(Adds detail on Ahold revamp.)
By Carolyn Henson and Maarten van Tartwijk
Of DOW JONES NEWSWIRES
BRUSSELS -(Dow Jones)- Belgium-based supermarket operator Delhaize Group (DEG) Thursday raised its full-year outlook after surpassing market hopes with a 28% surge in third-quarter net profit.
The company said sales had declined in the U.S. due to a continuing price war among grocers, but it managed to offset the decline with cost cutting and said it had outperformed the market and grown volumes by using targeted promotions and price reductions and making sure its stores were as efficient as possible.
Delhaize makes about 70% of its profit and sales in the U.S., mostly in the south east where it operates the Food Lion, Hannaford and Sweet Bay chains.
Grocers have proved resilient during the economic downturn as consumers have kept spending on food, even if trading down to cheaper goods and stores. However, the U.S. is now experiencing price deflation, stoking competition between retailers there.
"While price pressure in the U.S. continued to impact sales, we were encouraged to see that targeted promotions and outstanding store execution resulted in improving volume trends for the third consecutive quarter," Chief Executive Pierre-Olivier Beckers said.
The company posted a third quarter net profit of EUR128 million, up from EUR100 million in the same period last year, beating analysts' expectations for a 10% rise to EUR110 million. Sales grew 4.8% on year to EUR4.9 billion, boosted by a 5.2% rise in the dollar against the euro compared with 2008. At identical exchange rates sales rose 1.9%
Like-for-like sales at its U.S. stores dropped 1.3%, hit by the price war with the likes of discount giant Wal-mart Stores Inc. (WMT), while total sales fell 1.2% to EUR3.3 billion ($4.8 billion).
Delhaize's comments on U.S. prices echo those of Netherlands-based peer Royal Ahold NV (AH.AE), which earns about 60% of its revenue in the U.S. Late last month, Ahold reported a smaller-than-expected 4.3% rise in third-quarter sales, including a 1.9% rise in its key U.S. chains, Stop & Shop and Giant-Landover and a 0.8% rise at the smaller Giant-Carlisle chain. It had blamed price deflation, trading down by customers and increased promotional activity in the U.S. for missing expectations.
Ahold Thursday said it would break up its two U.S. units into four so that it can better integrate acquisitions and allow decisions on customer needs to be taken at a more local level. Stop&Shop/Giant-Carlisle and Giant Landover will be separated into Stop & Shop New England, Stop & Shop Metro New York, Giant-Landover and Giant-Carlisle.
In recent quarters, the company has benefited from a revamp of its U.S. operations that it started about two years ago. It had started reformatting and modernizing its stores and lowering its prices before the economic downturn hit, stealing a march on rivals who had to cut prices once the U.S. went into recession. It has said that it hopes to acquire stores that are sold by rivals during the downturn.
Both European companies did better than U.S. rivals Supervalu Inc. (SVU) and Safeway Inc. (WSY) in the most recent quarter. Supervalu reported a 7.5% decline in sales as profit fell 42%, while Safeway reported a 7% decline in sales and a 35% drop in earnings.
Delhaize did better in its home market than in the U.S. during the third quarter. Comparable sales in Belgium rose 4.6%, helped by extra shopping days on the calendar compared with last year, heavy price cutting and a very successful Disney Pixar card collection marketing campaign.
Delhaize has a network of 2,697 stores across the U.S., Belgium, Greece, Romania and Indonesia. More than half of its stores are in the U.S.
The company said it now expects operating profit for 2009 to grow between 1% and 4% at identical exchange rates, up from previous expectations for between 0% and 3% growth.
Delhaize's shares soared as a result, and at 1517 GMT they were up 5.3%, or EUR2.46, at EUR49.48, outperforming a slightly higher overall market.
The company's profits were boosted by cost cutting, which helped lift its operating margin four basis points to 4.7% of revenue. Beckers said the company is on track to cut costs by EUR100 million this year.
Bank Degroof analyst Ivan Lathouders called the result "excellent" and said the increased guidance, though small, was a positive surprise, especially in view of the price war in the U.S.
-By Carolyn Henson, Dow Jones Newswires; +32 2 741 1481; carolyn.henson@dowjones.com