Delhaize Group Reports 4.9% Revenue Growth at Identical Exchange Rates in First Quarter of 2008

·   Solid revenue growth: +4.9% at identical exchange rates

·   Strong organic revenue growth of +5.4%

·   Continued strong comparable store sales in the U.S. (+3.5%), continued improvement of comparable store sales growth in Belgium (+2.0%)

·   Excellent revenue growth (+15.0%) and operating profit growth (+55.8%) in Greece

·   Net profit from continuing operations increase of 4.6% at identical exchange rates

 

·   Confirmation of our 2008 earnings guidance

 

 

Pierre-Olivier Beckers, President and Chief Executive Officer of Delhaize Group, commented: “In this increasingly uncertain economic environment, all of our operating companies have focused successfully on keeping their customers loyal to their stores, providing strong revenue growth in the first quarter. Our competitive pricing and growing private label offering in particular have been instrumental in assuring sales momentum. We continue to focus on many sales and cost efficiency initiatives that will have increased impact in the second part of the year and will allow us to continue to offer highly competitive prices and to support our profitability. We fully expect to emerge from the weaker economic environment an even stronger company than we are today”.

 

 

In the first quarter of 2008, Delhaize Group posted solid growth in revenues of 4.9% at identical exchange rates. At actual exchange rates, revenues declined by 4.5% to EUR 4.5 billion due to a 12.5% weaker U.S. dollar versus the euro. Organic revenue growth showed a marked improvement of 5.4%. The revenue growth in the first quarter of 2008 was due to:

·         the strong 5.1% increase of U.S. revenues driven by a comparable store sales growth of 3.5% (3.3% excluding the effect of Easter);

·         the 0.8% increase of Belgian revenues, supported by a 2.0% comparable store sales growth yet negatively impacted by the divestiture of Di in 2007;

·         the continued outstanding performance of Alfa-Beta, showing a 15.0% increase in revenues, in addition to a very good first quarter last year; and

·         excellent revenue growth of 17.9% in Romania and Indonesia.

 

Delhaize Group ended the first quarter of 2008 with a sales network of 2,561 stores, representing a net addition of 16 stores for the quarter.

 

Gross margin declined to 25.3% of revenues (25.5% in 2007) as a result of the lower weight of the high gross margin business in the U.S. due to the U.S. dollar depreciation. At identical exchange rates, gross margin remained stable. Favorable mix changes at Food Lion (particularly toward private label and fresh products) and continued price optimization at Food Lion and Hannaford offset continued price investments at Sweetbay, higher logistic expenses from significant fuel cost increases and the negative gross margin impact from the divestiture of Di and the conversion of Cash Fresh stores to affiliated stores.

 

Other operating income increased by 8.3% at identical exchange rates and by 1.2% at actual rates to EUR 20.6 million mainly due to higher prices for recycled paper in the U.S.

 

Selling, general and administrative expenses rose 17 basis points as a percentage of revenues to 21.1% due to continued increases in utility costs, higher advertisement expenses and higher staff costs at Food Lion because of the earlier timing of store renewals. Operating expenses as a percentage of revenues at Delhaize Belgium were lower due to the divestiture of Di and the conversion of Cash Fresh stores to affiliates, while Sweetbay benefited from the leverage effect of increased revenues.

 

Other operating expenses amounted to EUR 2.4 million in the first quarter of 2008, a decrease of 34.0% compared to the first quarter of last year during which EUR 1.3 million store closing expenses were incurred at Sweetbay.

 

Operating margin was 4.6% of revenues and operating profit decreased by 0.4% at identical exchange rates (-10.4% at actual exchange rates to EUR 205.7 million).

 

Net financial expenses amounted to EUR 48.5 million, a decrease of 25.3% compared to the first quarter of 2007 and reflect lower interest costs due to the 2007 debt refinancing transaction and the weakening of the U.S. dollar.

 

The effective tax rate remained almost stable at 33.3% (33.1% in the first quarter of 2007). The favorable tax impact of the debt refinancing completed in the second quarter of 2007 almost equally offset the benefit of the U.S. tax refund received in the first quarter of last year.

 

Net profit from continuing operations increased by 4.6% at identical exchange rates (-4.7% at actual exchange rates) and amounted to EUR 104.9 million, or EUR 1.03 per basic share (EUR 1.13 in 2007). The result from discontinued operations, net of tax, amounted to EUR -0.2 million compared to EUR 3.1 million last year as the first quarter of 2007 included our Czech operations which have since been divested.  

 

Group share in net profit amounted to EUR 101.8 million, an increase of 0.5% at identical exchange rates (-8.7% at actual exchange rates) compared to 2007. Per share, basic net profit was EUR 1.02 (EUR 1.16 in 2007) and diluted net profit was EUR 1.00 (EUR 1.11 in 2007).

 

 

 

 

In the first quarter of 2008, net cash provided by operating activities amounted to EUR 260.9 million, an increase of 1.4% compared to EUR 257.3 million in 2007. Capital expenditures increased by 10.7% to EUR 121.7 million primarily due to the timing of new store openings, earlier remodelings at Food Lion and the ongoing renewal of the Belgian distribution centers.

 

Delhaize Group generated free cash flow of EUR 59.5 million, a decrease of EUR 90.3 million compared to last year as a result of the advance payment of the acquisition of Plus Hellas in Greece and of the purchase of land near Athens to build a new distribution center for fresh products. Delhaize Group held EUR 314.2 million cash and cash equivalents at the end of March 2008.

 

The net debt to equity ratio continued to improve, decreasing to 57.7% compared to 61.0% at the end of 2007.  Delhaize Group’s net debt amounted to EUR 2.1 billion at the end of March 2008, a decrease of EUR 182.7 million compared to EUR 2.2 billion at the end of December 2007 due to the weakening of the U.S. dollar and the continued generation of free cash flow.

 

In March 2008, Standard and Poor’s raised Delhaize Group’s credit rating to investment grade as a result of the steady improvement of Delhaize Group’s credit metrics and its strong operational performance.

 

  

·         In the first quarter of 2008, revenues from our operations in the United States grew strongly by 5.1% to USD 4.6 billion (EUR 3.1 billion). Revenue growth was supported by a comparable store sales growth of 3.5% (3.3% excluding the impact of Easter) and more store openings, particularly at Food Lion which added 15 stores compared to the first quarter of 2007.

 

Revenues in the U.S. in the first quarter of this year were supported by high retail inflation and more customer transactions in all U.S. operating companies, confirming the solid loyalty of our customers in these more difficult economic times. The average number of items sold per transaction decreased at Food Lion and Hannaford reflecting more careful consumer spending.

 

Our U.S. companies continued their rapid roll-out of high quality private label products, offering an attractive alternative to higher priced national brand products for cost-conscious consumers. As a consequence, our private label revenues have increased significantly.

 

At Food Lion, retail modifications based on our customer segmentation work were further implemented in the quarter. In the 200 stores where the roll-out is the most advanced, revenue growth exceeded total company revenue growth. Food Lion’s 100 stores that were renewed in 2007 showed double-digit revenue growth this quarter. Hannaford achieved revenue and market share growth supported by its competitive pricing and innovative strategy. Revenues at Sweetbay evolved favorably due to the reinforcement of the Sweetbay brand and more competitive pricing since the middle of last year.

 

At the end of March 2008, Delhaize Group operated 1,574 supermarkets in the U.S. In the first quarter of 2008, Delhaize Group completed the remodeling of 11 supermarkets in the U.S., including 10 Food Lion stores.

 

In the first quarter of 2008, operating profit remained stable at identical exchange rates while operating margin decreased to 5.2% of revenues (5.5% in the first quarter of 2007). Gross margin increased due to favorable product mix changes at Food Lion (primarily through more private label and fresh product sales), and price optimization at Food Lion and Hannaford. Cost inflation was largely passed through to the consumer, with the exception of Sweetbay where price investments that started in the summer of 2007 continued. Operating expenses increased particularly due to earlier market renewals at Food Lion in addition to higher advertising and fuel costs.

 

In 2008, Delhaize Group plans to open between 50 and 55 new supermarkets in the U.S. In addition, the Group plans to close approximately 18 stores of which nine will be relocated, resulting in a net increase of 32 to 37 stores.

 

Approximately 150 U.S. stores will be remodeled in 2008. Food Lion will remodel 141 stores as part of its market and store renewal programs. Four market renewals are planned by Food Lion for the year 2008: Wilmington, North Carolina; Richmond, Virginia; Charlottesville, Virginia and Savannah, Georgia.

·         In the first quarter of 2008, revenues of Delhaize Belgium increased by 0.8% to EUR 1.1 billion. The divestiture in June 2007 of Di, the beauty and body care business, had a negative impact on revenue growth. Excluding Di, revenues would have grown by 2.9%. Comparable store sales grew by 2.0%, continuing the improving trend of the fourth quarter of 2007.

 

The sales network of Delhaize Belgium was extended by 10 stores to 748 at the end of March 2008, including 139 company-operated supermarkets in Belgium, 34 stores in the Grand Duchy of Luxembourg and four stores in Germany. Market share declined in Belgium in the first quarter due to many competitive openings, the temporary closure of Cash Fresh stores during conversion work to Delhaize banners, and two permanent Cash Fresh store closures.

 

Operating profit decreased by 8.3%. The operating margin of Delhaize Belgium was 3.7%, consistent with the full year 2007 operating margin of 3.8% (adjusted for the change in cost allocation policy previously announced). Compared to the first quarter of last year, the operating margin declined by 37 basis points due to higher labor costs as a result of the automatic indexation of salary scales and higher depreciation.

 

Since the beginning of the year, Delhaize Belgium reduced prices of more than 600 high volume products, which has been largely compensated through more favorable buying terms. As a consequence, internal inflation of Delhaize Belgium remained 189 basis points below national food inflation in the first quarter of 2008.

 

Delhaize Belgium expects to end 2008 with a store network of between 788 and 793 stores, as a result of the net addition of 50 to 55 stores (including three company-operated supermarkets), compared to 27 in 2007. Delhaize Belgium plans to remodel 16 stores in 2008 and convert the remaining Cash Fresh stores to Delhaize banners.

 

·         In the first quarter of 2008, revenues in Greece grew at a 15.0% excellent pace driven by high comparable store sales growth, solid revenue trends in the stores remodeled last year and new store openings. The operating margin of Alfa-Beta increased to 3.4% of revenues (2.5% last year) due to the excellent revenue growth, a favorable product mix, better supplier terms and better inventory results. Operating profit increased by 55.8%.

 

In 2008, the sales network of Alfa-Beta is expected to pass the threshold of 200 stores thanks to 16 store openings and the acquisition of Plus Hellas, completed on April 1, 2008, adding 34 stores and a new distribution center close to Thessaloniki.

 

·         Revenues in the Rest of the World segment of Delhaize Group (Romania and Indonesia) increased by 17.9% in the first quarter of 2008 to EUR 44.5 million, as a result of the expansion of the store network and the excellent revenue performance in the existing stores in both countries. The Rest of the World segment recorded an operating profit of EUR 1.0 million in the first quarter of 2008.

 

On March 31, 2008, Delhaize Group has entered into an agreement to purchase 14 supermarkets in Romania for an amount of EUR 18.6 million, subject to contractual adjustments. This transaction is expected to close at the latest in the third quarter of this year.

 

In 2008, Delhaize Group expects to increase its sales network by 29 stores in the Rest of the World segment to a total of 107 stores, including the 14 La Fourmi supermarkets to be acquired in Romania.

 

 

On the basis of its first quarter results and its plans and expectations for the remainder of the year, Delhaize Group confirms its full-year guidance as issued on March 6, 2008.

As announced in our 2008 guidance in March of this year, we expect our 2008 earnings growth to be significantly weighted towards the second half of the year. The reasons for this are:

·         timing of the expected positive earnings impact from market renewals at Food Lion;

·         roll-out costs of the U.S. private label program;

·         timing of the anticipated benefits of cost and efficiency projects;

·         timing of store openings in the Group;

·         lower base of comparison in the second half of 2008 versus 2007, especially due to the Sweetbay impairment charge in the fourth quarter of 2007, the major price investments made at Hannaford and Sweetbay in the second half of 2007, and the weaker results of Delhaize Belgium in the second half of 2007.

 

Our 2008 guidance does not include the impact of the acquisition of Plus Hellas, which was closed on April 1, 2008. We currently estimate for 2008 a positive impact on Delhaize Group revenue of approximately EUR 70 million and a negative impact of between EUR 10 to 15 million on operating profit due the conversion expenses to the Alfa-Beta banners.

 

Delhaize Group’s management will comment on the first quarter 2008 results during a conference call starting May 7, 2008 at 03.00 pm CET / 09:00 am ET. 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 present in seven countries on three continents. At the end of 2007, Delhaize Group’s sales network consisted of 2,545 stores. In 2007, Delhaize Group posted EUR 19.0 billion (USD 26.0 billion) in revenues and EUR 410.1 million (USD 562.1 million) in net profit (Group share). At the end of 2007, Delhaize Group employed approximately 138,000 people. Delhaize Group’s stock 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 website http://www.delhaizegroup.com. Questions can be sent to investor@delhaizegroup.com.