Delhaize Group, the owner of the Food Lion supermarkets, rose to a two-year high in Brussels trading after second-quarter earnings showed that cost savings and better supplier terms are outweighing price cuts in the U.S.
Delhaize surged 10 percent to 53.20 euros, the highest value since June 2011, by the 5:35 p.m. close of trading on Euronext Brussels as 1.56 million shares changed hands, three times the 3-month average. The stock has gained 76 percent this year, the best performance in the Stoxx 600 Retail Index.
Operating profit before one-time items in the three months through June rose 6 percent to 193 million euros ($258 million), the Brussels-based company said today in a statement. Analysts projected a decline to 178 million euros, according to the average of 10 estimates compiled by Bloomberg. The grocer also slightly raised its forecast for 2013 and now expects a drop of less than 3.5 percent in operating profit before currency swings.
Delhaize’s operating margin widened 18 basis points in the quarter as improved terms in contracts with suppliers offset additional price cuts at Hannaford and in more Food Lion stores, while expenses were little changed as a proportion of revenue. The grocer generated 321 million euros of cash not required for reinvestment in the first half, cutting net debt by 191 million euros and removing any remaining concern about a loss of its investment-grade credit rating.
“The group is clearly on the right track,” Pascale Weber, an analyst at KBC Groep NV in Brussels, wrote in a note to clients today. “The guidance implies a free cash flow yield of 10 percent.”
Delhaize said it gained 35 basis points of market share in its Belgian home market, reversing losses of 43 basis points in the first quarter and of 50 basis points last year, even as same-store sales growth slowed to 0.8 percent from 2.4 percent in the prior three-month period.
“The market was difficult in Belgium, volumes were negative for the entire market,” Chief Executive Officer Pierre-Olivier Beckers said today on a conference call with analysts. “Consumer confidence has started improving, but it stays in negative territory, especially in Flanders, which is the richer region traditionally.”
Its Belgian sales rose 2.9 percent to 1.26 billion euros in the quarter, which compares with a 0.4 percent drop at Carrefour SA’s Belgian stores and a 3.4 percent increase in Colruyt NV’s retail business unit in the three months through June.
Delhaize agreed in May to sell its U.S. banners Sweetbay, Harveys and Reid’s to Bi-Lo Holdings LLC for $265 million in cash, after closing 34 unprofitable Sweetbay stores earlier this year, freeing funds to turn around the Food Lion banner and fend off competition from grocers including ShopRite Supermarkets at Hannaford. Kroger Co. agreed in July to spend $2.5 billion buying Harris Teeter Supermarkets Inc., whose 212 stores compete directly with Food Lion in the southeastern part of the U.S.
The 165 stores included in the transaction with Bi-Lo generated $1.8 billion of revenue, or almost 10 percent of Delhaize’s sales in the U.S., last year. Today’s report showed for the first time that those stores added only 22 million euros to operating profit in 2012.
The grocer forecast full-year operating profit of at least 755 million euros before currency swings today, a decrease of less than 3.5 percent. That compares with a previous forecast for a drop of about 3.6 percent and an increase of 9.8 percent in the first half.
Delhaize expects a deterioration in the second half because of further price cuts at Hannaford and in additional Food Lion stores, accelerated store openings in the U.S. and Romania and higher advertising spending in Belgium. The food retailer also profited from a release of bonus accruals in the third quarter of 2012.