Delhaize Sees Weak First Half

Delhaize executives said last week they expect a series of initiatives in the U.S. to help boost earnings 6% to 8% in the second half of the year, despite weak expectations for the first half. Wall Street remained skeptical, however, with the stock taking a heavy hit last week after the company said net income for the first quarter, which ended March 30, fell 4.7% to $161.6 million (U.S.)

BRUSSELS — Delhaize executives here said last week they expect a series of initiatives in the U.S. to help boost earnings 6% to 8% in the second half of the year, despite weak expectations for the first half.

Wall Street remained skeptical, however, with the stock taking a heavy hit last week after the company said net income for the first quarter, which ended March 30, fell 4.7% to $161.6 million (U.S.) and sales dropped 4.5% to $6.9 billion. (At identical exchange rates, Delhaize said net income was up 4.6% and sales rose 4.9%.)

The stock fell 8.6% in U.S. trading last Wednesday, the day of the earnings announcement.

While noting that a strong second-half earnings performance “is by no means implausible,” James Anstead, a London-based analyst with Citigroup, New York, said, “The problem is that the market is nervous that food inflation may be peaking and could decline as 2008 progresses, [and] there is understandable nervousness about the potential deterioration in the health of the U.S. consumer.”

Sales at Delhaize America, which account for approximately two-thirds of the company's total, rose 5.1% to $4.6 billion for the quarter, with comparable-store sales climbing 3.3%, excluding the impact of an earlier Easter this year, and operating profits up 0.2% to $241.2 million.

The company said the average number of items sold per transaction declined at Food Lion and Hannaford during the quarter, “reflecting more careful consumer spending,” while revenues at Sweetbay “evolved favorably due to the reinforcement of the Sweetbay brand and more competitive pricing since the middle of the year.”

Ron Hodge, chief executive officer of Hannaford, said Delhaize America is seeing “fairly consistent behavior” at Food Lion in the Southeast, Hannaford in the Northeast and Sweetbay in Florida.

In a conference call with analysts, Delhaize executives outlined the reasons for their optimism about a second-half earnings turnaround.

“Consumer confidence in the U.S. has continued to deteriorate, and consumers have become more selective and prudent in their spending,” CEO Pierre-Olivier Beckers said. “But given the results of past years and knowing the improvements our operating companies have gone through and the many projects in the implementation phase, we are well prepared to deal with the current economic environment.”

Beckers said second-half profits will be driven by both sustained top-line growth and cost savings. “Even though we'll continue to see consumers challenged in the second half of the year, we believe we will benefit from some of the initiatives we are building right now,” he said, including:

  • Market renewals in four Food Lion markets this year: Wilmington, N.C.; Richmond and Charlottesville, Va.; and Savannah, Ga. The 100 stores renewed in 2007 showed double-digit sales growth during the quarter, the company noted, while those stores two years past their renewals had “above average” increases, Beckers indicated.

  • Increases in private-label sales. Penetration moved past 18% at Food Lion in the first quarter, compared with 16.7% a year earlier, Beckers pointed out; and the first-ever marketing campaign specifically targeting private-label merchandise is scheduled to be launched later this year at Food Lion, he added.

  • The launch at Food Lion of a program tying customer segmentation data into point-of-sale systems “that will ultimately allow individualized communication at the checkouts with customers.”

    Craig Owens, executive vice president and chief financial officer, said the Food Lion stores adapted for specific customer segments are outperforming the rest of the chain, “and where we have gone broadly, we continue to see performance that would indicate we are meeting consumer needs better at those stores than in the past.”

    He said the company has taken two of its macro-clusters, which he did not identify, “and we are going extremely deep in terms of fixtures, product assortment and pricing, and that's going to impact slightly more than 200 stores.”

  • Research that has identified potential savings of $10 million to $12 million from improved efficiencies and sharing of best practices at its distribution centers; and $5 million to $6 million in cost reductions in supplies, maintenance and waste removal.

  • The openings of between 50 and 55 new stores in the U.S. and the closing of 18; and remodelings at approximately 150 stores, including the market renewals at Food Lion.

8.6%
Decline in Delhaize's stock price following the earnings release

Source: Yahoo.