EUR 850.00 For Business Accounts Only

Morningstar | Ahold Delhaize Presents Broadly In-Line Guidance and a Revamped Growth Strategy in CMD; Shares Rich

On Nov. 13, Ahold Delhaize presented its renewed growth strategy ("Leading Together") and updated its guidance at capital markets day in New York. Following this mostly in line print, we maintain our no-moat rating and do not expect a material change to our EUR 19.5 per share ($23.5 per ADR) fair value estimate after updating our model for minor changes in guidance. At the time of writing, shares trade around 17% higher than our fair value estimate. We believe consensus does not factor in the impact of the disproportionate growth coming from online food and nonfood operations (expected to be more than 10% of group sales by 2022 versus around 4% currently), which we expect to gradually dilute profitability (3.5% group operating margin by fiscal 2022 versus 3.9% for consensus) for Ahold Delhaize.

The company is one of many grocers (Kroger with Ocado, Carrefour, Casino, and Walmart, to name a few) stepping up investments in the e-commerce channel lately (though Ahold Delhaize has already incurred startup costs in the U.S. with Peapod), which we think could be detrimental to their business models longer term. We don't agree with the opinion that building an omnichannel business is the solution to the challenges that grocers face lately and we instead view the expenses incurred to develop it as higher costs of doing business in grocery retailing nowadays. In that vein, we think that given the company's target to double net consumer online sales (including third-party sales in bol.com platform) to around EUR 7 billion by 2021 (versus close to EUR 5.7 billion in our model), management's expectation to maintain operating margins in fiscal 2019 despite strong cost savings and synergy delivery (680 million in fiscal 2019) reflects the existence of higher structural costs in the business.

Elsewhere, management expects to deliver positive like-for-like sales growth and market share gains in the next three years.

From a profitability standpoint, the company expects flat operating margins in fiscal 2019, supported by EUR 80 million of net synergies and EUR 600 million of cost savings (part of an EUR 1.8 billion target for the next three years), broadly in line with our estimates and consensus. Share buybacks would reach EUR 1 billion (versus EUR 750 million in our model), while free cash flow is expected to remain around EUR 2 billion over the next three years, with higher capital expenditures (3% of sales in line with our estimates) thanks to incremental investments of EUR 150 million in the repositioning of Ahold Delhaize's largest banner in the U.S., Stop & Shop.