Ahold shocks with drop into the red

Related tags United states dollar Organic growth Ahold

For the first time in many years, the Dutch retail group Ahold has
reported a quarterly loss for the second three months of the year,
an announcement which "hurt" the proud company.

For the first time in many years, the Dutch retail group Ahold has reported a quarterly loss for the second three months of the year, an announcement which "hurt" the proud company.

Second quarter net losses reached €197.5 million, a sharp decline compared to the net profits of €323.8 million posted a year earlier, but as the company's president and CEO Cees van der Hoeven pointed out, the decline was entirely incidental.

"We had to take an exceptional charge as well as goodwill impairment for our Argentine operations,"​ he said at a press conference earlier this week. The exceptional charges of €410 million related to the default of Velox Retail Holdings (VRH), Ahold's former joint venture partner in Latin America, and while the goodwill impairment costs totalled €80 million.

Not surprisingly, Van der Hoeven was quick to put a brave face on the losses, stressing that they should be viewed within the framework of a company which has grown strongly over the last few years and which has always offered excellent value to shareholders, partners and customers alike.

"Almost everywhere in the world, the trading environment is challenging. It is difficult to grow sales and the outlook is not as yet improving. In these circumstances our performance is very solid, as we are able to grow market share and operating margins at the same time,"​ he said.

"It is the real strength of Ahold that collectively our companies are stronger than individually by realising many synergies and cost reductions behind the scenes. Once again we thank our people because it is their motivation and dedication that makes it happen."

Difficult conditions hit organic growth

Despite the negative impact of currency exchange, particularly with the US dollar, the Brazilian Real and the Argentine peso, Ahold's sales for the second quarter of the year rose by 7.3 per cent to €17.3 billion. Organic growth accounted for 2.9 per cent of this, and Van der Hoeven stressed that this was a very low growth rate compared to recent quarters, a clear reflection of the difficult trading environment in many markets.

Organic growth from the US retail sector, where the company operates under a number of fascias including Stop & Shop, Giant and BI-LO, organic growth was just 5.6 per cent compared to 8.5 per cent a year earlier. The addition of the Bruno's Supermarkets chain, consolidated as of December 2001, helped overall sales growth but also impacted profits as a result of integration costs.

In Europe, organic sales growth was just 3.2 per cent, a third of what it was a year earlier (9.2 per cent). The group's operations in the Netherlands, Scandinavia, Spain and Central Europe contributed to the sales rise, but the group's business in Portugal posted lower sales following the decision to withdraw a number of unprofitable product lines.

The Polish business is likely to grow in the second half of the year, however, as Ahold is to add five new hypermarkets under the Jumbo fascia to its portfolio there, acquiring them from Jeronimo Martins, itself Ahold's joint venture partner in Portugal. The stores will be converted to Ahold's Hypernova fascia, taking its total number of hypermarkets there to 26.

Currency devaluations were the main cause of lower sales in Latin America, although organic growth surpassed that of the year before at 3.0 per cent (compared to 2.0 per cent in 2001). Ahold operates under the names Santa Isabel, Disco and G. Barbosa in Latin America, and has recently announced its intention to acquire the outstanding 30 per cent of Santa Isabel's shares which it does not already own.

Asia was the main driver of organic growth - 15.3 per cent during the quarter - mainly due to the pace of new store openings there, but this also pushed operating losses to €5.6 million. The group is present in Thailand, Indonesia and Malaysia.

Optimistic growth projections

For the full year, Van der Hoeven said that organic growth was likely to be around 15 per cent, while operating profits should rise by around 20 per cent following the consolidation of new US acquisitions.

He explained that the unexpected losses in the second quarter had also prompted the company to issue a forecast for the following year, something it did not normally do but which allowed the group to put the losses into a wider context.

"Our focus will remain on profitable organic sales growth of around 4 to 5 per cent, and continued margin expansion as a consequence of additional synergies and further cost reduction programmes,"​ he said, adding that while no major acquisitions were planned, several smaller deals were likely during the year, both in terms of acquisitions and divestments.

Ahold has grown rapidly in the last few years, and is now fast approaching Carrefour in the European league table. But these results show the risks entailed in a rapid and worldwide expansion programme, in particular the effects of currency fluctuations and other economic concerns.

But these are part and parcel of managing a global business, and Ahold has plenty of experience in handling such blips - as Van der Hoeven is at pains to point out. While the slide into the red for the quarter is undoubtedly a blot on the escutcheon of a company which has posted an otherwise exemplary financial performance over the last few years, it is unlikely to stop the continued growth - or indeed success - of the group in the future.

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