In the US, realized particularly strong 1Q11 sales and margins. In the Netherlands margins were impacted however by increasing inflation which was not fully passed on to customers. Trading conditions continue to be challenging with inflation and intense promotional activity, especially in the US. We are upgrading our rating from Hold to Accumulate and are raising our target price from € 10.5 to € 10.7. The 1Q11 results illustrate that can successfully manage the balance between sales and margins in the US. Moreover, the stock is trading at very attractive multiples.
Group:
Net profits from continuing operations rose by 18% to € 298m (our forecast € 268m) on the back of 5.9% sales growth, a flat underlying retail operating margin of 4.9% (KBCS 16bp drop and CSS 6bp drop), € 5m one-off gains (KBCS € 7m charges), a € 13m drop (KBCS € 2m drop) in net financial charges, a tax rate of 25% (in line with our forecast) and a € 9m decline (KBCS € 5m decline) in the contribution from JMR+ICA. At identical exchange rates, group sales were up 6.0% (our forecast +4.9%). Sales volumes were up in all the markets where the group is present. Sales were positively impacted by the shift of the post-Easter week into the next quarter. Free cash flow improved by € 51m to € 407m.
US (59% of total sales):
Identical store sales growth (excluding fuel) accelerated from 0.9% in 4Q10 to 3.2% in 1Q11 (KBCS and CSS 1.5%). Reported sales rose by 7.4% to $ 7,592m (KBCS $ 7,393m and CSS $ 7,377m).
The underlying operating margin (before impairments, restructuring and disposal gains and losses) improved from 4.16% in 1Q10 to 4.62% (KBCS 4.06% and CSS 4.19%) in 1Q11. The clean REBIT margin (excluding other one-offs such as IT integration costs, inventory valuation alignment and accrual reversals) came out at 4.74% implying a 31bp improvement.
The Netherlands (35% of total sales):
Identical store sales growth decelerated from 4.0% in 4Q10 to 2.8% in 1Q11 (KBCS 3.5% and CSS 3.1%). Reported sales rose by 3.9% to € 3,223m (KBCS € 3,258m and CSS € 3,231m).
The underlying operating margin deteriorated from 6.93% in 1Q10 to 6.02% (KBCS 6.45% and CSS 6.62%) in 1Q11. The clean REBIT margin came out at 6.02% (our forecast 6.45%) implying a 65bp drop.
Central Europe (6% of total sales):
Identical store sales growth (including fuel) accelerated from 4.0% in 4Q10 to 4.9% in 1Q11 (KBCS 5.0% and CSS 3.3%). Reported sales rose by 9.8% to € 538m (KBCS € 529m and CSS € 516m).
The underlying operating margin improved sharply from 0.41% in 1Q10 to 1.12% (KBCS 1.50% and CSS 1.0%) in 1Q11. The clean REBIT margin came out at 1.12% (our forecast 1.50%) implying a 71bp hike.
[Rating: ACCUMULATE (upgraded), TARGET PRICE: € 10.70]