Talking shop: Ahold's measured ambitions win plaudits
By Dean Best | 28 November 2011
Ahold's shares dropped, but analysts remain confident in the retail giant
With a new chief executive in place, industry watchers were waiting to see what Ahold, the Dutch retail giant, planned to do to further grow its business in the next five years. The new strategy, outlined last week, still leaves some unanswered questions but, as Dean Best reports, Ahold has won praise for its plans.
A company announces a strategy update on Monday and, by close of business on Friday, its shares are down almost 3%. On the face of it, a less than ringing endorsement of its plans. This happened to Dutch retailer Ahold last week but, despite the fall in its stock, retail analysts believe the future looks bright for the operator of chains including Albert Heijn in the Netherlands and Giant Carlisle in the US.
There was a sense of anticipation among industry watchers for Ahold's announcement last week. Even as far back as July, Sanford Bernstein analyst Christopher Hogbin was asking whether Ahold's strategic update could do the same for its share price as a similar announcement from Morrisons in March had done for the UK retailer's stock. Back then, Hogbin said Morrisons' shares had outperformed the MCSI Europe index by 11% in 2011 and, with Ahold having a new CEO in place and set to provide an update on its strategy, it was, he argued, "an exciting moment for investors to consider the stock".
By the close of trading in Amsterdam on Friday, Ahold's shares stood at EUR9.08, down from a Monday opening of EUR9.35, or a fall of 2.87%. Hardly a case for alarm bells but a response from the market that raises questions over whether investors believe Ahold's new strategy can deliver significant returns for the business and for shareholders.
In his first major strategic announcement since becoming Ahold CEO in March, Dick Boer outlined a number of plans. He said the retailer wanted to triple online sales to EUR1.5bn (US$2.12bn) by 2016 and to introduce loyalty schemes that it believes will add 1-2% to its identical-store sales growth.
Boer said Ahold had to react to the new ways in which consumers were behaving. "The consumer is changing rapidly in the way it is shopping. We are really changing to follow the consumer's changing habits. People will shop everywhere, in every place and at every moment," he said.
Ahold plans to open at least 150 convenience outlets in Europe and 50 supermarkets in Belgium. It also told investors that it would remodel 50 stores in the Czech Republic and 100 outlets in the US, a market where the retailer also wants to expand its private-label revenues.
It would be understandable if there was any concern among investors about the cost of Ahold's plans but Boer, though he declined to put a figure on how much the retailer was spending, said the company's capital expenditure would remain 3-3.5% of annual revenues.
The retailer's strategy also involves plans to save EUR350m over the next three years through improvements to its supply chain and the standardisation of its systems. And, in a move to distribute a portion of its cash pile to shareholders, Ahold has increased its dividend pay-out ratio to 40-50% of normalised net earnings.
"Our new growth strategy will ensure Ahold remains successful and at the forefront of the food retail industry," Boer said. "Thanks to our disciplined approach in recent years, and the commitment of all our employees, we now have a solid platform on which to grow."
At Sanford Bernstein, Hogbin said the strategy outlined less than "we had - perhaps optimistically - hoped for". Two weeks ago, ahead of the announcement, Hogbin, noting Ahold's medium-term targets of 5% retail operating margin and 5% sales growth, said there was an opportunity for the retailer to improve on these metrics. In the event, Boer said that, despite its plans for expansion, it was sticking to those targets. Hogbin was sanguine about Boer's comments. "This likely reflects an understandable conservatism from a new management team but, at a minimum, should increase investor comfort in the achievability of the targets."
Ahold's announcement, Hogbin argued, was more than most investors had hoped for. Sanford Bernstein had surveyed Ahold investors prior to the retailer's strategic update and Hogbin said 52% were expecting "little or nothing". There was a mix of views among the respondents to the survey: some praised Ahold's operating performance in difficult circumstances, others were concerned about its position in a challenging US market; some wanted a clearer M&A strategy, others were keen not to see Ahold pursue an acquisition just for the sake of it.
Above all, however, investors wanted a "clear articulation of strategy", Hogbin said and, according to the analyst, they should welcome Ahold's announcement. The new strategy "highlights sustained stable growth, albeit in more developed markets", Hogbin said, while there is potential for the the retailer's "excess capital to be put to work", the analyst noted. And Ahold remains "attractive" from a valuation perspective, Hogbin said, who has an 'outperform' rating on the retailer's stock, with a target price of EUR11 (compared, remember, to Friday's price of EUR9.08).
Other analysts were even more positive about Ahold's prospects. SNS Securities analyst Richard Withagen raised his rating on the retailer's shares from 'hold to 'buy' and set a target price of EUR11.50. "The company has clearly sent the message that it is serious about growth," Withagen said. "Ahold shares are lowly valued, but the strategic update has in our view opened the door to a number of potential triggers that could correct this in the future."
Of course, for all the positive comments from analysts, the market still appears unsure about Ahold's long-term prospects. With the bulk of its stores in the Netherlands and the US, Ahold operates in more mature markets. Does Ahold's lack of exposure to the retail sector's emerging markets put off potential investors? The retailer's existing markets are priorities for expansion, while it has made moves into "adjacent" markets, like Germany, but moving into developing markets remains an unlikely prospect at present. Ahold, it seems, believes it will get a better return on investment in its existing markets.
The retailer is the market leader in the Netherlands (although it is set to face a stronger competitor with Dutch retailer Jumbo's acquisiton of local rival C1000) but it is Ahold's operations in the US that cause concern among some shareholders. Competition across the Atlantic is intense and trading conditions remain challenging. Could an acquisition in the US bolster Ahold's operations in the market? Boer has kept the door open to M&A and believes the difficult economic conditions could throw up opportunities.
There was some discussion that Ahold's shares fell last week due to the fact that, for all its strategic plans, the retailer maintained its current forecasts for sales and margins growth. Analysts might suggest that the company's plans should make investors feel more confident that the 5% growth targets will be met but perhaps shareholders wanted more.
However, in such a challenging sector (even the food retail sector, held up as one of the most recession-resilient, has seen sales volumes come under pressure in recent months), perhaps Ahold's decision to outline its plans for incremental growth while keeping its current growth targets is a prudent one.
"You have to stay realistic," Petercam analyst Fernand de Boer said. "It's food retail. It's a difficult business and you have to operate in a very challenging environment." With its plans, Ahold is demonstrating how it intends to navigate those conditions.
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