Ahold Delhaize Earnings: Profit Miss Driven by U.S. Underperformance

No-moat Ahold Delhaize AD released third-quarter results, with sales excluding gas up 3% to EUR 21.9 billion (up 2.9% at constant exchange rates). Sales were slightly below company-compiled consensus of EUR 21.95 billion, with underlying operating income of EUR 839 million (3.8% margin) missing the consensus estimate of EUR 856 million. The profit miss was driven by the U.S. segment (EUR 567 million versus expectations for EUR 605 million) with Europe largely in line (EUR 287 million versus consensus of EUR 283 million). Comparable sales growth was 0.9% for the United States and 7% for Europe, versus 1.5% and 5.5% estimates for company-compiled consensus. In the U.S., the main driver of underperformance was the reduction in emergency federal Supplemental Nutrition Assistance Program benefits, which according to the company resulted in around a 4% headwind to sales growth in the quarter. This along with a changing sales mix and increasing shrink contributed to lower U.S. margins in the quarter, a negative development that the company sees as lasting only a couple of quarters. In Europe, excluding the impact of strikes in Belgium following the company’s announcement of its intention to transform its integrated supermarkets into independently managed Delhaize stores, comparable sales were up 7.2%.

For 2023, the group downgraded its outlook for earnings per share to be lower (from similar before) than 2022 levels, but it upgraded its free cash flow forecast to EUR 2.2 billion-2.4 billion from EUR 2 billion-EUR 2.2 billion, although some of that emanates from lower capital expenditures (to EUR 2.4 billion from EUR 2.5 billion). We expect to maintain our EUR 30.50/$33.50 fair value estimate. Given the pronounced underperformance in the U.S.—the group’s largest segment—the shares were down about 7% at the time of writing and now trade firmly in 4-star territory.