Ahold Delhaize Earnings: Q2 Performance Mostly In Line With Better Free Cash Flow Guidance

Ahold Delhaize AD released second-quarter results, with sales up 2.9% to EUR 22.1 billion (up 4.3% at constant exchange rates). Sales were in line with company-compiled consensus (EUR 22.05 billion), with underlying operating income of EUR 904 million ahead of consensus (EUR 859 million for company-compiled consensus). Comparable sales growth was 3.6% and 6.3% for the United States and Europe, respectively, versus 3.5% and 5.1% estimates for company-compiled consensus. In the U.S., the main driver of outperformance was the continued strong performance of remodeled stores and the resilient performance of loyalty programs and online channels. In Europe, excluding the impact of strikes in Belgium following the announcement by the company of its intention to transform its integrated supermarkets into independently managed Delhaize stores, comparable sales were up 7.6%. On profitability, the underlying operating margin for the group was 4.1%, in line with the prior year, with resilient U.S. margins (at 4.6% or 10 basis points lower, with Food Lion and Hannaford continuing to gain market share) offsetting margin declines in Europe (caused by energy costs and strikes). Excluding escalating energy costs and Belgium strikes, underlying margins were modestly ahead of prior-year levels.

For 2023, the group reiterated guidance for earnings per share to be at 2022 levels (implying underlying growth due to nonrecurrence of one-off gains in 2022 related to interest rates), with underlying operating margin over 4% and upgraded guidance of free cash flow to a range of EUR 2 billion to EUR 2.2 billion versus around EUR 2 billion previously, which we think are achievable and are in line with our estimates. The company also expects to pay out in dividends around 40%-50% of earnings and has previously disclosed a EUR 1 billion share buyback program. We expect to maintain our EUR 30.5/ $33.5 fair value estimate for the firm. Shares are fairly valued.