Delhaize’s EBIT fell from € 241m in 1Q10 to € 218m (8% below consensus and 4% below our forecast) in 1Q11 mainly due to expenses incurred for key strategic initiatives in the US that should bear fruit later this year. Group sales rose by 1.5% to € 5,044m (consensus € 5,081m and our forecast € 5,059m) or by 0.7% at identical exchange rates. Comparable store sales fell by 0.3% (consensus and our forecast -0.5%) in the US and were flat (consensus +1.9% and our forecast +2.5%) in Belgium. The sluggish performance in Belgium is due to tough comparables (+4.3% comparable store sales growth in 1Q10) and labour disruptions at some stores. (55,75 EUR, -4,01%) no longer reports separate figures for Greece and the rest of the world. Operations in Southern Europe and Asia reported 4.7% sales growth. For the first time reported underlying operating profits or REBIT. The group’s REBIT fell from € 236m in 1Q10 to € 222m in 1Q11 implying a 30bps decline in REBIT margin to 4.4% (consensus 4.7% and our forecast 4.5%).
The EBIT margin fell from 5.3% to4.6% in the US despite an improving comparable store sales trend. Hannaford had another strong quarter. Increasing retail inflation remained lower than national food inflation as America continues to invest in prices. The decline in EBIT margin is due to costs related to more store remodels (compared to 1Q10), higher repair and maintenance costs, fees for increased electronic payments, expenses related to projects such as the common procurement initiative and sales building initiatives at Food Lion and Bottom Dollar. In Belgium EBIT margin declined from 5.3% to 4.9% as a result of price investments and wage indexation. These elements were only partly offset by better supplier terms and improved labour productivity in warehouses. Operations in Southern Europe and Asia reported a 46% increase in EBIT from € 7m to € 10m. The operating margin rose from 1.6% to 2.2% in these markets. Alfa Beta continued to realize strong market share gains in a declining market. The Greek player also acquired 6 stores from a competitor that filed for bankruptcy. In Romania and Indonesia sales were driven by new store openings.
Food Lion brand repositioning:
Following extensive customer research, Food Lion re-launched about 200 stores in the Raleigh (N Carolina) and Chattanooga (Tennessee) markets. Sales building initiatives are implemented to highlight the Food Lion brand attributes including price, assortment and shopping experience. Operational enhancements involve staffing and process improvement, product handling, replenishment improvements, increased SKU counts and easy and convenient shopping experience. The majority of the Food Lion stores will be re-positioned by the end of 2012.
We lowered our rating from BUY to ACCUMULATE following the disappointing 1Q11 EBIT. Our forecasts are under review. No change to our € 65 target price.