AHOLD SEEKS GAINS THROUGH COST-CUTTING

Elliot Zwiebach

ZAANDAM, Netherlands -- Ahold here said last week it does not intend to slash prices, but instead will seek to re-engineer its operations to lower costs and improve operating margins in its U.S. retail operations.

"We will take it step-by-step to prepare ourselves to be a more competitive player while still delivering something to our shareholders," Anders Moberg, president and chief executive officer, explained.

Speaking with industry analysts to discuss financial results for the company's first quarter that ended April 24, Moberg said Ahold regards market share as the most important indicator of success. "We have taken market share at Stop & Shop and at Giant-Carlisle, though we are still not there with Giant-Landover. And we haven't taken market share with Tops, but that's related to the fact we are rationalizing our portfolio there and making store closures."

Ahold closed six Tops stores during the quarter and said last week it plans at least three more closures, in northeast Ohio.

Moberg said Ahold is making price investments in certain categories, which he declined to pinpoint. "We have invested in some categories where we haven't passed on the inflation, and we have been able to achieve some cost savings. But there are some costs, such as utility and energy costs, going the other way.

"We will continue to invest in specific areas to drive top-line sales. That, combined with the investments we are making in new stores and remodelings, will take us up to the [5% net margin] numbers we have indicated" as its 2006 goal.

When analysts on the call expressed doubts Ahold will be able to achieve that goal on schedule -- pointing out margins have slipped since the first quarter of 2004 -- Moberg acknowledged margins in the first quarter this year were running close to 4.5%, compared with 2.9% in the fourth quarter. However, he urged analysts to chart the company's progress on a quarterly rather than an annual basis.

Hannu Ryopponen, executive vice president and chief financial officer, said the company expects some strengthening of margins to come from "the return of Giant-Landover from fairly good profitability to the levels we think it can perform at. And at Tops, a lot of restructuring work has been done that is starting to show clear improvement, although it is at totally unacceptable levels of profitability for the time being."

Ahold's global sales for the 16-week quarter fell 1% to 13 billion euros ($15.6 billion), though net sales excluding the impact of lower currency exchange rates rose 2.6%, while net income dropped 55% to $161.2 million.

Sales in Ahold's U.S. retail division rose 2.9% to $6.9 billion, after adjustments for the currency exchange rate and the sale in January of Bruno's and Bi-Lo. Operating income fell 6.3% to $358 million.

Operating income in the Stop & Shop and Giant-Landover arena fell 2.8% to $307 million. The company said Stop & Shop increased its market share during the quarter, although margins were impacted negatively when increases in perishables were not passed on to consumers.

Operating income in the Giant-Carlisle and Tops arena dropped 22.7% to $51 million.

"We are a little bit delayed on the remodeling side at Giant[-Landover]," Moberg said. "We will start many remodeling efforts in the second half of this year, now that we have decided to implement the same format at Giant-Landover as we have at Stop & Shop -- expanding stores to approximately 65,000 square feet in as many locations as possible."