Delhaize Slumps on Margin Outlook, Food Lion Spending Bill

Delhaize Group, the owner of the U.S. Food Lion stores, fell the most in 22 months in Brussels on concern margins will shrink further because of price cuts and maintaining U.S. sales momentum will require more spending.

Delhaize dropped as much as 8.6 percent in intraday trading, the most since May 2012, and traded 3.79 euros lower at 48.94 euros by 1:45 p.m. on Euronext Brussels. Today’s decline pared the stock’s advance so far this year to 13 percent.

The grocer’s operating margin in the U.S. narrowed 60 basis points to 3 percent in the fourth quarter even as same-store sales rose at the fastest pace in almost five years. Further price cuts will be made in the Northeast and in its Belgian home market to fend off competitors accelerating their expansion in those regions, the Brussels-based company said today in a statement. Delhaize will also spend $115 million testing a new store concept in 77 Food Lion stores this year.

“We suspect a chain-wide roll-out would result in a further capex increase in 2015,” Jefferies International analysts led by James Grzinic wrote in a note today. “The stock’s recent rebound toward the high end of its valuation history is at odds with industry challenges.”

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 region of the U.S., and Wal-Mart Stores Inc. has said it will speed up the expansion of its smaller-format Neighborhood Market and Walmart Express stores, opening 270 to 300 of the locations this year. In Belgium, Delhaize is facing increased competition from Royal Ahold NV’s Albert Heijn store openings and from discounter Lidl.

Cash Flow

Delhaize Chief Financial Officer Pierre Bouchut declined to give a forecast for future spending on the more than 1,100 Food Lion supermarkets at an analyst meeting today, saying only that lessons will be derived from the market test that will start in summer months.

Delhaize, which didn’t reiterate a forecast for average free cash flow generation of 500 million euros annually, plans capital spending of about 625 million euros this year, up from 565 million euros in 2013.

The grocer raised its dividend by 11 percent to 1.54 euros a share after last year’s cut and said it plans to distribute about 35 percent of annual net income excluding one-time items in the future.

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