Ahold returns cash to shareholders, but hit by worries over sales trends

Ahold returns cash to shareholders, but hit by worries over sales trends

Ahold shares dropped today (14 Novermber) after the Netherlands-based retailer warned its domestic market share is coming under pressure. However, a number of positives also came out of the financial update, including the announcement of a EUR1bn payout to shareholders and news the group will exit Slovakia. Here is the analyst verdict on Ahold's mixed third-quarter news.

Patrick Roquas, Rabobank

"The US combined ID sales growth excluding gas of 0.6% (consensus 0.7%) with a margin of 4.0% (consensus 4.0%). Inflation amounted to circa 1% implying that volumes were still negative. Ahold continued to gain share in the supermarket channel and was flat in the all outlet market.

The Netherlands reported a disappointing ID sales growth of -0.2% (consensus of 1.2%) with a margin of 5.3% (consensus 5.3%). The number of transactions was flat but customers bought fewer items per visit. On the back of inflation of c. 4%, the decline in volumes was substantial.  Excluding the addition of new stores (C-1000 conversions), [Ahold domestic chain] Albert Heijn lost market share in Q3 (versus market growth of c. 2%). We estimate this was already the case in H1 but clearly less pronounced. It seems that especially Lidl (and a few smaller chains like EM-TE) are doing well and are picking up share from C-1000.

The year-on-year EBIT margin remained flat as volume pressure and price investments were compensated by cost savings. Do note that weak sales for Albert Heijn was flagged earlier."

Fernand De Boer, Petercam

"Results were weaker than expected with in particular the Dutch market depressing Ahold's top line. The strong growth of Bol.com could not offset the weakness of Albert Heijn. Based on recent comments of Albert Heijn franchisees and market data this has not become better in 4Q. However, in 4Q13 comparison base is easier as in 4Q12 Etos had a very bad performance. Underlying operating income was slightly missing but at some point the weak top line will have a more depressing effect on margins. We also believe that Ahold is preparing more drastic actions in the US, with a former Tesco director becoming the MD for Giant Landover.

The weak results are offset by the EUR1bn capital return although this was widely expected. We are also pleased with the withdrawal from loss-making Slovakia although this is not a game changer.

Based on the capital return we could raise our 2014 estimate by some 7% but this was be partly offset by lower estimates for the underlying business."

Fabienne Caron, Kepler Cheuvreux

"The main news of the results is that Ahold is given EUR1bn cash back to shareholders on top of the EUR2bn share buyback currently running. They need the authorisation at an extraordinary shareholders meeting in January for the additional cash back and plans a reverse stock split. We do not know yet if the reverse stock split will be for the EUR1bn extra or for more as they have done only 30% of the EUR2bn buyback so far and need to get it done before end 2014. We would prefer them to stop the buyback next year and to do a reverse stock split for more. While this is positive, it is the minimum the market was looking at and Ahold could have given up to EUR2bn we believe without having issue with the rating agencies. 

The Netherlands came in below expectations at top line level with -0.2% but margin remained flat at 5.3%. Ahold highlights that the market is slowing down and that while transaction number is flat, the basket is coming down. The market will focus on the fact as in Q2 that gross margin is up 30bp in the quarter and will ask the company is they have been aggressive enough on price.

In the US there was no surprise with 0.6% LFL ex petrol and a 4% margin. Here as expected inflation is low and the market is competitive.

As a whole group underlying margin remained flat at 4.3% thanks to cost savings which helped offsetting the weak top line. The market may focus (as in Q2) on the gross margin expansion of +30bp in the quarter and Ahold will need to convince that they have been aggressive enough on price."