Carrefour SA

PAR:CA

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to the Carrefour Analyst Conference Call. I now hand over to Alexandre Bompard, Chairman and Chief Executive Officer. Sir, please go ahead.

[Alexandre Bompard, Chairman & CEO]

Good evening, I hope you and your families are well and safe. Matthieu Malige will take you through our financials for the first quarter, but I'm here today to address the most pressing topic for all of us: The current COVID-19 situation. Our thoughts, are of course, with those who have been affected. This crisis is impacting our colleagues and our customers, and we are protecting them by all possible means while ensuring business continuity. As of now, and in most of our geographies, the situation is a sort of in-between. We are out of the emergency stage, but not yet out of lockdown, nor of course, out of the crisis. This means that we are still living in uncertain times. I'd like to provide some insights on what we have done so far at Carrefour to face this unprecedented crisis. We had the advantage of having entered the crisis with 2 years of successful transformation behind us and a far more flexible organization. This puts our people in the right mindset to embrace change. Since the outbreak, we have built on the strength to adapt in real-time to a rapidly changing situation. We ensured shorter decision-making processes. I had assembled an executive team that has a very complementary skill set and the experience makes us proactive and quick. Meanwhile, our Board of Directors meets every week, ensuring that we have high level of corporate governance. We circulated best practices of what we have learned in this crisis, starting with lessons from Taiwan in February. Our global reach allowed us to save precious days of preparation and to take swift actions in all our countries. At this point, all our measures are in place with 4 main priorities in mind: First, our top priority is to ensure the safety of our colleagues and customers. We have implemented strict safety rules since the outbreak, going even further that the instructions given by safe authorities. We equipped our teams with masks and gloves and installed protective screens at the front of our checkouts. We enhanced cleaning routines in stores and warehouses. We introduced social distancing measures and regulated the entrance of our stores. These rules are essential for the proper continuity of our mission. This is why they are regularly audited in all our geographies. And beyond the rules, I want to salute the remarkable dedication that our employees are showing by looking after each other and looking after customers. Second, as a food retailer in this crisis, we have a major responsibility, making sure that everyone has access to food. Our first course of action is supporting the food supply chain. We are working closer than ever with our suppliers, enabling us to continue functioning properly. We simplified our offering to get more of the most popular products on shelves. We also simplified our logistics plan to favor short [ circuits ] of direct deliveries. This is also a way of supporting our local agricultural communities with their seasonal products. Our second course of action is one of solidarity. We created dedicated services for medical workers and vulnerable customers such as express ordering service with free on delivery, special hours in stores to go shopping, our free meal baskets. We accelerated our food donations and through our foundation, we devoted EUR 3 million to supplies for hospitals. All these initiatives demonstrate our sense of responsibility. The social responsibility is also why our Board of Directors decided to reduce by half the proposed dividend for 2019 at EUR 0.23 per share as a balanced answer between responsibility and fair remuneration of shareholders, and I'm waiving a portion of my fixed salary as is the group executive committee for the 2 months that correspond to the peak of the crisis. Further, to properly recognize the exceptional efforts of those working in stores, drives, on warehouses, we awarded vouchers or one-off bonuses in all our geographies. This, of course, means payroll expenses are going up as our supply sanitary and protective equipment expense, but this is how we stick to our values and assume our responsibilities as a group in a period of severe crisis. Third, we are serving customers with dedication and care. I had said that we would devote a lot of energy to customer satisfaction in 2020. I must say that our teams have gone above and beyond. I'd like to say how very proud I am of them. So many more customer-friendly initiatives have emerged from this crisis. We froze prices on everyday products in our key countries. We opened new channels, new services and new partnerships to respond to booming e-commercial demand. We saw many employees from our headquarters volunteer to serve customers, and our on-the-ground teams became more flexible and pitch in where needed. All these initiatives resulted in an above-market rise in our Net Promoter Score. We stand out as an essential brand according to many surveys. In France, notably, 2 weeks into the crisis, we already were in customers' top 3 most necessary brands. Through our purposeful actions, we are winning the heart of our clients. Lastly, we are monitoring our activity very closely. We had a quarter of solid activity characterized by highly different phases on volatile consumer behavior. Matthieu will walk you through the detailed figures. I just had 2 remarks. In this crisis, our group is being tested, and it is responding efficiently. We are leveraging our strength, being global and having a responsive team helps us confront the different challenges we face, on having a strong multi-format model, helps us address the different consumption pattern we see. Then looking at the future, I'd like to share with you some of my beliefs. I do not overlook the scale and severity of this crisis, which is still ongoing, and we cannot predict what will happen, but it is already clear that the crisis is intensifying existing trends. In fact, this whole crisis underscores our relevance, most of our transformation was. First, e-commerce and convenience stores, where we have been rapidly investing and expanding, I imagine from the confinement period as a key format. Second, the value proposition of our hypermarket and other discount formats will be further enhanced by growing concerns about purchasing power. Hypermarket also offered the highest degree of sanitary protection, thanks to the greater space, and they are a one-stop shop for families who want to limit their movement. I believe that these formats will emerge from these crisis as a reassuring and convenient place to shop. Further, today's crisis highlights our crucial food securities and how much what we eat matters for our health. This will provide further impetus to Carrefour's leading role in the food transition for home and support our efforts to develop organic product on grounds and local producers. Four, the crisis increases the need for a sound financial structure. Since 2018, we have exceeded our cost-cutting objectives and built a strong balance sheet. And since the outbreak, we have secured an even better liquidity position, as Matthieu will explain. Many initiatives that we started 2 years ago as part of our transformation plan will greatly matter in the coming months. We are still managing for this further crisis, but it is already clear that we are living in a defining moment for our sector and beyond, one that will have lasting effects on our economies and societies. For the future, we are laser-focused on how the situation is evolving, most notably on customer behavior. At this stage, we will continue pursuing our transformation with even greater confidence in our actions, and I reaffirm all the objectives of the Carrefour 2020 plan. Thank you for your attention. I now hand over to Matthieu.

[Matthieu Malige, Chief Financial Officer]

Thank you, Alexandre. Good afternoon to all of you. I'm very happy to be with you today. I hope you are all well and safe. This Q1 was obviously atypical, marked by high volatility on the back of unusual consumption patterns and unprecedented lockdown measures. Q1 sales were up by a strong 7.8% like-for-like, reflecting a good commercial performance in January and February, and a great execution by all Carrefour teams to respond to the peak in demand in March. The strong dynamic of like-for-like growth occurred in all our countries. Overall, the consumers' reaction to the pandemic was very similar from one country to another. So how has the quarter played out? What we can say is that this Q1 was marked by 2 distinct periods. First, in January and February, Carrefour continued to advance in its transformation plan with good sales and market share momentum and encouraging signs in terms of volumes and price perception. In the first 2 months of the year, like-for-like growth was plus 4.3%. Then in March, we recorded a strong increase in sales ahead of lockdown measures with consumers making precautionary purchases, mainly in dry groceries and products with long shelf lives. All store formats and e-commerce benefited from the strong momentum in food. Traffic and baskets hit record levels. Once the lockdown measures were put in place in the last days of the quarters, consumers turned to proximity and supermarkets closer to their homes at the expense of hypermarkets. Across all formats, the number of visits was lower while the average basket increased significantly. Food e-commerce continued to post strong growth. A few key consumption patterns are worth mentioning. E-commerce sales rose plus 45% in the quarter with very high-growth in March when demand for e-commerce picked up. Nonfood sales were down minus 3.5% with markets particularly penalized, notably certain categories such as textiles, which were not considered as a priority. Public authorities in countries like Spain or Italy even closed certain nonfood departments. Demand for organic products remained strong, with sales up 30% in the quarter. Carrefour branded products progressed throughout the quarter as they respond to 2 sustainable market trends, the need to protect purchasing power and attention to food quality. The penetration rate was up by circa 2 percentage points versus Q1 2019. Let's now look at our performance per country. In France, like-for-like sales increased by 4.3%, growing plus 5.9% in food, while nonfood was down 6.1%. We saw growth in all of our formats. Like-for-like increased by 0.9% in hypermarkets. Underlying sales trends improved in both January and February versus previous quarters. Then hypermarket benefited from precautionary purchases in March. The format clearly provides consumers with a broad offer, attractive prices and the convenience of concentrating purchases in a single place. Supermarkets grew 8.1% like-for-like and benefited from their intermediate positioning, combining proximity and broad choice. Carrefour also strengthened its loyalty scheme with the new Market Loyalty Premium program launched in January. This new loyalty premium recorded strong success. Convenience sales were up 11% like-for-like, highlighting a very strong momentum. Promo cash activities were penalized by restaurant closings. Turning now to Europe. In January, February, growth in all countries improved sequentially compared to previous quarters. In March, our European operations also benefited from precautionary purchases ahead of lockdowns. The region has been particularly affected by the pandemic with very strict lockdown measures, including closures of most nonfood categories in Spain and Italy. In Spain, like-for-like sales increased by 6.6%. The approach, based on customer satisfaction, was a key differentiator and resulted in a new improvement in Net Promoter Score. In Italy, like-for-like sales were up by 2.5%, with a strong presence in the North of the country that was particularly affected by COVID-19, Carrefour has capitalized on its multi-format presence. In Belgium, like-for-like growth was plus 6.2%. We resumed market share gains, including in the period preceding the COVID-19 crisis. In Poland and in Romania, momentum remained very solid, growing plus 8.8% and plus 9.7% like-for-like, respectively. In Latin America, which was impacted later than Europe by the pandemic, we continued to see very strong momentum. In Brazil, Q1 sales were up 12.2% at constant exchange rates with like-for-like growth of 7.6%. Foreign exchange had an unfavorable effect of minus 14%. Carrefour Retail posted sales up 8.9% on a like-for-like basis, notably thanks to strong momentum in food. Solid growth in e-commerce continued despite a slowdown in nonfood. Q1 sales at Atacadão were up 7% like-for-like. The banner continued to expand with the opening of 4 new stores in Q1. Financial services posted a new increase in billings. Carrefour Bank reinforced its selectivity in granting credit during the quarter. In Argentina, where like-for-like was up 70%, strong commercial momentum continued with traffic and volumes increasing continuously. Carrefour again acted in favor of consumers by freezing prices on 1,300 products. Finally, in Taiwan, sales rose plus 6% like-for-like. Effects linked to the pandemic situation were less marked than in other group geographies. Carrefour Taiwan benefited from the integration of 8 Taisuco stores in 2019 and successful commercial operations around Chinese New Year. As Alexandre shared with you, Carrefour is entering the current period, strengthened by 2 years of implement of the Carrefour 2022 plan. Let me complement this analysis. With a word on financial and cost discipline as well as Carrefour's solid balance sheet. Over the past 2 years, we have revamped a number of processes and simplified our organizations. We have developed deep expertise in the transformation of processes with an industrial approach. We have also shown strong selectivity and productivity in our CapEx policy. This helps Carrefour reinforce its balance sheet. We now have one of the strongest balance sheets in the industry. Last month, we further increased liquidity with a bond issue for an amount of EUR 1 billion with a maturity of over 7 years. The success of this issue attests to the great confidence of investors in the Carrefour signature. In addition, a few weeks ago, Carrefour Brasil signed a bank financing for BRL 1.5 billion over 2 and 3 years. Moreover, the group has 2 undrawn credit facilities totaling EUR 3.9 billion with a maturity in 2026. Carrefour's solid balance sheet is an important asset in the context of the fast-changing food retail sector as well as in the face of the current economic environment. Let me now conclude. Even if it's, of course, too early to grasp the full extent of the crisis we are going through, we are continuously assessing the impacts of the COVID-19 crisis and its effects on the economy and on consumer purchasing behavior. As you understood, the orientations of the Carrefour 2022 strategic plan are very relevant in the current context and are reiterated. We also confirm all operational and financial objectives. As far as our agenda for meetings with investors is concerned, we have decided in the current context to postpone to a later date the thematic event in Spain as well as the Carrefour Brasil Investor Day in São Paulo. I thank you very much for your attention. Alexandre and I are now very happy to take your questions.

[Operator]

[Operator Instructions] The first question comes from Cedric Lecasble from MainFirst Bank.

[Cedric Lecasble, Research Analyst]

I have actually 2 questions. So the first one, to understand the potential stocking, destocking impact you've had with pre containment, post containment. Could you help us maybe with current trading and tell us if the trading has normalized in April versus a lot of volatility in the weeks of March. The second question is in 2 parts. Did you see the same kind of behavior of the consumer for physical constraints in the containments in all the countries with your hypermarkets? Did you see a general pressure on traffic? And this is -- the second part is, did this context lead you to accelerate all the services you were pushing to add service and add value to the consumer, like food deliveries, et cetera, all the services associated to the hypermarket and part of your omnichannel strategy? What can you do today to bring back customers to the hypers when the containment will end?

[Matthieu Malige, Chief Financial Officer]

Thank you, Cedric. Let me maybe start with the second one. Well, obviously, different lockdowns in different countries. The level of constraints imposed to the populations has clearly varied in times and in locations -- sorry, and also in time. And the way that has impacted our hypermarkets, as I said in my comments, has varied with some governments deciding to close down nonfood. Then we have different types of hypers. Obviously, some big ones, which are located in shopping malls. These ones are clearly more difficult to be accessed in the lockdown situation. Other hypermarkets of smaller size, which have more of a proximity role. So very different performance throughout the geographies. And then different relative strength and attractiveness for the customers depending on the geographies. You've seen over the past few quarters, a clear difference between the performance, let's say, of our hypermarkets in Spain, which had a very solid performance. And in France, for instance, where it was a little more difficult. So these underlying trends, obviously, are still here during the period. Yes, but that's for the trend. Alexandre?

[Alexandre Bompard, Chairman & CEO]

And for the first part of your question on the consumption pattern, what you have to have in mind is the fact that the, I would say, the most prominent point of this crisis, potentially linked to the lockdown. The huge volatility and the huge -- and predictability of the consumption model. To tell that a little bit differently, no week is really similar to the previous week or to the week after. And consequently, what we see in this crisis is that the key point to analyze and to the performance is the capability to have permanent assets that are capable to answer to different moment of this crisis. And what we clearly see, since the beginning of March, is the fact of being multi-format is really a key asset when consumption trends change very rapidly. Just before the lockdown, it was, of course, a moment of huge consumption, particularly in hypermarket. Just the days after the lockdown, when the lockdown was very strict, of course, the performance is better in supermarket or convenience. And you know we are a clear leader on convenience. Food e-commerce has been outperforming during all the period particularly after March. And what we see is that the key point is that. And the fact to have this multi-format organization, to have been capable to develop e-commerce capabilities because, of course, the level of demand on e-commerce is strong on the [ wind ] force all the time. To have been capable also to develop a performance on attractive Carrefour branded products, with organic products because we clearly see that's linked to purchasing constraints, the relevancy of Carrefour branded products is strong. And last of all, to have competitiveness on price, and it's probably a long-term also element. And as you know, thanks to all what we have been capable to do on costs savings in the last 2 years, we have been capable to restore price competitiveness. So I would say, of course, there are different weeks, but no week is really similar to the other one. And the key point is to have all these assets and to be capable to accelerate on different formats according to the moment of the crisis.

[Cedric Lecasble, Research Analyst]

And if I may, how does April compare to January, February, if we exclude March?

[Alexandre Bompard, Chairman & CEO]

Sorry, can you say that again?

[Cedric Lecasble, Research Analyst]

Yes. Yes, just about circa on trading and the way April compares to January and February. If we exclude the strong volatility in March. How have things settled down during this phase versus January, February, all formats together?

[Matthieu Malige, Chief Financial Officer]

Well, today, we're already commenting Q1, Cedric, and we'll have a discussion in July about Q2, if you agree.

[Operator]

The next question comes from Carole Madjo from Exane BNP.

[Carole Gladys Madjo, Research Analyst]

A few question from me. First of all, you mentioned that you could LFL gross with 4% in the first 2 months of the year. Can you maybe share the LFL of the French other market for that period? Second question. The young French poll in Spain, what other countries in which you gave some bonuses to this task? If you can share that? And maybe the last question. So as you mentioned, of course, the growth duration is driving to higher cost. So maybe can you give us your thoughts on the EBIT consensus at this stage?

[Alexandre Bompard, Chairman & CEO]

So on the first question, Carole. On your first question on the French hyper like-for-like in January and February. What we said is that the trend improved. I think I said that in my speech. The trend improved versus previous quarters. So clearly, there's been an acceleration in March on the back of the precautionary purchases, but still an improving trend in January and February. On the bonuses to the staff, there is a number of -- we disclosed the amount. That's pretty much the same approach in all geographies with a number of measures, be it cash, vouchers, different schemes to thank our colleagues for the impressive work that they have done at the time of the peak.

[Matthieu Malige, Chief Financial Officer]

On your first question related to the EBIT margin. Well, as you know, we don't disclose on a quarterly basis, but what can we say? They are clearly pluses, notably volume uplift, but also minuses of which [ seconds to show ] additional costs. In Q1, thanks to the 8% of growth, and we have a positive operating leverage thanks to this increase in volume, but of course regarding costs, we have several additional costs, which are highly linked to the choice we have made to be very responsible during this crisis. So its cost related to the protection of employees and customers, and of course, equipment, new process, new way of working during this moment. Exceptional bonuses, I might just a word on that in all the geography and, of course, mainly in France, but also the decision we have taken at the beginning of the crisis, to be capable to create new services for the most vulnerable people, for [ help ] people and so on. So we have tried to work on that, be capable to open all these new services. Of course, they are not profitable, and that was not the choice we've made at this moment. So all in all, as you understand, we have this process linked to the volume, and we have this exceptional cost linked to the choice of responsibility of protection, of recognition for our employees.

[Operator]

The next question comes from Clement Genelot from Bryan Garnier.

[Clement Genelot, Analyst]

Just 2 questions from my side, if I may. The first one is linked to your pricing investment policy. I understand that in France, you are committed to -- indeed stable prices, but does it mean that you are being -- you are cutting on all your investment policy and especially on hypermarket? That's the first one. And the second one is linked to your cost marketing plan. I understand you have more that throughout 2020, by the end of the year, you still target EUR 2.8 billion, but do we have to expect some kind of slowing downtrend in H1 and a catch-up in H2 because, of course, I guess that in H1, you are all focusing on the crisis and not so much on the OpEx or control?

[Matthieu Malige, Chief Financial Officer]

Thank you, Clement. Well, on price investments, I think it's already a long-term strategy and policy that we have. It started 2 years ago. As we highlighted, that has continued in the course of Q1. We mentioned a few initiatives. One of them is the Le Marche, the loyalty premium in the French supermarkets, granting a 10% discount on all fresh products every day. It's not a special promotion, and that has been going on through the crisis in March. We have also decided, and that's part of our investments, but also of the responsible approach and philosophy of the group in the current context, to freeze a number of prices. We commented that the unbeatable 5,000 private label products in France, which have been blocked, and that pretty much happened everywhere. So this pricing investment strategy really keeps going and keeps developing. On your second question relating to the phasing of the cost savings. So you're right. We have confirmed EUR 2.8 billion target on cost savings by the end of the year. It's a number that we increased in February. Well, it's really -- I think we discussed that on previous calls. It's really a high number of initiatives in all our geographies. You're right, some of them maybe slow down, but we have other initiatives that are still working and progressing very well. So no big seasonality effect anticipated. It's really a mass of local initiatives, and we have not left our eye from the ball and from the cost-cutting initiatives in the current environment, as you can imagine.

[Operator]

The next question comes from Arnaud Joly from Societe General.

[Arnaud Joly, Equity Analyst]

Yes. Alexandre, Matthieu and team, I have 3 questions. The first one, so you have a jump in your online grocery sales. I'm just wondering whether it helps you to improve the profitability of your online operations. And maybe if you can give some flavor on the level of services, in particular regarding the product shortages? My second question, on French hypermarkets, I'm wondering what kind of initiatives you plan to relaunch traffic, let's say, in the coming weeks? And do you think that you will have to be much more aggressive on prices? And maybe the third question, when do you believe or when do you plan to relaunch, let's say, a kind of normalized marketing and pricing policy? I think that over the last few days, you started to launch e-mail and to by offering discounts and promotions in your hypermarket. So when do you plan to have a kind of normalized marketing policy?

[Alexandre Bompard, Chairman & CEO]

Thank you, Arnaud. First question on e-commerce. Just before discussing about the profitability of e-commerce, we tend to consider that on e-commerce, this crisis is an opportunity for us on e-commerce because we clearly see that we managed to convert customers that did not use online shopping for food before the crisis. And of course, it's a huge acceleration, and it's a huge opportunity for us to present to all our customers, the different services that we have been capable to develop in the last 2 years. Of course, drives, pedestrian drives, delivery, express delivery. And as you know, during all this crisis, we have tried to continue to propose new services such as the essentials, for example, in Paris, we have tried to be capable to continue this service, while in a certain number of countries, our competitors have stopped due to the high level of demand. And we have tried to open additional delivery on pickup slots, to communicate with the customers on our own page about the difficulties we have to fulfill exactly the proposals -- the initial proposals. We have created a virtual working line. We have give seniors and fragile people priority. We have created the opportunity to order by phone. So it's really a complete overall program that we have developed. On profitability, of course, e-commerce has not become in 1 day, profitable for all the retailer. As you know, e-commerce economic model is the margin cost variable cost minus fixed costs. So fixed costs are fixed. And due to the high level of increase in volume, we have seen a positive impact on the variable costs margin. And of course, it's a positive tendency to see that the volume, and I tend to consider that it would be this for a long time moments, but we have been capable to convert new customers on that. On the hypermarket, if you may authorize, I would say to share my personal conviction. Contrary to what sometimes I read, I do believe that the hypermarket value proposition would be attractive as soon as the lockdown is eased, because we clearly see the 3 potentials for the hypermarket. First, I think that we all share here that it's obvious, it's certain in all our geographies that purchasing power is going to be a major concern for customers in the upcoming quarters in this economic context. And as you know, hypermarket is the good answer to this purchasing constraints, and I don't see why and how this purchasing concern, this purchasing constraints would not favor the performance of the hypermarket. Second, I think that people, in this context, and particularly in the sanitary transition context, they will look for efficient shopping, with all under the same roof. And hypermarket, a unique one-stop shops. Consumer want to shop all at once, rather than queuing up to access multiple stores. And I'm convinced that the efficient shopping will be favorable to the hypermarket. And last, and I visit many stores, of course, since the beginning of the crisis, and you clearly realize that our hypermarkets make it possible for customers to shop with a safer shopping experience as physical distancing can be implemented in large-sized stores. So clearly, it is a third advantage. So when you gather this 3 advantage, you realize that when the lockdown will be eased, that would be a good value proposition for the hypermarket. On your last question, it's not so simple to answer about this type of question because as you probably realize the level of uncertainties about next weeks -- about next month, remain very strong. So it's quite difficult to completely know what would be the situation in May, in the beginning of June, in June. And so all the teams in France, all the teams in all the countries try to reassess the options to think about what could be the good moment to have a more normalized price on marketing policy, but we are that each week, and we don't have any visibility, of course, like everybody about what would exactly happen when the lockdown would be eased in the different geographies.

[Operator]

The next question comes from Fabienne Caron from Kepler Cheuvreux.

[Fabienne Caron, Head of Food Retail Sector]

Two questions from my side. The first one on the French supermarket. You performed in line with the market, which I consider a little bit disappointing, looking at performance of the independent industries, which were much stronger. So what is your analysis, how come you didn't gain market share in the supermarket? Did you have some issues with logistics or stock costs and any help will be great on that side. And on the French hypermarket, again, we've seen some [indiscernible], which had a very bad impact for April, assuming it remains the same for May. You believe Carrefour is strong enough to offset potential of the weak like-for-like in-store for 2 months?

[Matthieu Malige, Chief Financial Officer]

Fabienne, thank you for your questions. On the first one regarding the supermarkets. Well, we've not noticed any particular underperformance. However, there's a number of trends which are going on in our French supers, which we should all have in mind and which are basically the high level of investments that we are putting into this format. So first of all, we have a strong progression of the private label in this format. We clearly go faster than the market in penetration of -- no, increase of penetration of private label in French supers. That clearly has a dilutive impact on our top line. You may remember that starting from June last year, we launched a high number of price investments, notably the [indiscernible] and also investments on national brands to use and be more and more competitive. We are -- we have not circled on these investments yet. So they are still impacting our top line. We also have a number of works currently going on in a number of our supermarket stores, although we remain very cautious on not overinvesting, having modern concepts and modern store layout is important for our customers, and so we are investing. Then maybe last point, which is more related to the crisis. We've been very strict in implementing all the measures relating to social distancing. This is probably why you may have seen some lines outside of our stores. And again, I think we emphasized that quite strongly tonight. The protection, the safety of the health of our employees and customers is very, very high on the priority list. And so we don't play with these rules that may have a penalizing us [ few other ] if some direct competitors were less stringent on these rules.

[Alexandre Bompard, Chairman & CEO]

On your second question, Fabienne, on the hypermarket. I think sincerely that it would not have any sense to project the performance of the hypermarket in May. Let me try to criticize that. When the lockdown is very strict, when the lockdown is accompanied by the closure of the totality of the shopping malls, when people don't reduce very strongly their physical move, the hypermarket is suffering, and it's clearly the situation, the days after the lockdown decision. When things begin to evolve, day after day, and we cover that, we see that the performance of the day-to-day hypermarket begins to increase and to improve. And now we answer, as you know, in May in a new moment in France, and because we are talking about France, you've probably seen that all the modalities of the big consignments have been announced today. We clearly see that the capabilities for the consumers to move in 100 kilometers is now absolutely free. Of course, it means that with all the advantages of the [indiscernible] has already mentioned, there are this opportunity. Additionally, of course, there is still the capability to capture share of wallet in the out-of-home meals. So when you gather all these elements, it's really impossible to tell and to extrapolate the performance in May. As I mentioned previously, the performance evolved very strongly week after week. So the key question for us is to be capable to have the best performance, the best multi-format organization to capture the conception patterns where they are we capture.

[Fabienne Caron, Head of Food Retail Sector]

Okay. And just to make sure regarding promotions, when will the new flex start again to be distributed in France?

[Matthieu Malige, Chief Financial Officer]

Well, I think, Fabienne, that was answered by Alexandre previously. It clearly depends on how the market evolves. And as you know, it's quite a sensitive topic, so we will not develop this any further.

[Operator]

The next question comes from [indiscernible] from [indiscernible].

[Unknown Analyst]

I have just one question, please. Will the employee bonuses be classified outside of recurring costs?

[Matthieu Malige, Chief Financial Officer]

Well, let me come back on these exceptional costs. So you're right, it's a very particular quarter. I will not come back on what Alexandre said. Clearly, very high volumes and facing that exceptional cost, a number of them coming from exceptional bonuses to the employees in France and outside France. And also exceptional logistics costs to cope with the increase in volumes. Overall, I would say that net of these exceptional bonuses to employees the Q1 profitability is close to our initial expectations, which means that excluding these bonuses, it's ahead of our initial expectations. On the accounting treatment, it's -- although these bonuses are clearly exceptional in nature, it's too early to confirm what will be the accounting treatment for that at the end of June. It's a matter that will need to be discussed with our auditors later in the quarter.

[Operator]

The next question comes from Maria-Laura Adurno from Morgan Stanley.

[Maria-Laura R Adurno]

I actually have 2. So the first one, coming back to the cost. I was just wondering if there are any areas in which you're actually seeing cost inflation. And then the second question which I also had, was with respect to nonfood. So for instance, here in the U.K., we saw some of the grocers canceling or managing differently their nonfood orders with their suppliers. Just wondering if you could shed some light on this? And then just on second, what you just mentioned. So we said that including bonuses, the 1Q operating profit is in line with your expectations?

[Alexandre Bompard, Chairman & CEO]

On inflation on food, if it's your question, it's on cost. We don't see any particular elements in this quarter, although, except all the exceptional costs we've mentioned. On the cost, on the price on food, you probably mentioned that there's no inflation in this quarter. There are a certain number of prices that have been negative, and they have been compensated by an increase of prices of vegetable and fruits, which are clearly related to the choice we have made to favor and to privilege local or national producers. On nonfood, of course, it has been a very particular quarter. And in particular, we have so much, and it was not the priority of our customers and not the priority of ourselves. You probably know that a certain number of -- in a certain number of countries, such as, for example, Italy or Spain, we are going to have to close nonfood categories due to local regulation. In terms of trends, customers, we are more focused on fulfilling basic food needs while limiting your time outside the home. Of course, what we have seen is that textile has been highly impacted. On the other hand, and depending on the country, particularly the first day after the lockdown, consumer electronics or appliances departments were more positive. But overall, of course, this moment is negative for nonfood.

[Matthieu Malige, Chief Financial Officer]

And did you have a last question, but the line was bad, Maria, you mind repeating it?

[Maria-Laura R Adurno]

Yes, sorry. It's just that I wanted to check that I had heard correctly. So when you said that 1Q operating profit including the employee bonuses was in line with your expectations. Is that what you said?

[Matthieu Malige, Chief Financial Officer]

Yes, you understood well. Net of these exceptional bonuses, the Q1 profitability is in line with our initial expectations.

[Operator]

The next question comes from Rob Joyce from Goldman Sachs.

[Robert Joyce, Equity Analyst]

I've got 3. Just to clarify that final point you made there, you're saying that the -- after the bonuses, but including -- also including the increased volume, operating leverage, you are trending where you expected to be in Q1 prior to the outbreak of the COVID-19? The second one is just on the nonfood side of things, just if you could say whether the trends you're seeing there would impact your longer-term thinking on nonfood in hypermarkets? And whether you could just remind us what percentage of sales those textiles were in the French hypermarkets last year? And then the final one from me, just in terms of the -- again, thinking longer term, you mentioned there's quite a distinction between the large hypermarket performance and some of the more local hypermarket performance. Could you give us an idea of in France, what percentage of sales last year came, in the hypermarket division came from those larger hypermarkets versus what came from the more local hypermarkets?

[Matthieu Malige, Chief Financial Officer]

Rob. Thank you for your questions. Well, I think you got it right on the profitability. Let me repeat that. The net of these exceptional bonuses to employees, the profitability is close to our initial expectations, and that obviously increases all the other exceptional costs including logistics cost due to the high volumes and also the cost associated with protecting our employees and customers.

[Alexandre Bompard, Chairman & CEO]

On nonfood, I wouldn't consider that the performance since the beginning of March, could be extrapolated in a mid-term perspective for, I would say, 2 essential reasons. The first one-off is related to the fact that, of course, you understand that the mood of the customers were not at all, to a certain number of categories, in all the geographies. You mentioned textile. And of course, it's the symbol of that. So it's the first reason in [out of ] 3. The second, I would say, is the fact that we were not ourselves, focused on the performance on the nonfood during this quarter, the obsession of the team what should be capable to fulfill our mission on food, to give access to everybody, to manage the supply on [ France one saw ]. I wouldn't tell that it was the best moment for the nonfood. On the third element is related to what I've said about the hypermarket. Clearly, we anticipate that the customers would try to have an efficient shopping after this crisis. Clearly, we do think that the willingness to queue in many, many stores would not be so natural and to the fact to have everything under the same -- the same roof, could be an opportunity, of course, if we are commercially attractive. And I do consider that on -- in the next quarters, we have an opportunity to reinforce our performance there. Not to say that we know that a certain number of nonfood players could be in different positions than they were before the crisis. So all in all, I do think that we potentially have an opportunity for nonfood in the next quarters compared to what we have been capable to deliver since then.

[Matthieu Malige, Chief Financial Officer]

On your last question regarding the split. Well, I don't have it in my -- on the back of my mind in France between local role versus a more regional role. I think across our various geographies, you see differences, for instance, I think Belgium is quite interesting and inside the performance of Belgium on the quarter, we have some relatively smaller hypermarkets in Belgium, 6,000 square meters, I think, in average, and it's probably a more dense country in terms of urbanization. And so they have more of a proximity. So well, the different trends across countries, clearly and also inside the France.

[Robert Joyce, Equity Analyst]

Sorry, one quick question I meant to ask. Tesco flagged that there were -- they expected reduced profitability in their bank on the back of lower interest income and also some impairments there. I'm just wondering on your financial business, is there anything we should be aware of on that side of things?

[Matthieu Malige, Chief Financial Officer]

Well, it's a normal period to ask the question and focus on risk in a banking activity. We have no specific alert at the end of March on the basis of what we see. So no particular concern, but given the economic dynamic, we're clearly, more cautious, as I commented on Brazil, the policy on granting credit is more stringent for now a few weeks. We reinforced a number of teams to collect credit. So -- but -- so it's basic protocols in these businesses and no specific concern to date.

[Alexandre Bompard, Chairman & CEO]

Well, thank you very much.

[Matthieu Malige, Chief Financial Officer]

Thank you very much. Bye Bye. Have a nice evening.

[Alexandre Bompard, Chairman & CEO]

Goodbye. Keep safe. Thank you so much.

[Operator]

Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.