EUR 850.00 For Business Accounts Only

Morningstar | U.S. Beat in 3Q for Ahold Delhaize, Free Cash Flow Guidance Hiked; FVE Raised to EUR 19.50. See Updated Analyst Note from 07 Nov 2018

Ahold Delhaize reported third-quarter results with sales up 3.6% at constant exchange rates, broadly in line with our expectations. Underlying operating margin improved 20 basis points to 4.1%, supported by synergies, while management reaffirmed long-term synergy targets and hiked free cash flow guidance for fiscal 2018 to EUR 2 billion from EUR 1.9 billion as a result of lower capital spending expected. We are increasing our fair value estimate to EUR 19.50 per share from EUR 18.60 to account for the time value of money, modified guidance, and a higher-than-expected unfavorable currency impact on U.S. sales (to negative 4.5% from negative 3%). The shares look fairly valued.

We were pleased to see improvement in the United States, the largest segment of the group (61% of sales). With 1.6% price inflation and adjusted for the hurricane impact (management estimate), the 2.5% like-for-like (excluding gas) sales growth figure reported in the third quarter implies 0.9% volume growth for the division (most of it in-store), reflecting a noticeable improvement versus past trends in regions with fierce competitive markets (Southeast) and stagnant market growth (Northeast). U.S. online sales were up 12% at constant exchange rates, mainly driven by improved sales trends at Peapod, with the online grocer investing more heavily in prices as competitors are stepping up online investment in the region.

The improved performance was evident in the Netherlands as well, where like-for-like sales growth was 5.9% (4.2% excluding bol.com) for the quarter, and operating margin was up 20 basis points to 5.1% (5.7% excluding bol.com). Stripping out online sales, in-store sales of the group's banners in the Netherlands were positive (2.9% growth in the third quarter, on our calculations). Although rarely does a quarter make a trend, we will be closely monitoring the group's in-store sales growth in the coming quarters for signs of a sustainable reversal of trends.

In other regions (Europe), Central and Southeastern Europe sales growth was 3% at constant exchange rates, driven by store expansion (net addition of 123 stores, most of which were convenience stores), while Belgium increased 1% like for like.

Having already successfully revamped almost 70% of its Food Lion store network in the U.S., the group is now focusing on giving a fresh new look to the Stop & Shop banner (20%-25% of segment's sales), with 21 stores in the first phase completed.

In the Netherlands, the substantial growth of bol.com, the leading nonfood online retailer in the Netherlands, continues to dilute margins (60 basis points at the EBIT level); we estimate that operating margins for bol.com were still negative in the third quarter, although 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, Ahold Delhaize continues to deliver strong free cash flow, reflecting superior returns on capital and tax reform tailwinds in the U.S. Given that in the past we have expressed concerns about the group's weak in-store and U.S. volume growth, due to fierce competition across the regions in which it operates and strong online sales penetration, we are willing to reassess our view on the company if we see in-store volume growth outperformance persisting in the coming quarters.