Delhaize’s group sales come out slightly above consensus. REBIT was 7% below expectations. The Belgian REBIT margin came in only slightly below estimates but the REBIT margin is 30bps and 50bps below consensus in the US and SE Europe and Asia. Comparable store sales growth fell by 0.6% (CSS -0.4%) in the US and by 0.9% in Belgium (CSS -0.3%). The group provided the following full year guidance: REBIT is expected to decrease by 15% to 20% at identical exchange rates. Note that consensus was counting on a 6% decline.
Increased focus:Given the current trading conditions in the US and Belgium, Delhaize is increasing its focus on price competitiveness, cost reduction and free cash flow generation. Price investments will have a negative margin impact for the remainder of the year. The capex guidance has been revised from € 800-850m to € 700-750m for this year. The number of planned new store openings remains unchanged however. Management aims at a free cash flow of € 500m this year.
Group: Revenues rose by 8.6% € 5,478m (KBCS € 5,493m and CSS 5,438m). Organic sales growth reached 2.3%. REBIT fell by 14.6% to € 189m (KBCS € 207m and CSS € 204m). EBIT fell from € 218m to € 23m due to € 167m portfolio optimisation charges. Net financial charges rose from € 47m to € 53m due to the Maxi acquisition and forex losses.
USA: Reported sales declined by 1.2% to $ 4.6bn (1% above consensus) but increased by 0.7% excluding the impact from store closings. Volumes trends improved versus 4Q11.REBIT margin fell from 4.7% in 1Q11 to 3.7% (CSS & KBCS 4.0%) in 1Q12. Excluding Bottom Dollar Food, REBIT margin reached 4.3%. The positive trends in the Food Lion Phase One stores continued to accelerate. Both comparable store sales growth and volume growth were positive, at 2.9% and 1.8% respectively, as a result of the strongest quarterly increases in the number of transactions (+4.0%) and in the number of items sold (+2.5%) since the re-launch in May 2011. Phase Two which consists of +/-250 stores commenced on March 28 in Virginia also enjoyed significant improvement in sales momentum. Phase Three (260 stores) will be launched at the end of the summer.
Belgium: Revenues rose by 3.2% to € 1.2bn or 1% above consensus. Competitive pressure increased throughout the quarter. Delhaize invested further in its price positioning. REBIT margin fell by 26bps to 4.6% (CSS & KBCS 4.7%) mainly as a result of automatic wage indexation.
SE Europe and Asia:
Revenues rose by 62.4% to € 760m (1% below CSS and in line with our forecast) mainly as a result of the Delta Maxi acquisition. REBIT margin fell from 2.2% to 1.8% (KBCS 2.0% and CSS 2.3%). Serbia which represents about 75% of Maxi’s revenues recorded positive volume growth in 1Q12.
Conclusion: We lower our target price from € 45 to € 40 but maintain our Accumulate rating. We’ll revise our forecasts downwards to bring them in line with them in line with the guidance. On thepositive side, we are comforted by positive trends at the repositioned Food Lion stores. Food Lion is Delhaize’s largest banner.