On the money: Delhaize eyes "stabilisation" of US margins

Belgium-based retailer Delhaize Group has said it expects a "progressive stabilisation" of its operating margins in the US as it focuses on improving profitability and productivity across the business.

The retailer this morning (7 March) reported a drop in profits in 2012 as costs from store closures and impairment charges hit its bottom line. The retailer also cut its full-year gross dividend.

In the US, where Delhaize last month announced plans to cut 500 jobs from across the division, sales were down 2.2%, with comparable-store sales down 0.8% in 2012. Underlying operating margin dropped to 3.8% in 2012 from 4.8% last year, mainly as a result of price investments. Delhaize generates two-thirds of its revenue in the US.

Speaking on the firm's earnings call today, president and CEO Pierre-Olivier Beckers told analysts he expects the decline in operating margins to turn "moderate".

"We are expecting progressive stabilisation of our margin. We are quite aggressively continuing to support our revenue growth initiatives that create, in the short term, pressure. But for a variety of reasons we believe that we start 2013 in a better place to offset some of those pressures from Sweetbay, Bottom Dollar, two-thirds of our Food Lion stores, and from our cost savings work.

"For all these reasons we believe we are in more of a position to relieve the pressure on our operating margin, and you will see the decline will progressively stabilise over time."

Beckers said Delhaize was "pleased" with the progress of its US sales trends, despite the drop in profit, which CFO Pierre Bouchut said was down to a number of factors.

"About two-thirds of our Food Lion stores had been repositioned by Q4 2012 versus only 15% by Q4 in 2011. Additionally, at Food Lion, as of early October, we conducted an EDLP test across the whole of the Food Lion network, with two categories of product, dairy and frozen, which account for a very significant portion of our sales. We also invested more in prices at Hannaford in Q4."

Bouchut said the group had also posted higher losses at its Bottom Dollar stores.

"In the near future, we are considering that operating margin in America should moderate since two-thirds of our repositioning has now been achieved. Second, the tests carried out in dairy and frozen have not been compelling and will not be extended. Also, realised cost savings and the closure of non-performing stores should also help our profitability."

Roland Smith, recently-appointed CEO of Delhaize's operations, said the focus for the retailer in the US will be based on three "critical priorities". These will start with the "transformation" of Food Lion the "most important priority".

"While we are pleased with the continued progress of Food Lion, we know that we must continue to grow sales and market share and we also must better differentiate food Lion from its competition. To ensure we accomplish this, we are now focused on more clearly identifying the chain's unique selling proposition."

The remaining two priorities include strengthening the Hannaford banner by continuing to improve the banner's overall price competitiveness, and optimising Bottom Dollar Foods through growing sales and reducing operating costs. Here, Smith said, it was important to "have the right economic model" before considering expansion.

While analysts were relatively upbeat about the firm's results, some cast caution over the US results.

Petercam analyst Fernand de Boer said US margins were below expecataions.

"The guidance for US indicates some more pressure in 2013, where we were aiming for flat margins. However, this will be partly compensated by the somewhat higher estimates for Belgium and south-eastern Europe/Asia. Consequently, we expect to reduce our estimates by around 2% to 3%."

Likewise, CitiGroup analyst Alastair Johnston said the biggest downside risk Delhaize faces is that the US grocery sector turns down, "perhaps in a post-election period of austerity".

Nevertheless, the market reacted positively to Delhaize's results. Its share price was up 4.38% at EUR38.35 at 16:35 CET.