Delhaize Profits Drop in 'Challenging' Q2; Will Accelerate Sweetbay Conversions

BRUSSELS, Belgium --Global retailer Delhaize Group, whose primary market is the U.S., posted a 23 percent drop in second-quarter earnings yesterday, which was lower than expected. The company attributed the slide to higher operating expenses, the competitive environment in key markets, and a soft economy in Belgium. The bright spot was the payoff from conversions of its Kash 'n Karry stores to the new Sweetbay format, which Delhaize said has outpaced expectations. The conversion program will be accelerated in the Tampa/St. Petersburg market next year.

Delhaize Group said its second-quarter net profit was EUR 76.9 million ($95.896 million). Net sales and other revenues decreased by 0.1 percent to EUR 4.6 billion, impacted by the weakening of the U.S. dollar by 4.3 percent versus the euro.

The company reported a 3.2 percent spike in U.S. sales, which totaled $4.1 billion and were supported by store openings and the acquisition of Victory Supermarkets in the Northeast. Comps, adjusted for the timing of Easter, were up a modest 0.2 percent.

Sales continued to be strong at Hannaford and Sweetbay, but sales growth at Food Lion, Kash n' Karry, and Harveys was weak due to the strong competitive activity and consumer uncertainty due to higher gasoline prices, according to the company.

The conversions of Kash n' Karry to the Sweetbay Supermarket concept continued in the second quarter of 2005. At the end of June, 17 Sweetbay stores were in operation, and the results have "exceeded management's expectations," Delhaize said. Approximately nine additional stores will be converted or newly opened under the Sweetbay banner by the end of 2005. "The success of the Sweetbay conversions has resulted in the decision to convert most of Kash n' Karry stores in the Tampa/St. Petersburg market to Sweetbay in 2006," the company said.

"As we indicated earlier this year, the second quarter of 2005 proved to be a challenging one for Delhaize Group," said Pierre-Olivier Beckers, president and c.e.o., in a statement. "We knew we would be facing a strong base of comparison and had planned for higher operating expenses on a temporary basis because of different long-term strategic initiatives such as Victory, Sweetbay, and Food Lion's market renewals. But due to the continued competitive environment in our key markets and soft economic conditions in Belgium, our results were below our own sales and profit expectations."

On a more positive side, however, Beckers noted that during the month of June and continuing into the third quarter, the company is seeing improving sales trends in the U.S., which he expects will support a better performance in the second half of 2005.

"We are pleased with the recent sales performance of Food Lion as a result of our price and promotion activity and other sales building initiatives. These positive trends at Food Lion, the contribution of the acquisitions Victory and Cash Fresh, and a lower base of comparison in the second half year give us confidence in our full year guidance," Beckers said.

Delhaize Group also gave an update on its first-half performance. For the first six months of 2005, organic sales growth was 1.4 percent. At identical exchange rates, net sales and other revenues increased by 3.1 percent to EUR 9.2 billion; while net profit increased by 17.5 percent to EUR 163.6 million.

In the second quarter of 2005, Delhaize Group opened eight new supermarkets in the U.S., including two relocated stores, and closed two stores, resulting in a net increase of four stores. In addition, three Food Lion stores were converted to the Harvey's banner. Seventy U.S. stores were remodeled or expanded, including 58 stores in Greensboro, N.C., the third market renewal program of Food Lion that was re-launched on June 22, 2005. Food Lion is preparing to re-launch its Baltimore, Md. market in the fall of 2005.

Also during the second quarter, Hannaford continued to work intensively on the integration of the 19 acquired Victory supermarkets. Eight Victory stores were converted to the Hannaford banner, bringing the number of converted Victory stores to 10. The remaining nine Victory stores will be converted by the end of the third quarter, which Delhaize said should result in a better ratio between sales and operating expenses during the fourth quarter.

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