BRUSSELS -- Delhaize Group here has raised its sales and earnings outlook for the year, citing results from its cost-cutting efforts and the success of its aggressive pricing strategy.
In a conference call discussing its second-quarter earnings, the company, which generates about 80% of its revenues from its Food Lion, Hannaford Bros. and Kash n' Karry chains in the United States, said U.S. comparable-store sales would decline by as much as 1% for the year, an improvement over previous projections that they would decline as much as 2%. Total sales at Delhaize Group are expected to be up by 2% to 3.5% for the year, vs. a previous forecast of 1.5% to 3%.
Delhaize also said it expected its earnings before goodwill and exceptional charges to increase by 15% to 20% in 2003, compared with previous guidance that the figure would be flat.
The positive guidance came despite a reduction in the projected construction of new stores. Delhaize said adverse weather conditions in the eastern United States in the spring delayed the start of construction on some new locations, while the company also is cutting back on new-store openings in Europe. In both the United States and Europe, capital expenditures are being shifted toward remodels and enlargements. Delhaize America now projects 104 remodels in 2003, vs. previous projections of 82 remodels.
In a move that it hopes will allow it to make a significant statement to consumers, Food Lion is remodeling its entire 68-store Raleigh, N.C., market at once.
"Our goal will be to deliver a concentrated impact on consumers' perception within a given market, not only by the remodelings, but also by improved marketing, increased convenience, associate development and local marketing," said Pierre-Olivier Beckers, president and chief executive officer, Delhaize Group. "I think it will prove to be a turning point for Food Lion."
He said Food Lion's efforts to upgrade its produce assortment and improve the convenience of its shopping experience have "really started to pay off at Food Lion, and customers are increasingly aware of the improvements."
Food Lion and Kash n' Karry had "improving sales trends" in the second quarter, which, combined with continued positive sales trends at Hannaford Bros. and the Easter holiday shift, resulted in comparable-store sales growth of 0.7% at Delhaize America in the period. Without the late Easter, the company said comparable-store sales would have been down 0.4%.
"Food Lion's successful strategies at reducing costs and expense in the second quarter have allowed us to begin investing more aggressively in price in the highly competitive markets we're in," said Beckers. "We will continue to reinforce our price position in the remainder of the year."
As previously reported, Food Lion plans to achieve $100 million in cost savings this year. Delhaize also said it had begun rolling out a new gross-margin and inventory-management technology system at Food Lion, which forced it to take a charge in the second quarter for the conversion to a new inventory-accounting method. The system, which Food Lion expects to roll out chainwide by fall of next year, has been adapted from a system that had been used by Hannaford Bros. since 1997.
At Hannaford, the system helped the chain manage its margin, inventory and shrink, Beckers said.
Food Lion and Kash n' Karry will convert to the item-cost inventory accounting method from the retail-inventory accounting method to support the new system, resulting in a charge of $91.9 million in the second quarter.
The company said the weakening exchange rate for the U.S. dollar -- down by 18.7% against the euro in the first half -- also hurt its sales and earnings comparisons.
Net earnings for the second quarter were down 79.9%, to 9.3 million euros, or about $10.2 million, on a 12.5% decline in sales, to about $5.06 billion, vs. year-ago results. Operating profits fell 8.7%, to about $209 million, while the operating margin improved to 4.1%, vs. 4% in the year-ago quarter.
Earnings before goodwill and exceptional items increased 14.8%, to about $104 million.
Through the first half, net income slid 41.3%, to $61.16 million, on a 13.2% decrease in sales, to $10.18 billion.
In the United States, operating profit in the second quarter fell 0.4%, to $163.7 million, on a 1.1% increase in sales, to $3.79 billion. Through the first half, operating profit climbed 5.4%, to $354 million, on a 0.2% decline in sales, to $7.48 billion. Sluggish sales at Food Lion and Kash n' Karry earlier in the year and the closure of 42 stores contributed to the weak sales comparison, the company said.