Last week’s conference call focused on Food Lion’s repositioning. Even though price investments as part of the New Game Plan started at the beginning of 2010, the sales volume trend remains negative at Food Lion, the banner that represents more than 40% of group sales. A customer survey confirmed that price investments aren’t enough and Delhaize CEO Pierre-Olivier Beckers admitted that Food Lion’s business model needs to be transformed profoundly. Based on the customer survey, a number of actions have been identified that could improve the banner’s positioning. Earlier this month 200 Food Lion stores or 17% of the banner’s store count were re-launched in two markets. This repositioning – focused on price, assortment and shopping experience –will be rolled out to most of the Food Lion network by the end of 2012. Management expects “operating profit generation for the group to accelerate from 2Q11”. Visibility is relatively low however because the initiatives that are being implemented at Food Lion will increase operating costs. For example, there will be more staff at customer service and check-out. Management is confident however that these costs will be offset by cost savings (€ 500m from the New Game Plan) and improving sales momentum. As unemployment remains high in the regions where Food Lion is present, it may take some time however before sales volumes show healthy growth rates.
Last week the food retail subsidiary of Ruddick reported 1.42% comparable store sales growth and an EBIT margin that improved by 10bp to 4.81% during the quarter ending 3 April. About 15% of Food Lion’s stores compete with a Harris Teeter store within a 2.5 mile radius. Harris Teeter’s performance illustrates that it is possible to operate successfully in the Southeast US where competition is fierce due to the high penetration of Wal-Mart.
Management provided the following guidance: “The generation of operating profit of the group is expected to accelerate from 2Q11”. Growth can accelerate and operating profit can improve but the exact meaning of accelerating generation is unclear. We interpret the guidance to mean that operating profits will improve in 2Q11 versus 1Q11 in absolute terms. The group’s CEO indicated during the Q&A session on 4 May that he expects top line and profit growth this year at identical exchange rates and excluding Delta Maxi. We’ve lowered our EPS forecasts for 2011, 2012 and 2013 by respectively 3.4%, 5.5% and 5.3% on the back of the disappointing 1Q11 results, rising interest rates and the weaker $ .
The stock trades at very attractive valuation multiples. We therefore believe that most of the concerns are priced in, hence our unchanged Accumulate rating.