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Ahold Reports 3Q Loss Related to Class Action Settlement, Unveils Plan to Split U.S. Foodservice

AMSTERDAM, the Netherlands -- Royal Ahold yesterday reported a third-quarter net income loss of US $281.6 million (239 million euros), including a US $689.4 million (585 million euros) after-tax charge related to the international retailer's $1.1 billion settlement earlier this week with its shareholders in the wake of a profits overstatement scandal at the company's U.S. Foodservice unit.

Excluding the effect of the settlement, operating income rose 161 percent, according to the company, which turned in a "mixed retail performance in [a] sustained difficult trading environment." Additionally, Ahold completed its divestment program with gross proceeds of 3.1 billion euros (US $3.7 billion), exceeding the company's original target.

Ahold also reported that its net sales grew 0.7 percent to 10.2 billion euros (US $12.0 billion) and that net cash flow from operating activities decreased as a result of additional pension plans contribution.

According to Ahold c.e.o. Anders Moberg: "The settlement of the securities class action allows Ahold to move forward and focus intensely on its businesses and future strategy. Excluding the effect of this settlement, our performance improved this quarter despite the fact that the retail environment remains challenging."

For the retailer's American grocery chains, results were as follows: Stop & Shop/Giant-Landover Arena net sales went up 2.6 percent, but identical sales decreased because of continued high promotional expenditure by competitors. Meanwhile, operating margin rose 5.5 percent because of lower costs and higher gross margins. The Giant-Carlisle/Tops Arena experienced stable sales, excluding the divestment of 198 convenience stores. Giant-Carlisle gained market share and increased identical sales, while Tops, in keeping with its portfolio rationalization plan, is redefining core markets and initiatives to boost in-store profitability.

Also yesterday, Ahold revealed its long-term strategy for the continued profitable growth of its U.S. Foodservice subsidiary, which involves the company's reorganization into two separate businesses, Broadline and Multi-Unit, each concentrating on a specific customer segment.

The Broadline operating company, which makes up over 85 percent of U.S. Foodservice's net sales and has been its main driver of profitable growth, offers an extensive line of food and related products and services to independent restaurants, health care providers, hospitality customers, governmental entities, educational institutions, and others. Through the first three quarters of 2005, net sales of the Broadline operating company were $12.4 billion and the operating margin was 1.1 percent.

U.S. Foodservice's Multi-Unit operating company, which will receive its own brand identity, offers food and related products to large chain restaurants, particularly those in the "quick-service" and "casual theme" segments. Through the first three quarters of 2005, net sales of this operating company were $1.9 billion and the operating margin was -0.9 percent.

Ahold's objectives for the businesses include driving top- and bottom-line growth of Broadline by accelerating private brand penetration, investing in the sales organization, bolstering targeted local geographies, and introducing a comprehensive operational excellence program, and bringing Multi-Unit to profitability within the next two years.

Following a major investment in systems and infrastructure improvements during 2005, U.S. Foodservice also unveiled a plan to lower total company administrative costs by $100 million, with over half of these savings to occur in 2006 and the rest in 2007 and 2008. U.S. Foodservice expects to record a restructuring charge connected with these administrative cost reductions, in addition to the planned consolidation of one of its Chicago-area DCs in the fourth quarter of 2005.

Noted Moberg in a statement: "U.S. Foodservice's financial performance is recovering, and the plan we are presenting today details the strong opportunities for pursuing profitable growth and creating a more valuable and transparent business for Ahold shareholders."

Added U.S. Foodservice c.e.o. Lawrence Benjamin: "Our Broadline business has led the profit recovery of U.S. Foodservice, and we see opportunities here for driving significant additional margin and volume growth. The establishment of our integrated Multi-Unit operating company will provide an effective structure for achieving our goal for making this business profitable. We also expect that cost reduction will be a more significant driver of our future profit improvement, starting with an aggressive right-sizing of our administrative costs in 2006."

According to published reports, Ahold has no current plans to sell off the Multi-Unit business.

Columbia, Md.-based U.S. Foodservice is the second-largest distributor in the foodservice industry, after Houston-based Sysco.
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