Delhaize Gains as Lower Debt Eases Rating Threat: Brussels Mover

Delhaize Group SA, the Belgian food retailer that gets 64 percent of revenue from the U.S., rose to an 11-month high in Brussels as a decline in net debt eased concern the company may lose its investment-grade credit rating.

Delhaize climbed 1.61 euros, or 4.4 percent, to 38.35 euros on Euronext Brussels, the highest closing price since April 3. The shares have gained 27 percent so far this year, the best performance in the Bloomberg Europe Food Retailers Index.

Lower inventories in the U.S. helped to cut net debt to 2.06 billion euros ($2.67 billion), or about 2.9 times earnings before interest, tax, depreciation and amortization when adjusting for leases, the Brussels-based company said today in a statement. Delhaize also lowered its dividend for the first time in 10 years and forecast capital spending will drop about 5.5 percent.

“The group is clearly focused on maintaining its financial strength,” Pascale Weber, an analyst at KBC Securities NV in Brussels who recommends buying the shares, wrote in a note. “We are comforted by the fact that the improving U.S. sales trends continues in the first quarter.”

The top priority is to accelerate revenue growth while maintaining discipline in spending and on costs, Chief Executive Officer Pierre-Olivier Beckers told reporters in Brussels today. Delhaize already said on Jan. 17 that it halted a slide in U.S. same-store sales following price cuts and a brand overhaul covering 62 percent of the 1,127 Food Lion stores so far and which will be extended to an additional 180 stores as of May. The grocer plans to open 200 new stores this year, in “a sign of vitality,” Beckers said.

Cash Flow

The company reiterated its forecast for annual free cash flow of an average of 500 million euros in the three years through 2015.

While its profit margin in the U.S. will continue to shrink this year because of additional price cuts, cost savings and narrowing losses at the Bottom Dollar Food and Sweetbay banners should help to contain the decline, Delhaize said today.

The closure of 34 unprofitable Sweetbay supermarkets in Florida will boost U.S. earnings by about 20 million euros this year and losses at Bottom Dollar Food, Delhaize’s discount format in the Philadelphia and Pittsburgh areas, will “progressively disappear” by 2015, Chief Financial Officer Pierre Bouchut said on a conference call on Jan. 17.

‘Not Unhappy’

Delhaize’s U.S. operating margin will contract to 3.5 percent this year from 3.8 percent last year and 4.8 percent in 2011, according to the average of 16 analyst estimates compiled by the company. It was 3.3 percent in the fourth quarter. Analysts also project the decline in Delhaize’s so-called underlying operating profit will slow to about 3.7 percent after a 17.5 percent drop in 2012.

“If we had seen anything that we are not comfortable with in the consensus, we would have mentioned this,” Beckers told analysts on a call today. “So you can conclude that we are not unhappy with what we see.”

The Belgian grocer has a Baa3 long-term credit rating at Moody’s Investors Service, the lowest investment grade, and an equivalent BBB- at Standard & Poor’s Ratings Services. Both ratings companies assigned a stable outlook.

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