Operating profit falls at Ahold USA

Chain Drug Review, Oct 1, 2007

AMSTERDAM -- Restructuring charges and margin contraction triggered a sharp decline in operating income at the United States retail unit of Ahold NV, although the sale of its U.S. Foodservice Inc. division boosted the parent company's bottom line for the second quarter of fiscal 2007. Along with its first half financial results, the company has announced that it will delist from the New York Stock Exchange as part of a "strategy of improving its cost effectiveness by reducing complexity without detracting from the integrity of its governance and control processes."

Second quarter operating income generated by Ahold's retail businesses in the United States tumbled 20.2% to $217 million from $272 million a year earlier. The decline was concentrated in the Stop & Shop/Giant Food (Giant-Landover) chains, which Ahold treats as a single operating unit, or "arena," where operating profit plunged 27.8% to $161 million from $223 million in the prior-year quarter.

Management points out that gross margin was pressured by price reductions related to the expanded rollout of Ahold's Value Improvement Program, which is designed to lower prices and simplify assortments in certain product categories in the Stop & Shop/Giant-Landover arena.

Results were also influenced by restructuring charges totaling $26 million related to the closure of 10 Stop & Shop stores in southern New Jersey as well as $9 million of expense associated with an adjustment of payroll tax accruals related to prior years. The company further booked a gain of $13 million during the quarter on the sale of assets, including a distribution center.

Ahold's other retail unit, Giant Food Stores (Giant-Carlisle), turned in a much different performance as operating income climbed 14.3% to $56 million from $49 million. Management attributed the results to strong seasonal sales and low promotional expense.

U.S. operating income for the first half slid 18% to $502 million from $612 million as results at Stop & Shop/Giant-Landover dove 24% to $389 million from $512 million, overshadowing a 13% jump in profit at Giant-Carlisle to $113 million from $100 million.

Results for the half include first quarter restructuring charges of $9 million that consisted mainly of severance charges and asset-impairment losses.

Prior-year first half results, meanwhile, were shaped by a onetime benefit totaling $27 million from a negotiated plan amendment in post-employment benefits as well as a $23 million gain on the sale of real estate that consisted mainly of two distribution facilities. Those gains were partially offset by $20 million in restructuring and severance charges stemming largely from the closure of one warehouse.

Focusing on top-line performance, net U.S. retail sales for the second quarter gained 4.1% to $4.95 billion from $4.75 billion a year earlier. Giant-Carlisle recorded a 13.7% rise to $1 billion from $881 million due in part to the acquisition of 14 stores in the suburban Philadelphia area from Clemens Markets Inc. in the fourth quarter of 2006. Additionally, identical-store sales advanced 2.7% including gasoline sales, 2.6% factoring out the fuel business.

At Stop & Shop/Giant-Landover sales improved 1.9% to $3.95 billion from $3.87 billion as identical-store sales edged up 1.1% at Stop & Shop (0.6% excluding gasoline sales) and slipped 1% at Giant-Landover.

A similar pattern emerges in the year-to-date top line as net sales moved up 4.3% to $11.32 billion from $10.86 billion, propelled by a 15% jump in sales at Giant-Carlisle to $2.3 billion. Stop & Shop/Giant-Landover managed a modest 1.8% rise to $9.03 billion from $8.86 billion.

"The results show that we are continuing to make progress with our strategy for profitable growth," comments John Rishton, chief financial officer, and acting president and chief executive officer since the retirement of Anders Moberg. "Of particular importance is that the rollout of the Value Improvement Program at Stop & Shop and Giant-Landover remains on track, with customer perception of price reductions continuing to improve."

For the parent company second quarter net income registered a 10-fold increase to 2.23 billion euros ($3.04 billion) as it recorded income of 2.12 billion euros ($2.89 billion) from discontinued operations, consisting mainly of a 2 billion-euro gain on the sale of U.S. Foodservice and Ahold's Polish retail operations. The bottom line for the half reflected the sale, as well, as net income skyrocketed to 2.47 billion euros ($3.37 billion) from 465 million euros ($633.8 million) a year earlier.

Income from continuing operations advanced more modestly, rising 6.4% to 182 million euros ($248.1 million) in the second quarter and 2.9% to 352 million euros ($479.8 million) for the half. Companywide sales, meanwhile, grew 2% to 6.6 billion euros ($9 billion) in the quarter, while adding 1.6% to 15.22 billion euros ($20.74 billion) for the half.

Management announced that it would use part of the proceeds from the asset sale to initiate a 1 billion-euro share repurchasing program.