REBIT margin and sluggish identical sales (excl fuel) growth in the US. Even though we had taken into account the weak post-Easter sales week, REBIT for (8,03 EUR, -3,74%) US came in 5% below our estimate. The group’s gross marginfell by 100bp. Customers continue to focus on value in an environment of increasing inflation and intense promotional activity, especially in the US. We are cutting the target price from € 10.7 to € 10.0 on the back of the disappointing 2Q11. No change to our Accumulate rating. The stock continues to trade at attractive multiples even if we were to slash our margin assumptions in a worst case scenario. We also believe that gross margin pressure will ease in the event of a recession. There will be a conference call at 2pm CET.
Sales fell by 3.5% to € 6,874m (KBCS € 6,801m and CSS € 6,839m) due to the weaker dollar and the shift in the weak post-Easter week. At constant exchange rates sales were up 4.7%. Net profits from continuing operations rose by 1.5% to € 206m (our forecast € 221m) in 2Q11 on the back of the 3.5% sales decline, a 60bp drop in the underlying retail operating margin (4.6% actual versus KBCS 4.8% and CSS 4.9%), € 17m one-off charges, a € 9m drop (KBCS € 4m drop) in net financial charges, a tax rate of 22% (KBCS 25%) and a contribution of € 28m (KBCS € 30m) from JMR and ICA. Free cash flow dropped by € 223m to € 37m on the back of lower EBIT (€ 275m in 2Q11 versus € 347m in 2Q10) and a € 162m outflow related to “payables and other current liabilities”.
US (59% of total sales):
Identical store sales growth (excluding fuel) decelerated from 3.2% in 1Q11 to 1.2% in 2Q11 (KBCS 2.0% and CSS 1.7%). Reported sales rose by 5.3% to $ 5,813m (KBCS $ 5,741m and CSS $ 5,770m).
The underlying operating margin (before impairments, restructuring and disposal gains and losses) fell from 4.8% in 2Q10 to 4.1% (KBCS 4.3% and CSS 4.4%) in 2Q11. The clean REBIT margin (excluding other one-offs such as IT integration costs and release of insurance provisions) came out at 4.18% implying a 44bpdrop. We anticipated a 17bp decline.
The Netherlands (35% of total sales):
Identical store sales growth decelerated from 2.8% in 1Q11 to 2.6% in 2Q11 (KBCS 2.5% and CSS 2.3%). Reported sales rose by 4.0% to € 2,432m (KBCS € 2,406m and CSS € 2,418m).
Theunderlying operating margin fell from 6.8% in 2Q10 to 6.2% (KBCS 6.2% and CSS 6.3%) in 2Q11. The clean REBIT margin came out at 6.17% implying a 12bp drop (our forecast: 9bp).
Central Europe (6% of total sales):
Identical store sales growth (including fuel) fell from 4.9% in 1Q11 to 1.8% in 2Q11 (KBCS and CSS 4.0%). Reported sales rose by 7% to € 396m (KBCS € 401m and CSS € 396m).
The underlying operating margin rose from 0.3% in 2Q10 to 0.8% (KBCS 1.0% and CSS 1.1%) in 2Q11.