Amsterdam, Feb. 11 - How badly will a U.S. slowdown squeeze Ahold NV?
Of all the leading European supermarket operators, the Dutch group is most exposed to the U.S. economy via its grocery chains Stop&Shop, Giant-Landover and Giant-Carlisle, which account for some 60 percent of its sales.
A revamp of Ahold's U.S. stores is already taking place, helping boost confidence they will continue to lure American shoppers. But with the prospect of a recession looming, it may have to step up the pace with more price cuts and improvements to backroom operations.
Forecast-beating fourth-quarter sales unveiled last month and Ahold's statement that the turbulent U.S. economic environment did not have a significant impact have buoyed investor sentiment.
Yet investors say it may need to step up the pace of change.
"They have to do more, for example more cost cuts both in prices and labour. If forced to, they will do it. Market circumstances will force them," said asset manager Rob Koenders at Harmony Vermogensbeheer which owns shares in the retailer.
Ahold has already shown in recent years its ability to respond to a need for change.
Hit with a 1 billion euro ($1.5 billion) accounting scandal in 2003, the retailer sold off more than 3 billion euros worth of assets, reduced its debt and cut costs, measures which helped it regain an investment grade credit rating from Standard & Poor's last May.
Hopes that Ahold can ride out tough times in the United States are reflected in its share price, which trades at some 12.3 times projected 2009 earnings, compared with Delhaize and other U.S. food retailers' average price-earnings multiple of around 11, according to Credit Suisse.
"We think (the premium) is deserved. Ahold's earnings derive equally from U.S. recovery and European growth, which we think warrants recognition," the broker wrote in a note.
Yet against leading European grocers such as Carrefour and Tesco it trades at a discount, showing some investor concerns over its exposure to the competitive U.S. market and relatively small real estate portfolio.
"Both Ahold and Delhaize do not have big property assets compared with other European retailers. They also mainly rent their stores," said Oddo Securities analyst Nicolas Champ.
The Dutch group puts the market value of its properties at 5.6 billion euros compared with UK retailer Tesco's portfolio of stores which it valued at 37.6 billion euro in June and German Metro's estimated 12.5 billion euros.
DO THE RIGHT THING
Ahold is trying to duplicate across the Atlantic a formula which has made its Dutch unit a market leader at home.
In 2006, the seventh-biggest global retailer by sales began a two-year overhaul of its U.S. stores by slashing prices and offering more private-label products and greater varieties, which it called the Value Improvement Programme (VIP).
"If they do the right things, they can outperform even if the economy is not growing. They are doing the right things now. They should have higher volumes in spite of the slowing economy," said ING analyst John David Roeg.
The supermarket group needs to improve its logistics and back-office operations to outpace competitors which have implemented or are planning similar changes, said an analyst, who said details so far have been sparse.
"It could be the number of distribution centres or more IT systems. Delhaize has one of the most efficient backoffice systems," the analyst said.
Compared with some European rivals, investors appear to be giving Ahold the benefit of the doubt. The stock is down 11.5 percent since the start of the year, faring less badly than a 16.7 percent drop in the DJ Stoxx European retail index.
Delhaize, which also makes the bulk of its sales in the United States and often seen as a takeover candidate for Ahold, is 17 percent lower.
Ahold shares hit a two-week high on Jan. 25, gaining more than 5 percent in intraday trade after the sales figures came out, and closed 2 percent up.
Investors also like the prospect of a dividend which Ahold plans to pay for 2007 after a five-year break following the accounting scandal.
"What is (also) supporting Ahold's share price is its share buyback, return of a dividend and the (planned) sale of Schuitema and merger and acquisition play," said Claudie Casimir, analyst at Natixis Securities.
With its stores located in the more affluent U.S. northeast, Ahold should see less turbulence than grocers with a more extensive network across the country and thus more exposure to subprime problems and a possible recession.
"They are relatively well protected. Also, they have no exposure to non-food," said a London-based analyst who declined to be named.
Faced with skittish consumers, rivals such as Supervalu Inc and Family Dollar Stores Inc last month cut their full-year earnings forecasts. Kroger bucked the trend by sticking to its estimates.
It will be a tough balancing act for Ahold.
"They have to balance it. It also depends on what competitors are doing. The good news is that cost savings are more backloaded. These savings could be used for price investments," said Fernand de Boer, analyst at Petercam.