Delhaize Group Continues Strong Revenue Growth in Third Quarter

 

 

“In the third quarter of 2007, Delhaize Group realized a robust revenue performance and maintained its strong operating margins despite comparing to last year’s exceptionally strong quarter”, said Pierre-Olivier Beckers, President and Chief Executive Officer of Delhaize Group.

 

“We are particularly happy with the excellent performance of our operations in the U.S. We realized 4.6% U.S. comparable store sales growth, the highest since 2000 and continued to grow our U.S. operating margins. Revenue growth at both Food Lion and Hannaford stayed strong, particularly through increasing customer traffic. Sweetbay realized its best comparable store sales growth since the launch of the conversion project, showing encouraging signs in the rebranding of our Florida business.”

 

“In Belgium, intense competition, exceptionally bad summer weather and the sale of our beauty and body care business Di impacted our sales growth, although we still realized positive sales growth against the strongest quarter of 2006. We are positioning ourselves for better sales dynamics by investing significantly in our price position despite the temporary negative margin impact. Our Greek, Romanian and Indonesian operations continued their positive growth in revenues and profits.”

 

 

 

 

	Q3 2007 (1)						YTD 2007 (1)
Actual Results	At Actual Rates	At Identical Rates		IFRS, in millions of EUR, except EPS (in EUR)		Actual Results	At Actual Rates	At Identical Rates
4,749.5	-1.3%	+4.2%		Revenues		14,274.8	-0.7%	+4.9%
215.6	-6.0%	+0.5%		Operating profit		694.2	+1.5%	+8.1%
4.5%	-23bps	-17bps		Operating margin		4.9%	+10bps	+14bps
163.9	+0.7%	+7.9%		Profit before taxes and discontinued operations		414.9	-12.7%	-7.5%
106.5	-2.1%	+4.6%		Net profit from continuing operations		279.5	-7.9%	-2.8%
103.2	+128.2%	+145.7%		Group share in net profit		296.0	+24.8%	+31.3%
1.04	+119.2%	+136.0%		Basic earnings per share (Group share in net profit)		3.05	+21.7%	+28.0%

 

 

In the third quarter of 2007, revenues of Delhaize Group decreased by 1.3% to EUR 4.7 billion because the U.S. dollar weakened by 7.2%. Organic revenue growth was 4.6% comparing against the strongest quarter of 2006 with 6.0% organic revenue growth. Revenue growth at identical exchange rates was 4.2% as a result of:

·         5.4% increase of U.S. revenues (in local currency) driven by the strong performance at all of our U.S. operations. Comparable store sales grew by 4.6%, the highest since the Hannaford acquisition in 2000;

·         2.4% decrease of Belgian revenues due to intense competitive activity, bad summer weather, the sale of the beauty and body care business Di, and a negative calendar impact. Comparable store sales grew by 0.4%; and

·         11.6% increase of revenues in Greece due to the continued outstanding performance in the existing stores and new store openings.

 

Delhaize Group ended the third quarter of 2007 with a sales network of 2,509 stores, compared to 2,476 at the end of last year (adjusted for the divestitures of 132 Di and 97 Delvita stores in the first half of 2007).

 

Gross margin remained stable at 25.0% of revenues. Important price investments in Belgium, Hannaford and Sweetbay were offset by margin optimization and sales mix improvements, especially at Food Lion, and better inventory management at Hannaford and Sweetbay.

 

Other operating income increased to EUR 23.5 million (EUR 21.1 million in 2006), primarily due to the sale of certain Cash Fresh stores to independent owners to operate as Delhaize affiliates.

 

Selling, general and administrative expenses increased to 21.0% (20.7% in prior year) of revenues, principally because of the comparison to 2006 which benefited from a USD 13.8 million positive impact of forfeitures related to U.S. benefit plans. Without last year’s positive impact, selling, general and administrative expenses would have remained almost stable as a percentage of revenues. Continued cost efforts offset increases in advertisement and other operational expenses.

 

The operating margin of Delhaize Group decreased to 4.5% of revenues as compared to 4.8% in the third quarter of 2006. Adjusted for the 2006 one-time U.S. benefit plans impact, the operating margin remained stable, the result of a stronger operating margin in the U.S. and Greece offset by a lower margin in Belgium.

 

Operating profit decreased by 6.0% to EUR 215.6 million at actual exchange rates and increased by 0.5% at identical exchange rates. Adjusted for the 2006 one-time U.S. benefit plan impact, operating profit would have grown 6.2% at identical exchange rates.

 

Net financial expenses amounted to EUR 51.7 million, a decrease of EUR 14.9 million compared to prior year. This decrease is mainly due to lower interest rates as a result of the refinancing transaction in the second quarter of this year and the weaker U.S. dollar.

 

The effective tax rate increased from 33.2% to 35.0%. Last year’s tax rate was positively impacted by the resolution of state tax matters in the U.S. and the company benefit from the exercise of employee stock options in the U.S.

 

Because of the weaker U.S. dollar, net profit from continuing operations decreased to EUR 106.5 million, or EUR 1.04 per share (EUR 1.12 in 2006).

 

Group share in net profit amounted to EUR 103.2 million. Per share, basic net profit was EUR 1.04 (EUR 0.48 in 2006) and diluted net profit was EUR 1.01 per diluted share (EUR 0.47 in 2006). In the third quarter of 2006, net profit was negatively impacted by a charge of EUR 59.3 million related to the planned divestiture of Delvita, our former Czech business.

 

 

In the third quarter of 2007, net cash provided by operating activities amounted to EUR 214.1 million. Capital expenditures increased to EUR 218.3 million (including USD 231.6 million for the U.S. operations of Delhaize Group) primarily due to more store remodels and openings. Delhaize Group generated slightly negative free cash flow of EUR -2.9 million mainly due to increased capital expenditures and to more cash used in working capital. The Group held EUR 305.1 million cash and cash equivalents at the end of the third quarter.

 

The net debt to equity ratio decreased to 62.2% at the end of September 2007 compared to 74.0% at the end of 2006. Delhaize Group’s net debt amounted to EUR 2.3 billion at the end of September 2007, a decrease of EUR 359.4 million compared to EUR 2.6 billion at the end of 2006 mainly due to generation of free cash flow, the conversion of convertible bonds and the weaker U.S. dollar.

 

 

 

Year-to-date 2007, revenues of Delhaize Group decreased by 0.7% to EUR 14.3 billion because the U.S. dollar weakened by 7.4%. Year-to-date organic growth amounted to 5.0% (5.1% in 2006). Revenue growth at identical exchange rates amounted to 4.9% as a result of the:

·         5.1% increase of U.S. revenues (in local currency) due to the strong performance of Food Lion and Hannaford;

·         1.8% increase of Belgian revenues; and

·         13.3% increase of Greek revenues due to the continued outstanding performance of the existing stores and new store openings.

 

Gross margin remained stable at 25.3% of revenues due to a combination of sales mix improvements and price optimization at Food Lion offset by price investments at Sweetbay and Delhaize Belgium.

 

Other operating income increased to EUR 72.3 million (EUR 57.3 million in 2006) primarily due to the sale of certain Cash Fresh stores to independent owners to operate as Delhaize affiliates and the divestiture of the Di business.

 

Selling, general and administrative expenses remained almost stable at 20.9% (20.8% in 2006) of revenues due to successful cost control and the operational leverage of strong sales dynamics in most of our businesses.

 

The operating margin of Delhaize Group increased to 4.9% of revenues as compared to 4.8% in the same period of last year. Operating profit increased by 1.5% to EUR 694.2 million at actual exchange rates and 8.1% at identical exchange rates.

 

Net financial expenses increased to EUR 279.3 million mainly because of the charge related to the Delhaize America debt tender recorded in the second quarter of this year, partially offset by lower interest charges and the effect of the weaker U.S. dollar.

 

The effective tax rate decreased to 32.6% compared to 36.2% in 2006 as a result of the tax deductible debt tender charge in the second quarter of this year as well as a U.S. tax refund received in the first quarter of 2007. Last year’s first nine months results also included tax on the dividend payment from Delhaize America to Delhaize Group, while there was no similar dividend in 2007.

 

Net profit from continuing operations amounted to EUR 279.5 million, or EUR 2.79 per share (EUR 3.16 in 2006).

 

In the first nine months of 2007, the profit from discontinued operations, net of tax, amounted to EUR 25.2 million, mainly due to a positive accumulated foreign currency translation adjustment of EUR 23.7 million recorded as part of the closing of the sale of Delvita in the second quarter of the year.

 

Group share in net profit amounted to EUR 296.0 million. Per share, basic net profit was EUR 3.05 (EUR 2.50 in 2006) and diluted net profit EUR 2.92 (EUR 2.41 in 2006).

 

 

The strong performance in the first nine months of 2007 along with our expectations for the remainder of the year, support an increase in the expectation for U.S. comparable store sales growth to 3.5% to 4.0% (previously 2.5% to 3.5%). Delhaize Group confirms the remainder of its revenue and profit guidance as communicated on August 9, 2007, at the occasion of the announcement of its second quarter 2007 results.

In addition, Delhaize Group expects:

·      to end 2007 with a store network of 2,555 stores (2,573 stores previously), largely due to fewer openings of small-sized stores in Belgium;

·      to have in 2007 capital expenditures (excluding finance leases) of approximately EUR 780 million at identical exchange rates, including approximately USD 750 million for the U.S. operations of the Group (previously EUR 825 million and USD 755 million, respectively).

 

 

  

In the third quarter of 2007, thecontribution of the operations in the United States to the revenues of Delhaize Group amounted to USD 4.7 billion, an increase of 5.4% over the third quarter of 2006. Comparable store sales in the U.S. increased by 4.6%, the best performance in seven years, due to the strong sales momentum at all of our U.S. operating companies. Food Lion and Hannaford continued their excellent sales year while our Florida based Sweetbay operations improved sales trends in most of their stores.

 

The sales momentum at Food Lion was supported by effective price, promotion and marketing initiatives, improved assortment, a focus on execution in our retail stores and the continued success of market renewal initiatives. Hannaford’s sales were supported by targeted pricing, initiatives such as Guiding Stars, and new store openings. During this quarter, Sweetbay completed the three-year project to convert all its stores from Kash n’ Karry. The conversions and significant investments in price resulted in the highest comparable stores sales at Sweetbay since the start of the conversions.

 

 

The operating margin of the U.S. business at an excellent 5.6% of revenues, showed a decrease of 16 basis points due to the fact that last year’s margin was favorably impacted by forfeitures related to benefit plans for an amount of USD 15.4 million. Excluding this positive impact in the prior year, the current year operating margin increased 19 basis points. The margin increase was the result of strong sales momentum, sales mix improvements, cost control activities and better inventory results at Hannaford and Sweetbay, offsetting increased advertising expenses and significant price investments by Sweetbay and Hannaford.

 

Operating profit of the U.S. business of Delhaize Group grew by 2.5% to USD 261.7 million. Adjusted for the 2006 one-time U.S. benefit plan impact, operating profit would have grown 9.0%.

 

·         Delhaize Belgium revenues decreased by 2.4% to EUR 1.0 billion in the third quarter of 2007. Revenues grew by 1.2% excluding the sale of the beauty and body care business Di and a negative calendar effect. Comparable store sales growth was 0.4% due to intense competitive activity and the bad summer weather. Market share decreased slightly during the third quarter due to competitive activity and the temporary loss of sales related to the closings of Cash Fresh stores during their conversion to Delhaize banners. In the third quarter, five Cash Fresh stores were converted to Delhaize banners.

 

The operating margin of Delhaize Belgium decreased to 2.3% of revenues (2.8% in 2006), mainly due to weak sales and major price investments. Internal food inflation was approximately 150 basis points lower than national food inflation. Inventory results improved compared to the same period last year, but continue to show room for improvement. Operating profit of Delhaize Belgium amounted to EUR 23.4 million.

 

·         In the third quarter of 2007, revenues in Greece grew by 11.6% to EUR 278.0 million as a result of strong comparable store sales growth and new store openings. This was the sixth consecutive quarter of double-digit revenue growth for Alfa-Beta, which expanded its product assortment, especially in the private label ranges, and continued its efforts to upgrade its store network.

 

The operating margin of Alfa-Beta increased sharply to 4.5% of revenues (3.2% in 2006) due to excellent sales, good cost control and effective inventory management. In the third quarter of 2007, operating profit increased by 53.6% to EUR 12.5 million.

 

·         Revenues of the Emerging Markets (Romania and Indonesia) of Delhaize Group increased by 28.9% to EUR 42.3 million due to the continued strong sales performance in both countries. The Emerging Markets of Delhaize Group recorded an operating profit of EUR 0.4 million in the third quarter.

 

 

Delhaize Group’s management will comment on the third quarter 2007 results during a conference call starting November 8, 2007 at 03.00 pm CET / 09:00 am EST. The conference call can be attended by calling + 44 20 7108 6390 (U.K.) or + 1 210 795 0624 (U.S.), with “Delhaize” as password. The conference call will also be broadcast live over the internet at http://www.delhaizegroup.com. An on-demand replay of the webcast will be available after the conference call at http://www.delhaizegroup.com.

 

 

Delhaize Group is a Belgian food retailer with operations in seven countries on three continents. At the end of September 2007, Delhaize Group’s sales network consisted of 2,509 stores. In 2006, Delhaize Group posted EUR 19.2 billion (USD 24.1 billion) in revenues and EUR 351.9 million (USD 441.8 million) in net profit. Delhaize Group employs approximately 138,000 people. Delhaize Group is listed on Euronext Brussels (DELB) and the New York Stock Exchange (DEG).