Netherlands-based food retailer Royal Ahold NV (AH.AE) Thursday
reported a better-than-expected profit for the second quarter as it
outperformed many rivals in its U.S. markets with higher sales and
margins.
The company, which makes about 60% of its revenues in the U.S.
through its Stop & Shop, Giant-Landover and Giant-Carlisle
chains and its Peapod internet grocer, said operating income at
Stop & Shop and Giant Landover rose 60% to $200 million, or
4.9% of net sales. It said identical sales rose 1.7% at Stop &
Shop, or 3.4% excluding gasoline, while sales rose 3.7% at
Giant-Landover, or 3.5% excluding gasoline sales.
The margin was up from 3.1% a year earlier, while total sales
rose 2.8% to $4.1 billion.
The company is benefiting from a revamp of its U.S. operations
it started about two years ago. It reformatted and modernized its
stores and lowered prices, stealing a march on rivals who had to
cut prices when the downturn hit. Costs related to that revamp had
hit last year's result.
"By the time our competitors catch up, we'll be long gone and in
a completely different place," Ahold Chief Executive John Rishton
said. "The weak will get weaker, and the strong will get
stronger."
Signaling his confidence, Rishton said the downturn should throw
up acquisition opportunities and the company would snap up any
stores that are sold by its rivals.
Ahold's strong U.S. performance comes as Belgium-based Delhaize
Group SA (DEG), which operates the Food Lion, Hannaford and Sweet
Bay chains in the U.S., as well as U.S.-based rivals Supervalu Inc.
(SVU) and Safeway Inc. (SWY) have warned that price competition and
the use of promotions is increasing. But Rishton said he expects
food price declines to start easing, and for food price inflation
to pick up in 2010.
He said Ahold wants to increase own-brand penetration rates in
the U.S. to support margins when prices start to increase. Own
brand goods typically sell for less than big consumer brands, but
also cost the retailers less and hence margins are higher. About
50% of the goods Ahold sells in the Netherlands are own-brand.
"We remain well-positioned in an increasingly competitive
environment to deliver our strategy for profitable growth and
manage the balance between sales and margins," Rishton said.
The company intends to announce more cost cutting later this
year. The CEO said it is on track to meet its EUR500 million cost
savings target for this year.
It wasn't all good news in the U.S. The company's Giant-Carlisle
operations posted a 0.4% fall in sales to $1.1 billion - same-store
sales fell 1.8%, or 2% excluding gasoline - and operating income
fell to $48 million, from $51 million.
Rishton blamed competition from supercenters run by Wal-Mart
Inc. (WMT), the world's biggest retailer by sales. He said 75% of
Giant-Carlisle stores compete directly with Wal-Mart. However, the
CEO said all Ahold's U.S. operations are winning market share at
the moment.
Last week, Wal-Mart reported a 1.2% drop in same-store sales as
it also warned that competition was heating up. Wal-Mart treasurer
Charles Holley said: "We are expecting we will have some very
aggressive competitors," and the company's strategy will be to have
"sharp values" that it won't back away from.
European-based retailers with U.S. operations have performed
well so far this year, even amid the competition. Delhaize, which
generates about 70% of revenues in the U.S., earlier this month
reporter a 3.4% rise in U.S. sales at constant currency rates,
while In June, U.K. retailing giant Tesco PLC (TSCY.LN), said sales
more than doubled in the 13 weeks to May 30 after it revamped its
food offering to include more value packs. Tesco has launched a
chain of 120 convenience stores on the West Coast of the U.S., but
had to curtail expansion plans when the downturn hit.
Overall, Ahold's net profit for the three months to end-June
fell 42% to EUR195 million, from EUR336 million a year earlier.
However, last year's result included an EUR162 million gain on the
divestment of a majority stake in supermarket chain Schuitema to
CVC Capital Partners Ltd. Analysts had expected net profit to come
in at EUR183.9 million.
Its operating income rose 26% to EUR295 million, from EUR235
million, as operating income at the U.S. operations rose 60% in
euro terms to EUR181 million.
"Ahold's second quarter results are looking really good", said
Kepler Equities analyst Ton van Ooijen. He noted that strong
results at its Dutch unit, Albert Heijn, and the Stop & Shop
and Giant-Landover chains more than offset lower figures at its
Czech unit and the Giant-Carlisle operations. He rates Ahold at
buy.
Albert Heijn, which represents around one-third of the company's
sales, posted a 0.4% rise in identical sales, while operating
income increased 8.7% to EUR150 million from EUR138 million a year
earlier. The figure includes EUR16 million in pension costs, while
last year's figure was helped by a EUR10 million gain on the sale
of assets.
"Stop&Shop/Giant Landover and Albert Heijn were the star
performers," said Petercam analyst Fernand de Boer, who is raising
his recommendation on the stock to buy from add.
But Rishton said he expects competition to grow in the
Netherlands because customers are becoming more price sensitive due
to rising unemployment. He wouldn't be drawn into calling a price
war, but said he expects use of promotions to increase.
At the end of July, Ahold had reported that second-quarter sales
rose 11% to EUR6.43 billion, as a stronger dollar boosted results
from the food retailer's U.S. operations. Stripping out currency
fluctuations, sales were up 3.9% compared with a 6.2% rise in the
first quarter.
At 0955 GMT, Ahold's shares were up 3.6% at EUR8.44,
outperforming the AEX which was up 1.4% at the same time.
-By Robin van Daalen; Dow Jones Newswires; +31 20 571 5201;
robin.vandaalen@dowjones.com