EUR 850.00 For Business Accounts Only

Morningstar | Ahold Delhaize Reports In-Line 2Q and 1H 2018 results; Guidance Confirmed; Shares Slightly Rich

No-moat Ahold Delhaize reported second-quarter and half-year 2018 results with 0.9% and 1.7% growth in sales at constant exchange rates (down 3.7% and 4.8% at current exchange rates), respectively, in line with our expectations. Underlying operating margin improved by 10 basis points to 4%, supported by synergies, while management reaffirmed guidance for fiscal 2018 (EUR 750 million gross synergies, EUR 1.9 billion free cash flow, and EUR 1.9 billion capital spending). We are maintaining our EUR 18.60 fair value estimate. Shares look slightly overvalued.

With 1.9% price inflation and adjusted for Easter and for the remedy stores sold over the course of 2017, the 1.3% like-for-like, or LFL, sales growth figure reported in the first half implies negative 0.6% volume growth for the region, reflecting a fierce competitive environment (Southeast) and stagnant market growth (Northeast). U.S. online sales were up 8.5% at constant exchange rates, mainly driven by Peapod and the Hannaford To Go service expansion, with the former investing more heavily in prices as competitors are stepping up online investment in the region.

In the Netherlands, LFL sales growth was up 3.1% and operating margin was flat at 5.1% in the first half and 5.3% in the second quarter, up 20 basis points as a result of improved margins at bol.com. Stripping out online sales, in-store sales of the group's banners in the Netherlands were flat (0.4% growth in the first half), implying negative in-store volumes for the quarter and confirming our thesis that profitable in-store sales are gradually migrating online.

In other regions (Europe), Central and Southeastern Europe sales growth was up 2.7% at constant exchange rates, driven by store expansion (net addition of 120 stores, most of which were convenience stores), while Belgium increased 2.7% LFL (1.4% in the second quarter), reflecting commercial improvements and resulting in increased market share.

In the Southeastern U.S., Food Lion continued its positive momentum, with the second quarter of 2018 marking the 24th consecutive quarter of positive like-for-like volume growth, driven by the successful rollout of the "Easy, Fresh and Affordable" program, which continues apace.

In the Netherlands, the substantial growth of bol.com, the leading nonfood online retailer in the Netherlands, continues to dilute margins (50 basis points at the EBIT level); we estimate that operating margins for bol.com were around negative 2.8% for the first half of 2018 (we expect it to be profitable at the EBITDA level in fiscal 2018, in line with management's comments on the call).

All in all, while Ahold Delhaize continues to deliver strong free cash flow, reflecting superior returns on capital and tax reform tailwinds in the U.S., we remain on the sidelines, as we still view its weak in-store and U.S. volume growth, coupled with fierce competition across the regions in which it operates, as a structural impediment to maintaining its margins and returns (excluding positive impact from synergies).