Delhaize Profit Tumbles on Margin Squeeze
08/22/2012| 06:45am US/Eastern
AMSTERDAM--Belgian retailer Delhaize Group (>> DELHAIZE GROUP), which generates more than half of its revenue in the U.S., Wednesday posted a fall in second-quarter profit despite higher sales, and warned its margin will remain under pressure.
"We confirm that we will reach our full-year underlying operating profit guidance. However, we expect to achieve the bottom end of the range as we remain committed to improving our customers' experience in terms of both price and service," said Chief Executive Pierre-Olivier Beckers.
In the first quarter, the company said it expected operating profit to decline between 15% and 20% in 2012.
Delhaize, known for its eponymous Belgian supermarket chain and U.S. brand Food Lion, has sacrificed its margin in recent quarters by plowing money into store revamps. So far in 2012 it has remodeled 700 Food Lion stores--about 65% of the existing network.
It has also been cutting prices this year to entice increasingly price-sensitive shoppers, further eating into its margin.
But success has so far been limited. Sales in the U.S. in dollar terms fell in for the second consecutive quarter, by 3.1%. It expects the price cuts to begin to have a positive effect on sales in the fourth quarter.
"We will face a more aggressive competitive environment in the second half of the year," Mr. Beckers said at a press conference, referring to both the U.S. and Belgium. He said competition is particularly fierce in the northeast and southeast of the U.S., following the opening of more rival discount stores.
Chief Financial Officer Pierre Bouchut added: "The third quarter will be more difficult, then there will be some relief in the fourth."
Net profit for the second quarter fell 29% from a year earlier to 87 million euros ($108 million), edging above analyst expectations of EUR85.9 million, according to FactSet.
Sales rose 12% to EUR5.70 billion, but underlying operating profit dropped 12% to EUR184 million. The underlying operating profit margin was one percentage point lower than a year earlier at 3.3%.
Revenue rose 0.33% in its home Belgian market, while the company achieved 59% growth in emerging markets, which account for 14% of total revenue.
Delhaize has struggled with falling volumes in the U.S. for more than two years. The rate of decline accelerated after the company raised prices, most significantly in the fourth quarter of 2011, in an effort to pass on cost inflation to customers.
But Delhaize subsequently reversed this strategy in the first quarter, crimping its operating margin and leading to a continued decline in revenue from stores in the U.S. that have been open more than a year.
It has for some time been lagging its biggest rival, Royal Ahold NV (>> AHOLD KON), which runs the Stop & Shop and Giant supermarket chains in the U.S. The Dutch retailer got a head start on its own restructuring program in the U.S. and acted earlier on price cuts. Ahold announces its second-quarter results Thursday.
Delhaize Wednesday said annual gross cost savings will now exceed the EUR500 million target and come in at EUR550 million at the end of 2012. It also reiterated its 2012 free cash flow target of EUR500 million.
"The results didn't include any nasty surprises. Moreover, the repositioning of Food Lion continues to generate strong sales momentum and cost savings at the group level are set to exceed the original plan," KBC Securities said in a note.
"The stock is trading at very attractive multiples," the Belgian brokerage added, raising its rating to "buy" from "accumulate," with a EUR40 target price.
At 0744 GMT, Delhaize shares were up 7.7% at EUR35.70. The shares have lost 18% in value so far this year.
Write to Archibald Preuschat at email@example.com and Robert van den Oever at firstname.lastname@example.org
(Frances Robinson in Brussels contributed to this article.)
Subscribe to WSJ: http://online.wsj.com?mod=djnwires