Ahold: Solid 4Q11 but cautious 1Q12 outlook

Ahold’s sales rose by 5.5% at identical exchange rates and the underlying retail margin fell by merely 10bps despite a 60ps contraction of the gross margin. Increased promotional activity and cost inflation were almost completely offset by efficiencies and cost management. These results show that Ahold is well equipped to perform well in a challenging environment.

Slowdown in sales momentum in 1Q12:
Ahold reported solid 4Q11 results but the group is witnessing a slowdown in 1Q12 sales momentum on the back of very weak consumer confidence in the Netherlands, while in the US consumer spending is dampened by high fuel prices and food inflation. The group will also face tough comparables in 1Q12 because 1Q11 did not include the weak post-Easter week.

Focus on efficiencies:
In the past 5 years the group has reduced costs by € 800m. Management reiterated the goal to realize an additional € 350m in cost savings in 2012-2014, with a focus on support services and standardized business processes whereby best-in-class practices are leveraged across the entire group.

Optimising capital structure:
New CFO Jeff Carr is tackling the excess cash issue. At the end of 2011, the group was sitting on a gross cash pile of € 2.6bn, but which only generated € 20m in interest income last year. The ideal level of cash would be around € 1bn. There will be some significant cash outflows however in 1H12, including the completion of the current share buyback program (€ 0.3bn), dividends (€ 0.4bn), a notes repayment (€ 0.4bn), acquisitions (€ 0.5bn) and the buy-back of some leases. Management feels comfortable with a lease adjusted net debt/EBITDAR multiple of around 2.0x. This compares with the current level of 1.8x. The group remains committed to the investment grade rating.

Conclusion:
Our EPS forecasts for 2012-2013 have been tweaked down by 3%. The stock is trading at adiscount versus the peer group. We anticipate that this discount will disappear as growth initiatives bear fruit and the capital structure is optimized. We maintain our Accumulate rating and target price of € 11.5.