Ahold Delhaize Q1 ‘unlike any we have ever seen before,’ CEO Frans Muller says

Ahold Delhaize CEO Frans Muller said “unprecedented demand” triggered by the coronavirus lifted global net sales more than 12% in the fiscal 2020 first quarter, including nearly 14% comparable sales growth in the United States.

And with more consumers ordering groceries online during the pandemic, Zaandam, Netherlands-based Ahold Delhaize also is raising its projections for e-commerce growth — especially in the U.S., where the company now expects online sales to climb over 50% for the year, up from the previous forecast of 30%.

“The first quarter of 2020 was unlike any we have ever seen before,” Muller said in a conference call with analysts this morning. “The COVID-19 crisis has affected all of us, and I truly hope that all of our stakeholders — and in particular the people who are out on the front line — are managing through the crisis as well as they can. I’m honored to represent the leadership and brands of Ahold Delhaize, who are doing their utmost best to provide the essential service of helping to feed our local communities.”

Frans Muller, CEO of Ahold Delhaize. (Photo courtesy of Ahold Delhaize)

For the first quarter ended March 29, net sales at Ahold Delhaize USA surged 13.7% to $12.48 billion from $10.98 billion a year earlier. Comparable-store sales grew 13.4% overall and 13.8% excluding fuel, with all U.S. store banners — Stop & Shop, Giant Food, The Giant Company, Food Lion and Hannaford — seeing double-digit comp-sales growth. Ahold Delhaize said the quarterly comp-sales gain was boosted by a 33.8% jump in March as the pandemic escalated, while less severe winter weather had a negative impact of 0.8%.

Related:Ahold Delhaize sees U.S. comparable sales jump 34% in March

“Food Lion and Giant Food led the way, and we believe we gained overall market share in the quarter as well. So we’re very proud of our performance across the board,” Chief Financial Officer Natalie Knight said in the analyst call, her first since joining Ahold Delhaize on March 1 and being appointed CFO on April 8.

“Product sales were strong across the board, and we continued to make progress on our Save for Customers program,” she explained. “We did see a modest shift toward lower-margin products in the period, but this had little influence on our margin, as customers bought more products that were typically not on promotion and product availability issues prevented us from running certain promotions.”

U.S. online sales totaled $357 million in the first quarter, up 42.3% from $251 million a year ago.. “This increase comes despite considerable product availability issues early in the coronavirus crisis, which caused the U.S. to close click-and-collect operations under most banners for some portion of March,” Knight noted.

Related:Ahold Delhaize USA donates $10 million relief package to local communities

Ahold Delhaize expects online grocery demand to remain strong in the U.S. and, consequently, plans to bolster e-commerce investment for its largest business unit, namely in pickup service, according to Muller. U.S. e-commerce operations are powered by Peapod, Ahold Delhaize USA's online grocery arm.

“In the U.S., we will be able to generate this higher level of online sales by investing in incremental associates and supplemental infrastructure, such as through more storage units, picking devices and stepping up the pace on the number of click-and-collect locations we plan to open this year,” he told analysts. “We are upping our target to over 1,000 locations in 2020 versus our initial target of roughly 1,000.”

Ahold Delhaize USA finished the quarter with 707 pickup sites, compared with 692 at the end of fiscal 2019.

Also during the first quarter, Ahold Delhaize acquired three warehouses from C&S Wholesale Grocers as part of a three-year, $480 million investment to transition its U.S. supply chain to a self-distribution model. The company said its multiyear project to upgrade Stop & Shop’s store based, dubbed “Reimagine Stop & Shop,” is bearing fruit as sales at remodeled stores sales performed in line with expectations before the COVID-19 outbreak. However, fewer than 65 remodels are expected in 2020 because the pandemic may push out timelines, the retailer noted. The quarter also saw Ahold Delhaize ratify four-year collective bargaining agreements for Giant Food.

Former Adidas executive Natalie Knight succeeded Jeff Carr as Ahold Delhaize CFO last month. (Photo courtesy of Ahold Delhaize)

"We remain committed to investing capex at around 3% of sales on a year-by-year basis in order to accelerate our digital and omnichannel capabilities,” Muller said, referring to global capital spending. “The growth will be used to improve our store fleet through remodel programs such as Reimagine Stop & Shop. And we will improve new solutions capacity and private-label offerings to further differentiate our offerings and help us gain more share of stomach. This is especially important if the consumer decides to eat more at home than in the past.”

In an update, Ahold Delhaize said it now expects to finalize its acquisition of Long Island, N.Y., supermarket chain King Kullen Grocery Co. in the second half of 2020, pending customary closing conditions. The previous timeline was for the transaction to close in the first half of the year. The deal, announced in January 2019, includes 29 King Kullen supermarkets, five Wild by Nature natural/organic grocery stores and the use of King Kullen’s corporate office in Bethpage, N.Y. Some King Kullen stores have been closed since the transaction was announced.

“Although our capex investments exclude M&A by definition, we will continue to explore partnerships and M&A opportunities,” Muller added.

Globally, Ahold Delhaize reported first-quarter sales of €18.21 billion ($16.51 billion), up 14.7% (12.7% at constant exchange rates) from €15.88 billion ($13.98 billion) a year earlier. The gain was driven largely by 12.2% comp-sales growth excluding fuel, with a 26.9% increase in March from coronavirus-related demand. Net consumer online sales climbed 38.6% (37.7% at constant exchange rates) to about €1.35 billion ($1.22 billon) in the first quarter from €970 million ($854 million) in the prior-year period.

Net income (continuing operations) in the quarter was €644 million, or €0.59 per share, compared with €436 million, or €0.38 per share, a year ago. Operating income rose by 42.8% (40% at constant exchange rates) to €964 million for the quarter from €675 million.

Companywide, first-quarter underlying operating margin was 5.3% (6.7% in the U.S.), up 0.9% versus a year ago ( 1.7% in the U.S.). Ahold Delhaize attributed the increase primarily to the timing of “unexpectedly higher sales” before COVID-19 investments, including customer and employee safety, worker compensation, e-commerce, community donations and plans to hire 40,000 more associates. The retailer pointed out that Europe experienced customer stockpiling purchases in late February and therefore saw earlier coronavirus investments, whereas stock-up purchases in the U.S. took off in March.

“Clearly, our Q1 performance across all our geographies were impacted by the unprecedented demand created by the COVID-19 outbreak,” said Muller. “But keep in mind that the margin reported in Q1 is mainly the function of timing and is not a fair representation of the cost pressures we will experience related to COVID-19. Instead, it largely reflects the timing of unexpected higher sales which preceded the timing of significant investments related to COVID-19 at the end of the quarter. The margin rate you see in Q1 is not sustainable and not likely to be in subsequent quarters. Nevertheless, we maintain our full-year outlook that our group underlying operating margin in 2020 will be broadly in line with 2019.”

As of the end of the first quarter, Ahold Delhaize had 7,002 stores in the U.S., the Netherlands, Belgium and Central and Southeastern Europe, compared with 6,785 a year earlier, reflecting a net gain of 217. Ahold Delhaize USA finished the quarter with 1,971 stores, a net increase of eight stores versus a year ago.