Delhaize Group SA, the owner of the U.S. Food Lion stores, rose the most in almost 3 1/2 years after price cuts lured back shoppers, driving revenue growth in more than a third of the Food Lion network.
Delhaize soared as much as 8.4 percent on Euronext Brussels, the biggest intraday gain since March 2009, and traded 2.31 euros higher at 35.47 euros by 10:45 a.m. local time. The shares, which have lost 23 percent in the past 12 months, are trading for about nine times adjusted profit this year, based on the average of 29 analyst estimates compiled by Bloomberg.
Comparable sales growth in the 434 Food Lion stores where Delhaize had already cut prices and improved its offering of fresh produce by the end of March exceeded 3 percent in the second quarter. That compares with a 0.6 percent contraction in same-store sales for all of the 1,548 stores Delhaize operates in the U.S. Same-store sales growth in Belgium was positive for the first time in 1 1/2 years following price cuts.
“We are positively surprised by the continued good like-for-like of the Food Lion stores after remodelling,” Fabienne Caron, an analyst at Kepler Capital Markets in Frankfurt, wrote in a note to clients. “While the consensus should not move, the market should be reassured by the continued positive impact.”
Delhaize extended price cuts this year as it seeks to revive the Food Lion network in the southeastern U.S., fend off competitors such as ShopRite to its Hannaford banner in the northeast and win back shoppers lost to discounter Colruyt NV in its Belgian home market. The retailer is also opening additional Bottom Dollar Food discount stores in the Pittsburgh area, giving up short-term profitability to drive revenue growth.
The price cuts, as well as the lower profitability of the Belgrade-based Delta Maxi DOO it bought last year, reduced Delhaize’s gross margin by 92 basis points to 24.3 percent, the lowest level in at least eight years. The proportion of revenue left after subtracting costs of goods sold had shrunk 86 basis points in the prior quarter.
Operating profit excluding some items fell to 184 million euros ($229 million) in the second quarter, an 18 percent decrease before currency effects. That beat the 173.4 million-euro average of 10 analyst estimates compiled by Bloomberg.
Delhaize said full-year profit on that basis will be “at the bottom-end” of a May 3 forecast for a 15 percent to 20 percent decline as the grocer prepares to make additional price reductions to lure cash-strapped consumers. Price cuts and a “persistent difficult” trading environment in Belgium will affect third-quarter earnings, Delhaize said in the statement.
Free Cash Flow
The grocer also reiterated its target to generate 500 million euros of cash not required for reinvestment this year, or about 14 percent of its current market value. Free cash flow fell 60 percent to 126 million euros in the six months through June.
“We have some difficulty in seeing the target to be reached by the end of the year,” said Marc Leemans, an analyst at Banque Degroof SA in Brussels. “Interests paid look somewhat skewed to the first half, but capital expenditures seem to be on track to come in at the guided range. Working capital was a source of funds in the first half to the tune of 75 million euros.”