Based in Belgium, Delhaize Group (DEG), a well known retailer of food products, reported adjusted earnings of $1.07 per diluted share in the second quarter of fiscal 2012, down 28.9% from the comparable prior-year quarter. The year-over-year decline in earnings was due to weak margins.
Quarter Highlights
The company reported year over year net revenue growth of 4.2% in constant currency in the second quarter of fiscal 2012, driven by strong comparable store sales growth in Belgium and Southeastern Europe and Asia.
The company generated revenue from the United States segment, Belgium segment and Southeastern Europe & Asia segment.
United States reported 3.1% year-over-year decline in revenue due to a 0.6% decline in comparable store sales. However, segment volume grew in the second quarter driven by repositioning of the Food Lion brand and strong sales growth of Bottom Dollar Food. The company has repositioned more than 700 Food Lion stores and expects that the strategy would support top-line growth in the second half of the fiscal 2012.
For the second quarter of 2012, Belgium segment reported 0.4% year over year rise in revenue, driven by over 1.1% growth in comparable store sales.
For the second quarter of 2012, the Southeastern Europe and Asia segment reported 58.8% increase in revenue, driven by Maxi acquisitions and strong growth in comparable store sales particularly in Romania.
The company’s gross margin declined 92 basis points to 24.3% in the second quarter of 2012, owing to the low margin Maxi acquisition and price increases in Belgium and the U.S. The underlying operating margin was 3.2% in the second quarter of 2012, compared with 4.1% in the prior-year quarter.
Delhaize Group acquired Delta Maxi during the first half of 2012, at a cost of $748 million. The company expects the acquisition to contribute to profitability in fiscal 2012.
Outlook
The company expects to generate savings of $643 million by the end of fiscal 2012 from their ongoing 2010 to 2012 cost reduction program. The company maintains its previous guidance of 15% to 20% decline in underlying operating profit at identical exchange rates. The company’s continuous investment in prices and customer focused operations is expected to generate underlying operating profit close to higher end of the range.
Our Recommendation
We currently have a Neutral recommendation on Delhaize Group. The stock carries a Zacks #4 Rank (short-term ‘Sell’ rating).
We are positive about the company’s repositioning of stores and cost control initiatives. However, we prefer to stay on the sidelines till there are further improvements in global macroeconomic conditions.
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