Third Quarter 2006 Results
- Strong comparable store sales growth in the U.S. (+3.1%) and in Belgium (+4.3%)
- High organic sales growth of 6.0%
- Stable operating margin
- Net profit from continuing operations grows by 18.2% at actual exchange rates
Portfolio
- Reclassification of Czech Delvita activities to assets held for sale and discontinued operations
2006 Guidance
- Confirmation of full year guidance
Full press release in pdf format
Financial statements Delhaize America (US GAAP)
Report of the Statutory Auditor
CEO Comments
“The third quarter was another solid quarter for Delhaize Group”, said Pierre-Olivier Beckers, President and Chief Executive Officer of Delhaize Group. “The commercial dynamism and high level of execution in all our banners were reflected in our very strong sales growth. In fact, our third quarter was another organic sales record for Delhaize Group in more than five years. Comparable store sales grew 3.1% in the U.S. and 4.3% in Belgium, and in Greece, Alfa-Beta continued its outstanding performance growing sales by 15.3%.”
“These results fully reflect our strategy of accelerating our top-line growth while maintaining our industry-leading margins, as was confirmed in the good performance of Hannaford, Food Lion and Alfa-Beta. Disciplined cost management allowed us to offset price investments and keep our operating margin stable in the quarter”, continued Mr. Beckers.
“The decision to exit the Czech Republic was a difficult one. However, we have given full consideration to the interests of our Czech associates and the market environment, and we believe that the combination of Delvita with another Czech retailer will allow the combined entity to be more competitive in this market. The divestment will allow us to focus our resources in higher opportunity markets”, said Mr. Beckers.
Analysis of Results
The third quarter results have been impacted by three significant elements:
- The recognition of an impairment loss of EUR 59.3 million related to the expected sale of Delvita, which has been reclassified to assets held for sale and discontinued operations. This amount does not include a positive accumulated foreign currency translation adjustment of approximately EUR 22.3 million. This amount will be recorded as income at the effective date of the sale;
- The reduction of planned retirement and profit sharing plan expense of Food Lion and Sweetbay/Kash n’ Karry to reflect the identification and forfeiture of retirement and profit sharing plan balances for the accounts of employees who have left the Company with unvested account balances. This adjustment impacted selling, general and administrative expenses favorably by USD 13.8 million and cost of sales by USD 1.6 million;
- In Belgium, we have implemented several new information systems, including our state-of-the-art ACIS system, designed to provide more accurate information on margins, inventories and payables. In this process we have identified several elements that have contributed to an unanticipated negative impact on gross profit of EUR 13.3 million.
Income Statement
In the third quarter of 2006, net sales and other revenues of Delhaize Group increased by 2.8% to EUR 4.8 billion. Organic sales growth amounted to 6.0%, the strongest growth rate in five years. Net sales and other revenues increased also by 6.0% at identical exchange rates due to:
- the 5.1% increase of U.S. sales driven by the strong performance of Food Lion and Hannaford. Comparable store sales grew by 3.1% for the U.S. operations;
- the 6.9% increase of Belgian sales due to comparable store sales growth of 4.3% and new store openings; and
- the 15.3% increase of Greek sales due to the continued outstanding performance in the existing stores and new store openings.
Delhaize Group ended the third quarter of 2006 with a sales network of 2,676 stores (including the Czech operations for sale) compared to 2,636 stores at the end of 2005.
Gross margin decreased to 25.1% of net sales and other revenues (compared to 25.3% in the third quarter of 2005) primarily as a result of reduced gross profit at Delhaize Belgium as described above. Excluding the EUR 13.3 million impact at Delhaize Belgium, gross margin would have been stable.
Selling, general and administrative expenses decreased by 8 basis points to 20.7% of net sales and other revenues. This was mainly due to reduced operating expenses at Food Lion and Sweetbay/Kash n’ Karry related to the forfeited accounts in their retirement and profit sharing plans. This was partially offset by the costs related to the conversion of Kash n’ Karry stores to Sweetbay in Florida, increased utility and fuel expenses throughout the Group and higher medical costs in the U.S.
Operating profit increased by 2.3% to EUR 229.4 million at actual exchange rates and 5.7% at identical exchange rates. The operating margin of Delhaize Group was stable at 4.8% of net sales and other revenues.
Net financial expenses decreased by 12.1% to EUR 66.6 million due to the positive impact of debt repayments made in the first half of 2006.
The effective tax rate decreased from 38.0% to 33.2% primarily due to the tax benefit from the exercise of employee stock options in the U.S. and the positive impact of the resolution of state tax matters in the U.S. Thanks to the higher operating profit and the decrease in the tax rate and net financial expenses, net profit from continuing operations increased by 18.2% to EUR 108.8 million, or EUR 1.12 per basic share (EUR 0.97 in 2005).
In the third quarter of 2006, the result from discontinued operations, net of tax, amounted to EUR -61.4 million, following the impairment loss related to the planned sale of our Czech operations and its reclassification to assets held for sale and discontinued operations as a result of our decision to sell this business. As a result, Group share in net profit amounted to EUR 45.3 million. Per basic share, net profit was EUR 0.48 (EUR 0.95 in the third quarter of 2005) and per diluted share EUR 0.47 (EUR 0.91 in the third quarter of 2005).
Cash Flow Statement and Balance Sheet
In the third quarter of 2006, net cash provided by operating activities amounted to EUR 214.4 million, 13.4% lower than in the same period last year due to higher use of working capital than last year. Capital expenditures increased to EUR 179.1 million (EUR 155.6 million in the third quarter of 2005) primarily due to the continued Sweetbay rollout and the market renewal program at Food Lion. Delhaize Group generated free cash flow of EUR 38.4 million. After major debt repayments earlier in the year, the Group held EUR 243.9 million cash and cash equivalents at the end of the third quarter.
The net debt to equity ratio decreased to 76.7% at the end of September 2006 compared to 81.4% at the end of 2005. Delhaize Group’s net debt amounted to EUR 2.7 billion at the end of September 2006, a decrease of EUR 201.3 million compared to EUR 2.9 billion at the end of 2005 due to the weakening of the U.S. dollar between the two balance sheet dates and the continued generation of free cash flow.
Segment Reporting
In the third quarter of 2006, the contribution of the operations in the United States to the sales of Delhaize Group amounted to USD 4.4 billion (EUR 3.5 billion), an increase of 5.1% over the third quarter of 2005, mainly due to the continued strong sales momentum at Food Lion and Hannaford. During the third quarter of 2006, comparable store sales increased by 3.1%.
The strong sales momentum at Food Lion was supported by effective price, promotion and marketing initiatives, improved assortment and customer service, the success of the market renewal and concept renewal initiatives, and last year’s store closings by Winn-Dixie, a major competitor of Food Lion. Hannaford’s sales were again strong this quarter, supported by targeted promotions and marketing initiatives and a continued positive momentum in the Massachusetts market. Sales growth at recently converted Sweetbay stores continued to be good, while sales at non-converted Kash n’ Karry stores and in new and converted Sweetbay stores cycling their grand opening were weaker than expected.
Gross margin improved by 16 basis points, due to better inventory results, continued margin management and price optimization and an improvement in the sales mix partially offset by targeted price reductions to improve the competitiveness of our U.S. businesses. Selling, general and administrative expenses as a percentage of net sales and other revenues were stable, mainly due to expense reduction of USD 13.8 million related to forfeited accounts in the retirement and profit sharing plans of Food Lion and Sweetbay/Kash n’ Karry, offset by expenses related to the Sweetbay conversions, increases in health care costs and higher utility and fuel expenses.
The operating margin of the U.S. business increased by 43 basis points to 5.8% of net sales and other revenues. Excluding the expense reduction related to the retirement and profit sharing plans of Food Lion and Sweetbay/Kash n’ Karry, the operating margin of the U.S. operations of Delhaize Group would have increased by 8 basis points to 5.5%. The operating profit of the U.S. business of Delhaize Group increased by 12.9% to USD 255.5 million (6.1% excluding the retirement and profit sharing plans’ expense reduction).
In the third quarter of 2006, Delhaize Group opened six new supermarkets in the U.S., including two relocated supermarkets. One Kash n’ Karry store was closed.
Food Lion progressed with the renewal of its Washington, D.C. market and the entry of the new market of Greenville-Spartanburg, South Carolina. In Washington, D.C., 10 Bottom Dollar Food stores, 14 Bloom stores and seven Food Lion stores were re-launched in the third quarter. Approximately 15 Bloom and one Bottom Dollar Food conversions will be completed in the fourth quarter of the year, while approximately 11 Bloom stores will be ready in early 2007. In the Greenville-Spartanburg market, one Food Lion store was opened in the third quarter. This will be followed by two Bloom and one Food Lion stores in the last quarter of 2006.
For 2007, Food Lion has selected Norfolk, Virginia and Myrtle Beach, South Carolina for its next market renewal projects. In Norfolk, Food Lion plans to use a multi-banner approach in renovating 85 stores. In Myrtle Beach, 20 Food Lion stores will receive major renovations.
At Hannaford action was undertaken to structurally reduce expenses particularly at its head office. These initiatives allowed Hannaford to increase its price competitiveness, with a particular focus on the Massachusetts area, while protecting its profitability. Hannaford launched its in-store nutrition navigation system called “Guiding Stars”, created to make it easier for interested shoppers to choose more nutritious foods. Hannaford also expanded successful categories such as its private label Inspirations and its Meals to Go products.
Six Kash n' Karry stores were converted to the Sweetbay Supermarket concept in the third quarter of 2006. At the end of September, 54 Sweetbay stores were in operation. Fourteen additional Kash n’ Karry stores will be converted to the Sweetbay banner by the end of 2006. Customers continued to react positively to the Sweetbay brand, as reflected in major sales uplifts after conversion.
Delhaize Belgium increased net sales and other revenues by 6.9% to EUR 1.1 billion in the third quarter of 2006. The Company again posted strong comparable store sales growth of 4.3% supported by successful merchandizing initiatives and an improved price perception among consumers. Delhaize Belgium slightly increased its market share during the third quarter.
The operating margin of Delhaize Belgium decreased to 2.8% of net sales and other revenues (4.2% in 2005), mainly due to the EUR 13.3 million reduced gross profit related to the implementation of new information systems. Excluding the EUR 13.3 million impact, the operating margin remained almost stable at 4.1%. Operating profit decreased by 28.2% to EUR 30.4 million and increased 3.2% excluding the EUR 13.3 million impact.
In the third quarter of 2006, sales in Greece grew 15.3% to EUR 249.0 million due to strong comparable store sales growth and new store openings. Alfa-Beta expanded its product assortment, especially in the premium private label ranges, and increased its price competitiveness. The operating margin of Alfa-Beta increased strongly to 3.2% of sales (1.4% in 2005), while the operating profit increased by 165.8% to EUR 8.1 million.
Net sales and other revenues of the Emerging Markets (Romania and Indonesia) of Delhaize Group increased by 13.5% to EUR 32.7 million due to the continued good sales performance in both countries. The Emerging Markets of Delhaize Group recorded a slight operating loss of EUR -0.2 million in the third quarter.
The Czech activities of Delhaize Group, formerly in the Emerging Markets segment, have been reclassified to assets held for sale and discontinued operations (for both 2005 and 2006) as a result of our decision to sell this business.
Divestiture of Delvita
As a part of its regular portfolio evaluation, Delhaize Group concluded that the resources required for the success of its Czech business, Delvita, would be more beneficial to the Group if invested in other activities. As a consequence, Delhaize Group has decided to pursue the sale of its Czech operations. We believe there are several interested buyers.
As a result, Delhaize Group reclassified Delvita’s assets and liabilities as held for sale and Delvita’s results as results from discontinued operations. In the third quarter of 2006, an impairment loss of EUR 59.3 million was recognized in results from discontinued operations. This amount does not include a positive accumulated foreign currency translation adjustment of approximately EUR 22.3 million, which will be recorded as income at the effective date of sale.
2006 Financial Outlook
Based on the strong performance in the first nine months of 2006 and our confidence for the remainder of the year, Delhaize Group confirms its guidance for the full year (at identical exchange rates of 1 EUR = 1.2441 USD):
- Comparable store sales growth of the U.S. operations of Delhaize Group in 2006 is expected to be in the range of 2.5% to 3.0%.
- It is expected that net sales and other revenue growth of Delhaize Group will be in the range of 4.5% to 5.5%.
- Operating profit is expected to grow by 4% to 6% in 2006.
- Net profit from continuing operations (Group share) growth expectations are between 8% and 12%.
In addition, in 2006:
- The sales network of Delhaize Group is expected to increase by approximately 83 stores to a total of 2,719 stores (including the Czech activities for sale).
- Delhaize Group continues to expect capital expenditures (excluding finance leases) of approximately EUR 770 million at identical exchange rates, including approximately USD 700 million for the U.S. operations of the Group.
Contacts
Guy Elewaut: +32 2 412 29 48
Geoffroy d'Oultremont: + 32 2 412 83 21
Hans Michiels: + 32 2 412 83 30
Ruth Kinzey (U.S media): + 1 704 633 82 50 (ext. 2118)
Amy Shue (U.S investors): + 1 704 633 82 50 (ext. 2529)
CONFERENCE CALL AND WEBCAST
Delhaize Group’s management will comment on the third quarter 2006 results during a conference call starting November 9, 2006 at 03.00 pm CET / 09:00 am EST. The conference call can be attended by calling +44 20 7108 6390 (U.K.) or +1 773 756 4600 (U.S.), with “Delhaize Earnings” as password. The conference call will also be broadcast live over the internet at http://www.delhaizegroup.com. An on-demand replay of the web cast will be available after the conference call at http://www.delhaizegroup.com.
DELHAIZE GROUP
Delhaize Group is a Belgian food retailer present in eight countries on three continents. At the end of September 2006, Delhaize Group’s sales network consisted of 2,676 stores. In 2005, Delhaize Group posted EUR 18.6 billion (USD 23.2 billion) in net sales and other revenues and EUR 364.9 million (USD 450.4 million) in net profit. At the end of 2005, Delhaize Group employed approximately 135,700 people. Delhaize Group is listed on Euronext Brussels (DELB) and the New York Stock Exchange (DEG).
This press release is available in English, French and Dutch. You can also find it on the web site http://www.delhaizegroup.com. Questions can be sent to investor@delhaizegroup.com.
FINANCIAL CALENDAR
Press release - 2006 sales: January 18, 2007
Press release - 2006 fourth quarter and full year results: March 15, 2007
Press release - 2007 first quarter results: May 9, 2007
Ordinary general meeting of shareholders: May 24, 2007
Press release - 2007 second quarter results: August 9, 2007
Press release - 2007 third quarter results: November 8, 2007
IFRS INFORMATION
The interim financial information has been prepared in accordance with the recognition and measurement principles of IFRS, as adopted by the European Union.
REPORT OF THE STATUTORY AUDITOR
Deloitte Bedrijfsrevisoren/Reviseurs d’Entreprises SCC has conducted a limited review of the interim consolidated financial information as at September 30, 2006. This limited review consisted principally of analysis, comparison and discussions of the financial information and therefore was less extensive than an audit, the purpose of which is to form an opinion on the financial statements taken as a whole. This review did not disclose any elements that would have required significant corrections in the interim consolidated financial information. The full report of the statutory auditor on the limited review of the interim consolidated financial information can be found on Delhaize Group’s website at www.delhaizegroup.com.
DEFINITIONS
- Basic earnings per share: profit or loss attributable to ordinary equity holders of the parent entity divided by the weighted average number of shares outstanding during the period. Basic earnings per share are calculated on profit from continuing operations less minority interests attributable to continuing operations, and on the group share in net profit
- Comparable store sales: sales from the same stores, including relocations and expansions, and adjusted for calendar effects
- Diluted earnings per share: is calculated by adjusting the profit or loss attributable to ordinary equity shareholders and the weighted average number of shares outstanding for the effects of all dilutive potential ordinary shares, including those related to convertible instruments, options or warrants or shares issued upon the satisfaction of specified conditions
- Free cash flow: cash flow before financing activities, investment in debt securities and sale and maturity of debt securities
- Net debt: non-current financial liabilities, plus current financial liabilities and derivatives liabilities, minus derivative assets, investments in securities, and cash and cash equivalents
- Net financial expenses: finance costs less income from investments
- Organic sales growth: sales growth, excluding sales from acquisitions and divestitures, at identical currency exchange rates
- Other operating income: primarily rental income on investment property, gains on sale of fixed assets, recycling income, and services rendered to wholesale customers.
- Outstanding shares : the number of shares issued by the Company, excluding treasury shares
- Weighted average number of shares: number of shares outstanding at the beginning of the period less treasury shares, adjusted by the number of shares cancelled, repurchased or issued during the period multiplied by a time-weighting factor
In its financial communication, Delhaize Group uses certain non-GAAP measures. Delhaize Group does not represent these measures as alternative measures to net earnings or other financial measures determined in accordance with IFRS. These measures as reported by Delhaize Group might differ from similar titled measures by other companies. We believe that these measures are important indicators of our business and are widely used by investors, analysts and other parties. In the press release, the used non-GAAP measures are reconciled to financial measures determined in accordance with IFRS.
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Statements that are included or incorporated by reference in this press release and other written and oral statements made from time to time by Delhaize Group and its representatives, other than statements of historical fact, which address activities, events and developments that Delhaize Group expects or anticipates will or may occur in the future, including, without limitation, statements about strategic options, future strategies and the anticipated benefits of these strategies, are “forward-looking statements” within the meaning of the U.S. federal securities laws that are subject to risks and uncertainties. These forward-looking statements generally can be identified as statements that include phrases such as “guidance”, “outlook”, “projected”, “believe”, “target”, “predict”, “estimate”, “forecast”, “strategy”, “may”, “goal”, “expect”, “anticipate”, “intend”, “plan”, “foresee”, “likely”, “will”, “should” or other similar words or phrases. Although such statements are based on current information, actual outcomes and results may differ materially from those projected depending upon a variety of factors, including, but not limited to, changes in the general economy or the markets of Delhaize Group, in consumer spending, in inflation or currency exchange rates or in legislation or regulation; competitive factors; adverse determination with respect to claims; inability to timely develop, remodel, integrate or convert stores; and supply or quality control problems with vendors. Additional risks and uncertainties that could cause actual results to differ materially from those stated or implied by such forward-looking statements are described in Delhaize Group’s Annual Report on Form 20-F for the year ended December 31, 2005 and other periodic filings made by Delhaize Group and Delhaize America with the U.S. Securities and Exchange Commission, which risk factors are incorporated herein by reference. Delhaize Group and Delhaize America disclaim any obligation to update developments of these risk factors or to announce publicly any revision to any of the forward-looking statements contained in this release, or to make corrections to reflect future events or developments.