COST CONTROLS BOOST DELHAIZE PROFITS IN 2ND QUARTER

MARK HAMSTRA

BRUSSELS, Belgium -- Delhaize Group here last week said its profits improved more than expected in the second quarter because of the success of its cost-control programs and gains in sales.

In the United States, comparable-store sales were up 1.4% in the period, and total sales grew 5.4%, to $4 billion, compared with year-ago results.

In a conference call discussing the earnings results, the company said the increase in operating margins -- from 4.1% in last year's second quarter to 4.9% this year -- was the result of a confluence of factors.

"It was a mix of things falling into place," said Craig Owen, chief financial officer.

Rick Anicetti, chief executive officer, Food Lion, said the margin improvements at the company's largest chain came from energy efficiency, procurement savings, payroll savings, alterations in the medical plan and synergies with other banners, among other factors.

He also said the company has seen strong results from the marketwide remodeling last year of the Food Lion stores in the Raleigh, N.C., market. While that market had been among the worst performers in same-store sales in recent years, it was among the best in the chain in the second quarter.

Pierre-Olivier Beckers, CEO, Delhaize America, said the company has seen sales gains in produce, meat and wine in the remodeled Food Lion stores in Raleigh, as well as an improved sales mix. Employee retention also has improved. The Salisbury, N.C.-based chain is on track to complete its second marketwide remodeling program -- in Charlotte, N.C. -- by this fall, he said.

Ron Hodge, CEO of Hannaford Bros., the Scarborough, Maine-based chain that also oversees Delhaize's Kash n' Karry chain in Florida, said the closure of 34 Kash n' Karry stores in the central and eastern parts of the state helped the company's margin structure. Tampa-based Kash n' Karry -- whose sales trends have been improving under Hannaford's supervision, according to Beckers -- is slated to begin converting its stores to the Sweetbay Supermarkets concept by the end of this year.

The company said it was able to pass along cost inflation in the form of higher prices to consumers to some degree, but it was not able to do so uniformly throughout its operating areas.

"Generally, the more north you go, the easier it is to pass along the cost increases. But the more southeast you go, the more difficult it is," Beckers said.

When analysts pointed out that Delhaize America's comparable-store sales growth was relatively weak compared with that of Southeastern rivals like Harris Teeter, Ingles and Publix (see Pages 12, 31 and 82), Anicetti noted that those formats tend to have higher prices and can thus more easily pass along cost increases.

"The ability for those companies to pass along price increases is far more evident," he said. "We are priced less against them than we are against other low-priced players, and that's where we are finding the pressure in terms of being able to pass [cost inflation] along in a uniform manner."

Asked about competitive openings, the company said Food Lion faced 16 in the first half of the year, 13 of which were supercenters operated by Wal-Mart Stores, Bentonville, Ark. Anicetti said the pace of competitive supercenter openings had slowed somewhat in the Southeast, although the amount of new square footage coming into the market has remained relatively constant year to year.

The company maintained its sales and earnings projections for the year, and said same-store sales would grow in the "high end" of the projected 0.5% to 1.5% range. At identical exchange rates, Delhaize projected sales to grow 2.5% to 3.5% in 2004 and earnings to grow "in the mid-single digits" before goodwill and exceptional events.

The company reported that second-quarter net income totaled 81.9 million euros, or about $98 million U.S., up from about $11 million a year ago when it incurred charges of about $62 million.

Net income for the first half totaled 73.9 million euros, or about $88.7 million, up 32.9% from year-ago levels, while sales decreased 2.8%, to about $10.8 billion. The company attributed the soft sales comparison to the weakness of the U.S. dollar against the euro, the closing of the Kash n' Karry stores, and the divestiture of the company's Shop N Save banner in Thailand, partially offset by the addition of 43 Harveys stores in the fourth quarter of last year.