorities 1,001 1,017 1,107 1,232 1,370 1,525 Total shareholders' equity 9,386 10,503 11,770 13,102 14,569 16,218 Net debt 6,828 6,322 7,586 6,790 5,679 4,519 Solvency Key Company Metrics 60 8 Sales growth (%) DB EPS growth (%) EBITDA Margin (%) EBIT Margin (%) E 09E 10E Payout ratio (%) Net debt/equity (LHS) Net interest cover (RHS) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) [email protected] Net interest cover (x) ,239 34,067 Source: Company data, Deutsche Bank estimates ,020 35,854 26,120 38,342 43,440 32, ,520 26,520 32,200 31, Page 2

3 Strong headwinds The story is still there Carrefour has, over the last 36 months, been progressively more proactively managed as a group, with more targeted and controlled capex allocation and a more robust strategy, all led by the right management team. Coupled with significant further restructuring opportunities, we continue to believe that Carrefour is in a much stronger strategic position now than it was 12, 24 or 36 months ago. And we have no doubt that Carrefour will continue to make very good progress towards a considerably more efficient business model. But equity markets have also changed, over the last 12 months in particular, with an understandably more riskaverse attitude, a greater focus on near term delivery of earnings, and far less inclination to give companies the benefit of the doubt for future potential. Hence the double whammy of restructuring benefits taking longer than anticipated and short-term earnings coming under pressure is one that we think the shares are unlikely to bounce back from in short measure. These are the initiatives that we believe Carrefour will be focused on over the next 2-3 years Champion conversions: a positive move The announcement yesterday of the rollout of the Carrefour Market banner across the French supermarket Champion, disappointed the market for 2 reasons: 1/ The scale of the total cost savings/ synergies given by Carrefour was light versus expectations ( 200m vs DBe of 300m and some estimates of 400m+) and 2/ positive impact not seen before We do not disagree. Nevertheless we do still see this as a positive move and we see this conversion process as a top line improvement opportunity as well as a cost savings opportunity. Additionally, this announcement is a pretty good example of the culture change at the group for 2 reasons: (i) (ii) Not only it is a relatively capital-light project (total of 200m to convert over 1000 stores) but the capex will come by reallocation of planned capex on existing projects. This shows the group s increased discipline in capex allocation The aggressive timing of the roll out shows a quicker execution of the group s decision. Also it is worth mentioning that while we say the synergy benefits are disappointing that maybe it is better that way than with the unrealistic expectations that accompanied the Carrefour Promodes merger. Costs savings: an important opportunity On top of the expected costs savings/ synergies coming from the roll out of Carrefour Market, we believe that additional costs savings could be found in term of supply chain, marketing spend, head office costs as well as positive impact of growing shelf ready packaging and global sourcing- In total, we expect costs savings to accelerate from 200 in FY08 to 350m in FY09. Property deal: not factored into consensus forecasts On property, Carrefour gave a valuation of between 20-24bn in August last year, which seemed at that time conservative (vs DBe of 28bn), hence we do not see significant downside risk to that valuation today. Carrefour announced in March this year its intention to place privately 1-1.5bn of its property in Q The group will wait for better market Page 3

4 conditions before doing the IPO of an additional 1.5-2bn. The cash will be used for a sharebuy back Non-food: potentially more radical initiatives Over the last 2 years, the group has been working on the repositioning of non-food within its hypermarkets and current initiatives are today already well-known, with a number of trials of new non food ranges and merchandising in French hypermarkets. Remember that non food represents c.20% of French sales, ie 7.5bn, and we estimate generates an EBIT margin of only c.2%. The group has been working over the last 2 years on selling space reallocation, widening the product range in some categories (textile, household goods, consumer electronics) as well on the layout of the store. The potential non food restructuring has been over the last 2 years an important aspect of the Carrefour turnaround story. In the current macro environment and more importantly in light of the very weak performance reported by Carrefour in its French hypermarkets in 1Q, it is fair to say that the non food appeal has faded from the Carrefour story today. Most importantly, conversations with management suggest that the new format stores (40 from a total of 218) have not fared dramatically better than traditional ones in the recent downturn. Coupled with the news yesterday that the Capex allocated to the Champion Conversion/Carrefour Market roll out will mainly come from resources originally planned for non food conversions, this suggests to us that the group might be thinking about more radical solutions to address the non food issue, such as significantly reducing the space allocated to non food categories in their hypermarkets by reducing the size of stores. If that is the case, this could have a significant positive impact on group returns since that would reduce exposure to an underperforming business effectively better employ property assets by selling or renting the extra space to specialist retailers. but new risks have emerged Tougher trading environment in non food The consumer downturn has had a significant impact on discretionary spending in France since the beginning of the year. This is particularly true for hypermarkets which are being impacted by fuel costs and a tougher environment for the French consumer - it is clear from talking to Carrefour that rising fuel costs, coupled with pressure on discretionary spend, are disincentivising French customers from driving to hypermarkets relative to other food retail formats. Page 4

5 Figure 1: Carrefour Quarterly non food LfL growth in French hypermarkets 2.0% 0.0% -2.0% -0.1% 0.1%0.0% 1.2% -1.4% -0.5% -4.0% -6.0% -3.6% -4.4% -5.0%-5.0% -8.0% -10.0% -9.0% -8.0% 1Q-06 2Q-06 3Q-06 4Q-06 1Q-07 2Q-07 3Q07 4Q-07 1Q-08 2Q-08E 3Q-08E 4Q-08E Volume in food impacted by strong inflation Food inflation arrived with a bang in France in Q4, and accelerated through Q1 and Q2, causing a small negative impact on volume growth in French hypermarkets in 1Q08. We believe, based on conversations with other French food retailers, that this negative volume impact will have likely accelerated in Q2, for the industry as a whole but particularly for hypermarkets. Figure 2: Carrefour Food Volume Growth in French Hypermarkets Figure 3: Carrefour Food inflation in French Hypermarkets 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 3.9% 6.5% 3.8% 2.1% 2.2% 3.5% 1.7% 0.8% 4.0% 3.0% 2.0% 1.0% 0.0% 0.5% 0.8% 1.6% 3.5% 3.5% 3.0% 1.5% -1.0% -2.0% -3.0% -1.4% -2.0% -1.0% -1.0% -1.0% -2.0% -0.7% -0.5% -1.6% -1.0% -0.5% 1Q-06 2Q-06 3Q-06 4Q-06 1Q-07 2Q-07 3Q07 4Q-07 1Q-08 2Q-08E 3Q-08E 4Q-08E 1Q-06 2Q-06 3Q-06 4Q-06 1Q-07 2Q-07 3Q07 4Q-07 1Q-08 2Q-08E 3Q-08E 4Q-08E Spain, an increasingly risk Recent macro data and retail comments have suggested that the Spanish market has deteriorated further over the last 3 months. In 1Q, Carrefour reported good LFL sales growth for Spain (+4.2%), helped by a strong level of food inflation (c.5%), offsetting weak trends in non food. In 2Q we believe that there is a high risk that non food growth and food volumes will have come under greater pressure. Page 5

6 Figure 4: Total Retail sales growth (volume, 3MMA), Cal Adj % Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 Source: Instituto Nacional de Estadistica And restructuring will take longer than anticipated Champion Despite an aggressive timing of the roll out of the Carrefour Market banner across its 1,000 store French supermarket business Champion (conversion done in 24 months), management indicated that the impact should be neutral on FY08 and FY09 earnings, marginally positive on FY10 earnings and a significant positive on FY11 earnings. In total, the 200m represents 13% of DBe forecast French EBIT, 5% group FY11 EBIT. The benefits are slower than we had hoped. Non food Restructuring As we mentioned earlier, the potential non food restructuring has been over the last 2 years an important aspect of the Carrefour turnaround story. In the current macro environment it is fair to assume that the potential impact of non food restructuring (if any) will not been seen in the next 6-12 months (versus previously first positive impact expect to be in FY08), particularly if it is to be driven by reallocation of space/shrinking of hypermarkets, a process that could take some time to execute. Page 6

7 Downgrade to Hold, price target of 45 Forecasts: EBIT cut by 2.5% in 2008 Sales growth 2008 and 2009 unchanged: +6.9% and +7.2% We have kept our sales growth assumptions unchanged for the next 3 years: +6.9% growth in 2008, +7.2% in 2009 and This compares to the company s new guidance of 7% total sales growth (so including acquisition) for FY08 (vs previous guidance of 6-8% organic growth, ie 7-9% total sales growth). Our forecast is based on the following assumptions: Figure 5: LfL E 2009E 2010E France 1.4% 0.3% 2.6% 2.1% 2.0% Europe 0.4% 1.6% 1.2% 1.0% 1.0% Latin America 5.5% 9.8% 5.4% 4.9% 5.0% Asia -0.9% 2.8% 2.0% 2.5% 2.6% TOTAL 1.2% 1.8% 2.3% 2.0% 2.0% Figure 6: Selling space contribution E 2009E 2010E France 3.1% 0.7% -0.2% 0.1% 0.1% Europe 6.3% 5.0% 5.5% 6.1% 6.7% Latin America 6.5% 27.0% 16.0% 6.5% 6.6% Asia 13.7% 14.7% 10.3% 10.3% 10.6% TOTAL 5.2% 5.3% 4.3% 3.8% 4.2% Figure 7: FX impact E 2009E 2010E France 0.0% 0.0% 0.0% 0.0% 0.0% Europe -0.4% 0.4% 0.5% 0.0% 0.0% Latin America 4.3% 0.7% 1.8% 0.0% 0.0% Asia 1.7% -5.8% -4.8% 0.0% 0.0% TOTAL 0.2% -0.1% 0.1% 0.0% 0.0% Figure 8: Disposal / acquisitions impact E 2009E 2010E France 0.0% 0.0% 0.0% 0.0% 0.0% Europe 0.0% 0.0% 0.0% 2.0% 2.0% Latin America 0.0% 0.0% 2.0% 5.0% 2.0% Asia -0.5% 0.0% 0.0% 0.0% 0.0% TOTAL -6.6% 0.0% 0.2% 1.3% 1.0% Page 7

8 Figure 9: Total sales (in m) E 2009E 2010E France 37,212 37,621 38,534 39,379 40,186 Europe 28,835 30,837 33,074 36,090 39,588 Latin America 5,929 8,211 10,284 11,976 13,605 Asia 4,911 5,480 5,887 6,641 7,519 TOTAL 76,887 82,149 87,779 94, ,898 In France, we expect LFL of 2.6% inc petrol and 1.6% ex petrol Figure 10: French LfL expectations 1Q-08 2Q-08E 3Q-08E 4Q-08E FY08E FY09E FY10E Total LfL in France 2.8% 1.6% 3.5% 2.7% 2.6% 2.1% 1.9% Calendar impact 0.2% -0.6% 0.6% 0.3% 0.1% 0.0% 0.0% Total LfL ex calendar 2.6% 2.2% 2.9% 2.4% 2.5% 2.1% 1.9% Petrol impact 1.7% 1.6% 1.6% 1.6% 1.6% 0.8% 0.2% Total LfL ex Petrol ex calendar 1.0% 0.6% 1.3% 0.7% 0.9% 1.3% 1.7% This is based on the following assumptions for the FY08 (summarized in the table below): A negative LfL of 1.1% in hypermarkets (ex petrol, ex calendar), versus -1.4% reported in 1Q08 A positive LfL of 2.7% in supermarkets (ex petrol, ex calendar), versus +3.6% reported in 1Q08 A positive LfL of 3.3% in discount stores (ex calendar), in line with 1Q08 Figure 11: Breakdown of LfL assumptions in France per formats 1Q-08 2Q-08E 3Q-08E 4Q-08E FY08E FY09E FY10E Hypermarkets ex petrol ex calendar -1.4% -1.5% -0.2% -1.2% -1.1% 0.9% 1.6% Calendar 0.2% -0.7% 0.7% 0.4% 0.1% 0.0% 0.0% Hypermarkets ex petrol -1.2% -2.2% 0.5% -0.9% -0.9% 0.9% 1.6% petrol 1.9% 2.0% 2.0% 2.0% 2.0% 1.0% 0.0% Hypermarkets 0.7% -0.2% 2.5% 1.1% 1.0% 1.9% 1.6% Supermarkets ex petrol ex calendar 3.6% 3.0% 2.0% 2.0% 2.7% 2.0% 2.0% Calendar 0.2% -0.7% 0.7% 0.4% 0.1% 0.0% 0.0% Supermarkets ex petrol 3.8% 2.3% 2.7% 2.4% 2.8% 2.0% 2.0% petrol 2.9% 2.5% 2.5% 2.5% 2.6% 1.0% 1.0% Supermarkets 6.7% 4.8% 5.2% 4.9% 5.4% 3.0% 3.0% Discounters ex Calendar 3.2% 3.0% 3.5% 3.5% 3.3% 2.0% 2.0% Calendar 0.2% -0.7% 0.7% 0.4% 0.1% 0.0% 0.0% Discounters 3.4% 2.3% 4.2% 3.9% 3.4% 2.0% 2.0% Other formats ex calendar 3.6% 3.5% 3.5% 3.5% 3.5% 1.5% 1.5% Calendar 0.2% -0.7% 0.7% 0.4% 0.1% 0.0% 0.0% Others Formats 3.8% 2.8% 4.2% 3.9% 3.7% 1.5% 1.5% Page 8

9 For the French hypermarkets (probably the key swing factor given its significant exposure to non-food), our FY08 LFL sales forecasts are based on the following (numbers are ex petrol, ex calendar): -6.8% decline in non food versus -9% reported in 1Q08 (the comp base eases considerably in Q3) -1.4% decline in volume in food, in line with 1Q08 and c. 3% food inflation in food versus 3.5% in 1Q07, since we expect some impact in Q4 from annualisation of inflation. Figure 12: Detailed LFL expectations in French Hypermarkets 1Q-08 2Q-08E 3Q-08E 4Q-08E FY08E FY09E FY10E LFL 0.7% -0.2% 2.5% 1.1% 1.0% 1.9% 1.6% o/w Petrol impact 1.9% 2.0% 2.0% 2.0% 2.0% 1.0% 0.0% LFL ex Petrol -1.2% -2.2% 0.5% -0.9% -0.9% 0.9% 1.6% Food Unadjusted 2.3% 0.8% 2.7% 0.9% 1.7% 2.5% 2.5% o/w inflation 3.5% 3.5% 3.0% 1.5% 2.9% 1.5% 1.5% o/w volume -1.2% -2.7% -0.3% -0.6% -1.2% 1.0% 1.0% Non-food Unadjusted -8.8% -8.7% -4.3% -4.6% -6.6% -2.0% 0.0% o/w deflation 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% o/w volume -8.8% -8.7% -4.3% -4.6% -6.6% -2.0% 0.0% o/w Calendar impact 0.2% -0.7% 0.7% 0.4% 0.1% 0.0% 0.0% LFL ex Petrol, ex calendar -1.4% -1.5% -0.2% -1.2% -1.1% 0.9% 1.6% Food Adjusted 2.1% 1.5% 2.0% 0.5% 1.5% 2.5% 2.5% o/w deflation 3.5% 3.5% 3.0% 1.5% 2.9% 1.5% 1.5% o/w volume -1.4% -2.0% -1.0% -1.0% -1.4% 1.0% 1.0% Non-food Adjusted -9.0% -8.0% -5.0% -5.0% -6.8% -2.0% 0.0% o/w deflation 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% o/w volume -9.0% -8.0% -5.0% -5.0% -6.8% -2.0% 0.0% Activity Contribution forecasts cut by 2.5% for FY08 Despite the fact that we are maintaining our group top line forecasts, we are trimming our EBIT forecasts by 2.5% in 2008 (- 88m), 3.9% in 2009 (- 148m) and by 4.3% in 2010 (- 181m). This is due to lower quality sales growth than anticipated, mainly in France. Indeed, in 2008 petrol (10-12% of French hypermarkets sales and 20% of French supermarkets sales) will have a higher contribution to sales growth than previously anticipated (petrol is a zero margin business), whilst the non food performance will be significantly lower. Whilst this will have no material impact on top line (one offsetting the other), this has a negative impact on margin mix. Page 9

10 Figure 13: French hypermarkets and Supermarkets sales split Hypermarkets Supermarkets % Contribution to total sales Food 56% 71% Non Food 33% 9% Petrol 11% 20% Margin per categories Food 6.5% 6.5% Non Food 2.0% 2.0% Petrol 0.0% 0.0% EBIT Margin 4.3% 4.8% Our Activity Contribution forecasts in a touch below the Company guidance We now expect EBIT to grow by 6.2% in FY08. This is consistent with the company s guidance of EBIT growing broadly in line with sales growth. Not conservative forecasts The company guidance is based on "no further deterioration in consumer spending", which is a clear risk going forward. Indeed, whilst we think that the non food trend is now factored in the new guidance, we believe that there is today a significant risk of deterioration of: (i) (ii) Food volumes, which started to see a negative impact in 1Q08 from the high level of inflation. We believe that this trend has worsened in 2Q and could deteriorate further in the coming quarters. Spain (20% of group s profits) has held up fairly well in 1Q08, but macro and retailer newsflow suggest that the macro environment has deteriorated pretty drastically over the last quarter. Sensitivity to non-food sales growth Total non food sales in France were c. 7.4bn in Assuming that the EBIT margin on NF are at 2% of sales, and that due to the operating leverage, a 1% fall in top line will lead to a 4% decline in operating profit, this means that a 1% fall in non food sales will have a negative impact of 5-6m to group EBIT, ie a 0.4% negative impact on French EBIT. Net profit cut by 3% in FY08 and 5% thereafter We have hence reduced our Net profit forecast by 3.1% for FY08 and by c.5% for FY09 and FY10. We now expect EPS of 2.81in 2008, 3.08 in 2009 and 3.51 in 2010 versus 2.90, 3.24 and 3.69 previously. Valuation, Price target downgrade to 45, Hold Our key DCF assumptions are - WACC of 7.3% based on Risk free rate of 4.3% Equity Risk premium of 4.5% Page 10

11 Beta of 0.9 Cost of debt of 3.4% 20% debt and 80% equity - Terminal growth rate of 1.5% (which is just below the historical long run average industry growth for European food retail). The change to our Target Price relies on DCF Valuation based on new forecasts (3% change to FY08 profit and 5% thereafter) The application of a 25% discount to our DCF valuation versus 5% previously since we believe that the risks linked to consumer downturn in Carrefour s main markets, primarily France and Spain, have significantly increased since this downturn could be deeper and longer than anticipated. Figure 14: DCF-based valuation EV 56,852 Discount applied 25% Discounted EV 42,923 Debt -9,800 Associates 568 Minorities -2,236 Value of Equity 31,455 Shares 704 Target Price 45 Source: Deutsche Bank Based on our a new numbers, Carrefour shares trade on a FY09 PE of 11.7x, which is an only 3% discount to the sector average. Figure 15: Europeans Food Retails- Valuation table (prices at close 26 th June) EV / EBITDA (x) PE Ratio (X) Jeronimo Martins Colruyt William Morrison Casino Sainsbury Tesco PLC Ahold Carrefour Metro Group Delhaize Sector average Source: Deutsche Bank, Page 11

12 Risks Carrefour is more prone to variations in consumer spending than most of its food retail sector peers due to its high non-food sales content, so any significant deterioration of the consumer spending environment could represent a risk on the upside or downside. Page 12

13 Appendix 1 Important Disclosures Additional information available upon request Disclosure checklist Company Ticker Recent price* Disclosure Carrefour CARR.PA (EUR) 26 Jun 08 1,6,8,14 *Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees. 6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company calculated under computational methods required by US law. 8. Deutsche Bank and/or its affiliate(s) expects to receive, or intends to seek, compensation for investment banking services from this company in the next three months. 14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year. Important Disclosures Required by Non-U.S. Regulators Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes. 1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees. 6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company calculated under computational methods required by US law. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Ingrid Azoulay Page 13

14 Historical recommendations and target price: Carrefour (CARR.PA) (as of 26/06/2008) Previous Recommendations Security Price Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations Buy Hold Sell Not Rated Suspended Rating *New Recommendation Structure as of September 9, Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Date 1. 14/12/2005: Upgrade to Buy, Target Price Change EUR /3/2006: Buy, Target Price Change EUR /5/2006: Buy, Target Price Change EUR /2/2007: Downgrade to Hold, EUR54.00 Equity rating key 5. 24/7/2007: Upgrade to Buy, Target Price Change EUR /8/2007: Buy, Target Price Change EUR /3/2008: Buy, Target Price Change EUR61.00 Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total shareholder return (TSR = percentage change in share price from current price to projected target price plus projected dividend yield ), we recommend that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes: 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of - 10% or worse over a 12-month period % 45% 30% 27% 7% 31% Buy Hold Sell Companies Covered Cos. w/ Banking Relationship European Universe Page 14

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16 losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. New Zealand: This research is not intended for, and should not be given to, "members of the public" within the meaning of the New Zealand Securities Markets Act Russia: The information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a licence in the Russian Federation. South Africa: Publisher: Deutsche Securities (Pty) Ltd, 3 Exchange Square, 87 Maude Street, Sandton, 2196, South Africa. Author: As referred to on the front cover. All rights reserved. When quoting, please cite Deutsche Securities Research as the source. Turkey: The information, interpretation and advice submitted herein are not in the context of an investment consultancy service. Investment consultancy services are provided by brokerage firms, portfolio management companies and banks that are not authorized to accept deposits through an investment consultancy agreement to be entered into such corporations and their clients. The interpretation and advices herein are submitted on the basis of personal opinion of the relevant interpreters and consultants. Such opinion may not fit your financial situation and your profit/risk preferences. Accordingly, investment decisions solely based on the information herein may not result in expected outcomes. United Kingdom: Persons who would be categorized as private customers in the United Kingdom, as such term is defined in the rules of the Financial Services Authority, should read this research in conjunction with prior research on the companies which are the subject of this research. Disclosures relating to the firm's obligations under MiFiD can be found at Page 16

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