Ahold First-Quarter Earnings Drop on Product Promotion Costs

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Royal Ahold NV, the owner of the Stop & Shop and Albert Heijn supermarkets, said first-quarter earnings dropped due to product promotions in the U.S. as it faces increased competition from chains such as Wal-Mart Stores Inc.

Underlying operating income fell 0.5 percent to 390 million euros ($425 million), the Zaandam, Netherlands-based company said in a statement Wednesday. On average, analysts surveyed by Bloomberg estimated earnings of 406 million euros.

The retailer on May 12 said it was discussing a potential merger with Delhaize Group, the Belgian company that operates the Food Lion chain in the U.S. A deal would create savings of as much as 600 million euros, according to analysts, helping deflect competition. Ahold also is upgrading stores to better compete, a process that has yet to fully pay off, said Joost van Beek of Theodoor Gilissen Bankiers NV.

“The further upgrade of the stores, so that the shopping experience improves and the assortment better fits customers’ desires, that process has been ongoing for 1.5 years, so in the stores where you’ve adjusted you should eventually see some effect,” the analyst said by phone. “I don’t fully see that yet.”

Sales increased 15 percent to 11.3 billion euros. Underlying operating margin fell to 3.5 percent from 4.0 percent in the same three months last year.

“Our investments in growth across our businesses and a one-off insurance charge decreased our underlying operating margin somewhat,” Chief Executive Officer Dick Boer said on a conference call with journalists.

Ahold, which generates about two-thirds of its revenue in the U.S., has been hurt by competitors opening new stores, while the market in New England has been stagnant, the company has said. Delhaize’s Food Lion faces challenges from Wal-Mart’s addition of smaller-format grocery stores, while Harris Teeter is cutting prices under the ownership of Kroger Co.

Ahold fell 0.7 percent to 18.40 euros at 9:20 a.m. in Amsterdam. Shares had gained 7.5 percent through yesterday’s close since Belgian paper De Tijd first reported the Delhaize discussions on May 9.

The CEO repeated his commitment to have 50 Albert Heijn stores in Delhaize’s home market of Belgium by the end of 2016, but declined to give more details on the discussions to combine operations.

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