BRUSSEL, July 31, 2003 (PRIMEZONE) -- Delhaize (Euronext Brussels:DELB) (NYSE:DEG):
Improving Sales and Profit Raise Outlook for the Year
* Net earnings of EUR 9.3 million after EUR 51.8 million exceptional non-cash charge related to change in inventory accounting method
* Net earnings per share increase 31.5% to EUR 0.66, before change in accounting method
* Earnings before goodwill and exceptionals up by 14.8% to EUR 1.03 per share
* Organic sales growth of +2.8% due to +0.7% comparable store sales growth in the U.S. and +6.4% in Belgium
* 19.2% weaker U.S. dollar pushes sales 12.5% lower than in second quarter 2002
* Operating margin of 4.1% (4.0% in second quarter 2002)
* Stronger trends raise outlook for the year
Full press release in pdf version
Delhaize Group (Euronext Brussels:DELB) (NYSE:DEG), the Belgian international food retailer, announced today that in the second quarter of 2003 its net earnings per share amounted to EUR 0.10 despite a 19.2% weaker U.S. dollar against the euro and an exceptional non-cash charge of EUR 51.8 million net of tax related to a change in inventory accounting method in the U.S. Earnings before goodwill and exceptionals grew by 14.8% to EUR 1.03 per share (EUR 0.89 in 2002).
For the first six months, Delhaize Group realized EUR 201.8 million free cash flow due to solid earnings. Delhaize's net debt decreased from EUR 3.9 billion at the end of 2002 to EUR 3.4 billion at the end of the second quarter 2003 due to the application of free cash flow and the weaker U.S. dollar.
"Our strong underlying second quarter results confirm the improving sales momentum and continued strong margins at all our key banners, including Food Lion and Kash n' Karry", said Pierre-Olivier Beckers, President and Chief Executive Officer of Delhaize Group. "These results represent the fruits of our disciplined approach in implementing sustainable sales growth initiatives while cutting costs when appropriate. This approach enables us to protect our profitability, to reinvest in our price competitiveness and to build long-term success. Hannaford, Delhaize Belgium and Alfa-Beta in Greece continued their excellent sales performance while sales trends at Food Lion and Kash n' Karry improved for the second consecutive quarter."
SECOND QUARTER 2003 EARNINGS
In the second quarter of 2003, total sales decreased by 12.5% to EUR 4.6 billion and were impacted by the weakening of the U.S. dollar by 19.2% against the euro. Organic sales growth was +2.8% due to: the improving sales trend at Food Lion and Kash n' Karry and continued strong sales at Hannaford, resulting in a comparable store sales growth of Delhaize America by +0.7%, partially due to the Easter holiday occurring in the second quarter of 2003 instead of the first quarter of 2002 (positive impact of 1.1% on the comparable store sales growth of Delhaize America); and continued strong sales at Delhaize Group's other operations, with very good comparable store sales growth in Belgium (+6.4%) and Greece.
Operating costs (excluding depreciation and amortization) improved from 18.4% to 18.1% of sales due primarily to ongoing cost and expense savings at Food Lion. The gross margin decreased 40 basis points due to the negative impact of the U.S. dollar depreciation on the contribution of the high margin U.S. operations to Delhaize Group's results and due to planned price investments by Food Lion and Kash n' Karry.
The operating margin of Delhaize Group rose from 4.0% to 4.1%. Delhaize Group posted an operating profit of EUR 189.7 million, 8.7% lower than the prior. At identical exchange rates, operating profit would have increased by 9.0%.
Net earnings decreased to EUR 9.3 million, impacted by an exceptional charge and the 19.2% weaker U.S. dollar. Per share, net earnings amounted to EUR 0.10 in the second quarter of 2003 compared to EUR 0.50 per share in the second quarter of 2002. Excluding the exceptional charge, net earnings per share grew by 31.5% to EUR 0.66.
In the second quarter of 2003, earnings before goodwill and exceptionals were EUR 1.03 per share, 14.8% higher than in the second quarter of 2002. At identical exchange rates, earnings before goodwill and exceptionals would have increased by 33.1%.
Gross Margin and Inventory Management at Food Lion
The Company decided to begin, in the third quarter of 2003, the rollout of a new gross margin and inventory management system across all of its Food Lion stores. A similar system at Hannaford, in place since 1997, has led to improvements in inventory, shrink and gross margin performance. This rollout is to be completed in the third quarter of next year. "The new system -- which combines updated business processes and state-of-the-art technology -- will provide full visibility to item-level data which will improve margin analysis, shrink control and inventory management," said Rick Anicetti, President and Chief Executive Officer of Food Lion.
The implementation of the new gross margin and inventory management system is supported by a change from the Retail Inventory Accounting Method to the Item Cost Inventory Accounting Method at Food Lion and Kash n' Karry. While the Retail Inventory Accounting Method is widely used in the industry, Food Lion and Kash n' Karry will move to the Item Cost Inventory Accounting Method, which improves the product cost calculations by eliminating the estimations inherent in the averaging across categories of products of the Retail Inventory Accounting Method. The Item Cost Inventory Method retains the actual cost information by item, and inventories are valued at the lower of costs on a weighted average cost basis or net realisable value.
The difference between the two methods results in an initial adjustment to inventory values, recorded as an exceptional non-cash charge of EUR 83.2 million (USD 91.9 million) pre-tax in the second quarter of 2003, negatively impacting the balance sheet total by this amount. After tax, net earnings and Group equity are negatively impacted by EUR 51.8 million.
FIRST HALF 2003 EARNINGS
In the first half of 2003, total sales decreased by 13.2% to EUR 9.2 billion compared to the first half of 2002 and were impacted by: the weakening of the U.S. dollar by 18.7% against the euro; and the closing of 41 Food Lion stores and one Kash n' Karry store in January-February 2003; Organic sales growth amounted to +1.6% in the first half of 2003 due to: soft but improving sales at Food Lion and Kash n' Karry; and the continued strong sales trends of Delhaize Group's other operations, with high comparable store sales growth in Belgium, Greece and at Hannaford in the U.S.
Operating profit amounted to EUR 399.1 million, which is 5.7% lower than the prior year. At identical exchange rates, operating profit would have increased by 13.0% in the first half of 2003.
The profit before income taxes and exceptional items was EUR 220.2 million, an increase of 24.2% compared to EUR 177.3 million in the first half of 2002.
Net earnings in the first half of 2003 decreased by 41.3% compared to the first half of 2002 primarily due to exceptional expense and the weakening of the U.S. dollar against the euro. Exceptional expense was EUR 116.4 million in the first half of 2003 due to charges for the closing of the 42 U.S. stores, the reduction of support and management positions at Food Lion, and the second quarter accounting change at Food Lion and Kash 'n Karry.
Earnings before goodwill amortization and exceptionals grew by 15.9% to EUR 2.10 per share in the first half of 2003. At identical exchange rates, earnings before goodwill and exceptionals would have grown by 35.6% in the first six months of 2003.
Balance Sheet and Cash Flow analysis
Since the beginning of the year, Delhaize Group has generated EUR 201.8 million free cash flow due to solid earnings and lower capital spending. Due to the timing of the annual dividend payment and semi-annual interest payments, Delhaize Group registered a negative free cash flow of EUR 43.1 million in the second quarter of 2003. Delhaize America generated USD 212.5 million free cash flow in the first half of 2003, totaling USD 879.4 million since the beginning of 2001. Delhaize America is on track to realize the targeted USD 1 billion free cash flow in the period 2001-2003.
Delhaize Group's net debt amounted to EUR 3.4 billion at the end of the second quarter of 2003, a decrease of EUR 469.0 million compared to EUR 3.9 billion at the end of 2002. At identical exchange rates, net debt would have decreased by EUR 216.7 million in the first six months of 2003. Delhaize Group applied the full EUR 201.8 million free cash flow to net debt reduction and further improved its balance sheet by decreasing lease obligations by EUR 4.4 million in the first half of 2003. The net debt to equity ratio was reduced to 98.2% at the end of the second quarter of 2003 compared to 109.4% at the end of 2002, continuing the positive trend in this measure.
GEOGRAPHICAL OVERVIEW
In the second quarter of 2003, the contribution of Delhaize America to the sales of Delhaize Group amounted to USD 3.8 billion (EUR 3.3 billion), an increase of 1.1% over the second quarter of 2002 due to the rise of comparable store sales by 0.7% and the expansion of the store network to 1,449 stores. The sales trend improved in the second quarter at Food Lion and Kash n' Karry despite the weak economy and the competitive environment. Hannaford continued to perform well. The timing of the Easter holiday -- included in the first quarter of 2002 and in the second quarter of 2003 -- impacted sales positively. Excluding the Easter effect, comparable store sales of Delhaize America would have declined by 0.4% in the second quarter of 2003. Delhaize America's sales declined 0.2% to USD 7.5 billion (EUR 6.8 billion) in the first six months of 2003 compared to the previous year due to the weak sales in the first months of the year at Food Lion and Kash n' Karry and due to 42 store closings in the first quarter of 2003.
In the second quarter of 2003, Delhaize America's operating profit decreased by 0.4% to USD 163.7 million (EUR 143.0 million) compared against the second quarter of 2002 due to price investments by Food Lion and Kash n' Karry to reinforce their competitive positions. These investments were largely offset by ongoing initiatives in cost and expense reductions. Food Lion plans to achieve USD 100 million in cost savings in 2003 which will be used to strengthen its low price leadership and to protect its profitability. The cost and expense savings at Food Lion contributed significantly to Delhaize America's operating profit growth of 5.4% to USD 354.0 million (EUR 320.4 million) in the first half of 2003.
In the second quarter of 2003, Delhaize Belgium sales grew by 8.7% to EUR 911.9 million due to the expansion of the sales network and comparable store sales growth of 6.4%. The ongoing strong comparable store sales growth was due to the continued success of Delhaize Belgium's commercial strategy. The market share of Delhaize Belgium increased. In the first half of 2003, sales at Delhaize Belgium grew by 8.4% to EUR 1.8 billion.
Delhaize Belgium reduced the prices of more than 2,700 products in the second quarter of 2003. Despite these price investments, the operating margin of Delhaize Belgium grew to 5.6% (3.7% in 2002) due to disciplined cost management and improved sales mix. The strong sales and operating margin resulted in an increase of the operating profit of Delhaize Belgium to EUR 51.0 million (EUR 31.1 million in 2002), resulting in an increase of operating profit in the first half year of 60.8% to EUR 87.2 million.
In the second quarter of 2003, sales in the Southern and Central European operations of Delhaize Group (Greece, Czech Republic, Slovakia and Romania) grew by 4.2% to EUR 303.2 million (+4.6% in the first half of 2003 to EUR 593.4 million). Sales performance continued to be very strong by Alfa-Beta in Greece. Delvita's sales in the Czech Republic and Slovakia remained weak due to price deflation and the competitive environment, but its operating margin evolved favorably due to an improved sales mix and effective cost management. The operating profit of the Southern and Central European operations of Delhaize Group grew 103.2% to EUR 4.9 million in the second quarter of 2003 and 128.6% to EUR 7.5 million in the first half of 2003.
Sales of the Asian operations of Delhaize Group amounted to EUR 53.8 million compared to EUR 54.3 million in 2002 (-0.3% in the first half from EUR 107.0 to EUR 106.7 million). The small decrease was due to the depreciation of the Asian currencies against the euro. In local currency, sales of the Asian operations continued to grow. The operating loss of the Asian activities of Delhaize Group amounted to EUR -1.1 million in the second quarter and EUR -3.0 million in the first half of 2003.
2003 Financial Outlook
The improving sales trend, the success of the cost and expense initiatives and the good gross margin resulted in stronger than anticipated results in the first half of 2003. This leads the management of Delhaize Group to revise positively the sales and earnings outlook for the Company for 2003 despite the continued economic uncertainty and competitive climate, particularly in the U.S.
In 2003, the sales network of Delhaize Group is expected to grow by approximately 60 stores to a total of 2,580 stores, taking into account the 42 U.S. store closings completed in January and February 2003. Previously, Delhaize Group planned to have 2,617 stores at year-end of 2003. The reduction in planned store openings in 2003 is attributable to fewer store openings in the U.S. related to construction delays due to adverse weather, fewer small convenience store openings in Belgium under the Shop 'n Go banner and fewer specialty store openings under the Di and Tom & Co banners. The planned number of store remodelings at Delhaize America is increased from 82 to 104. Delhaize Belgium is also accelerating the number of remodelings.
At identical exchange rates, it is expected that annual sales of Delhaize Group will grow in 2003 by 2.0% to 3.5% (including 53 weeks of sales at Delhaize America) instead of the 1.5% to 3.0% previously forecasted. Assuming the current exchange rate of EUR 1 = USD 1.124 for the balance of the year, this implies sales in 2003 of EUR 18.5 billion to EUR 18.8 billion.
Delhaize America's comparable store sales growth in 2003 is projected to be in the range of -1.0% to flat instead of -2.0% to flat as previously indicated.
Delhaize Group's expectations for 2003 earnings before goodwill and exceptionals has improved, at identical exchange rates, to an increase of +15% to +20%. Previous guidance was approximately flat as compared to the prior year. Assuming the current exchange rate of EUR 1 = USD 1.124 for the balance of the year, earnings before amortization of goodwill and intangibles and exceptional items would be between EUR 336 million and EUR 355 million.
At identical exchange rates, Delhaize Group's net earnings expectation is -13% to flat as compared to 2002. The net earnings guidance includes the impact of exceptional expenses related to U.S. store closings and the inventory accounting method change amounting to a total of EUR 136.8 million at identical exchange rates. Assuming the current exchange rate of EUR 1 = USD 1.124 for the balance of the year, reported earnings would be between EUR 128 million and EUR 147 million.
At identical exchange rates, capital expenditures are expected to be approximately EUR 530 million, down from the previous forecast of EUR 650 million.
Delhaize Group is on track to realize the targeted net debt to equity ratio of approximately 100% at the end of 2003 and to generate USD 1 billion free cash flow in 2001-2003 at Delhaize America.
Delhaize Group
Delhaize Group is a Belgian food retailer present in eleven countries on three continents. At the end of the first half of 2003, Delhaize Group's sales network consisted of 2,505 stores. In 2002, Delhaize Group posted EUR 20.7 billion (USD 19.6 billion) in sales and EUR 178.3 million (USD 168.6 million) in net earnings. Delhaize Group employs approximately 144,000 people. Delhaize Group is listed on Euronext Brussels (DELB) and the New York Stock Exchange (DEG).
Conference Call and Webcast
The Delhaize Group management will comment on the second quarter 2003 results during a conference call starting August 1, 2003 at 03.00 p.m. CET / 09:00 a.m. EDT. The meeting can be attended by calling + 44 20 7162 0182 (U.K.) or + 1 952 556 2813 (U.S.), with "Delhaize" as password. The meeting will also be broadcast live over the internet at http://www.delhaizegroup.com. An on-demand replay of the web cast will be available after the conference call at http://www.delhaizegroup.com.
This press release is available in English, French and Dutch. You can also find it on the web site http://www.delhaizegroup.com. Questions can be sent to investor@delhaizegroup.com.