The business
Delhaize Group (NYSE:DEG) is a food supermarket chain with stores throughout the United States, Belgium, Luxemberg and Southeastern Europe and Asia.
Delhaize Group was founded in in 1867 by two brothers Jules and Edouard Delhaize and their brother-in-law Jules Vieujant. Initially a wholesale distributor, they expanded their stores throughout Brussels and Belgium and opened their first supermarket in 1957 in Brussels.
Spanning 3,408 stores as of the end of December 2011 , 80% of Delhaize stores are company operated and 20% are operated as affiliated or franchise stores.
In total, 90% of Delhaize revenues are generated from the operation of retail food supermarkets in the US, Belgium/Luxemberg & Southeastern Europe & Asian businesses.
The United States market is a significant part of Delhaize Group’s business generating over 65% of their revenues in 2011. They operate under the banners of Food Lion, Hannaford, Sweetbay Supermarket, Bottom Dollar Food, Reid’s and Harveys.
In Belgium & Luxemberg, they have a strong franchise with a 25.8% market share and which generates US$6.1 billion ( EUR 4.8 billion) in revenues or 23% of Delhaize Group’s total revenues.
The third part of the business, Southeastern Europe & Asian business has grown considerably throughout the last 3 years with the acquisition of Delta Maxi and now represents 12% of Delhaize revenues.
Competitive advantages
Delhaize Group stores face substantial competition from retailers across their different brand name stores including retailers such as Wal-Mart, Kroger, Bi-Lo, Super Valu and Royal Ahold . As a result, there is substantial pressure on profit margins across their various stores particularly in the United States. This has manifested itself in disappointing results recently that have pressured the share price.
Delhaize Group owns well established brand name stores including Food Lion, Delhaize Belgium and Alfa Beta and the majority of the customer purchases in these stores were made with loyalty cards which shows good customer retention.
In the US, many of their stores are located in established urban locations that would be difficult for a competitor to replicate and are spread across south eastern, mid-Atlantic and northeastern part of the United States.
Profitable for the last 10 years
The last 10 years of financials shows that the Delhaize Group has been steadily profitable every year. Their lowest EPS was US$3.41 in 2003 & highest EPS was US$7.11 in 2010. Their average EPS over the last 5 years is US$5.95.
They have paid an average dividend of US$1.92 (EUR$1.51) over the last 5 years (based on a US/EUR exchange rate of 1.27 which we have used throughout this article). The dividend has approximately average one-third of their after tax net profit.
Their share count dilution has been minimal with 99.34 million shares outstanding at year end 2007 versus 100.71 million shares outstanding at year end 2011.
Cash from operations have averaged US$1.386 billion(EUR$1.092 billion) over the last 5 years. They have used approximately 53% of their operating cash flows to pay for capital expenditures (excluding business acquisitions) over the last 3 years.
Debt level
At the end of 2011 Delhaize Group had consolidated debt level of EUR 3.2 billion with EUR 700 million of unused commitments. The company historically has a track record of reducing leverage over time.
Moodys & S&P have marked their long term debt investment grade with stable outlook. Their maturities are in my view manageable in the context of their cash flow generation. Their average interest rate on long-term debt was 5% at December 2011 and this has fallen over the last 12 months.
Outlook
They are targeting free cash flow of US$635 million ( EUR 500 million) in 2012 and capex of US$889 - US$952 million (EUR 700-750 million) .
They are expecting a fall in underlying operating profit by 15-20% for the full year at identical exchange rates as they are determined to be more price competitive across their stores to generate greater revenue. Assuming an operating profit pre-tax of EUR 670 million in 2012 down from EUR 812 million in 2011, I estimate their net profit to be US$454 million (EUR $358 million) or $4.51 per share assuming a financing cost of EUR 180 million similar to 2011 and a 27.5% tax rate estimate.
The slowdown in world growth combined with price inflation will continue to pressure margins of the Delhaize Group. Offsetting this are some positive developments within Delhaize’s business. In 2011 they bought a supermarket chain Delta Maxi that has enabled them to expand their footprint in southeastern Europe, they have seen growth in their Bottom Dollar chain in the US and they are focused on cutting costs throughout their business that has delivered close to US$500 million over the last few years.
Valuation
The shares were recently trading at US$35.64 on 25th June 2012, which puts the current year’s PE at 7.9 and the company is paying a healthy dividend yield of 5.95%. At this single digit PE multiple, a lot of bad news is already priced into Delhaize group’s shares.
Disclaimer: The author owns the ADR shares of Delhaize Group (DEG). This article represents the opinion of the author and is not intended as financial advice for the reader and should not be relied upon as financial advice.
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