DELHAIZE GROUP - ETS DLHZ FR DEG
February 18, 2014 - 9:28am EST by
andreas947
2014 2015
Price: 50.00 EPS $0.00 $0.00
Shares Out. (in M): 101 P/E 0.0x 0.0x
Market Cap (in $M): 5,050 P/FCF 8.0x 8.0x
Net Debt (in $M): 1,700 EBIT 0 0
TEV ($): 6,750 TEV/EBIT 0.0x 0.0x

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  • Grocery Stores

Description

Delhaize Group (DEG or DELB.BR)  

 

Summary

 

Our fund generally focuses on smaller companies with Ft. Knox balance sheets and large & sustainable free cash flow yields.  We are often seeking a mid-teens FCF yield or higher on an unleveraged basis.  The objective is for the sustainable FCF to eventually drive up the share price to a more reasonable valuation through share buybacks, debt reductions, dividends, or accretive acquisitions.  Obviously, it is important we have a management team that cares about shareholder value.

 

We think Delhaize Group (ticker is DEG in U.S. dollars) (ticker is DELB.BR in euros) is an attractive larger cap stock with an unleveraged FCF yield of 10%, a “Ft. Knox” balance sheet, and a stable, cash-generative business model.  DEG is a Belgium-based food retailer with almost two-thirds of its total revenues and adjusted EBITDA generated in the U.S.  The Company operates supermarkets in Belgium, the U.S. (Southeast and Mid-Atlantic as well as Northeast), Greece, Serbia, Bosnia and Herzegovina, Albania, Bulgaria, Romania, and Indonesia.  The Company retails both branded and private label nutritional and household products, among others.  The Company operates different supermarket brands and formulas:  Food Lion, Bottom Dollar Food, and Hannaford supermarkets in the U.S.; Delhaize, AD Delhaize, Delhaize City, Proxy, Red Market, Shop n’ Go, and Tom & Co. in Belgium and Luxembourg; Maxi, Tempo, and Mini-Max in Montenegro; Maxi and Tempo in Serbia, among others. 

 

In May 2013, DEG reached an agreement with Bi-Lo Holdings on the divestiture of its Sweetbay, Harvey’s, and Reid’s chains (165 total stores) in the U.S. for $265m or about 200m euros.  This transaction is expected to close in first half of 2014 and will further reduce net debt.   The sale of these non-core banners will allow DEG to focus completely on its highest return opportunities in the U.S. segment.

 

As we describe in more detail below, notwithstanding the well-known challenges that “traditional” grocery retailers in mature markets like the U.S. and Belgium face, we believe DEG is a tremendous cash-generating machine, which we think can sustainably generate 600m euros of FCF per year or more in the future, even after making very significant capital expenditures of 600m euros per year to maintain and even improve its competitive position.  Management has spent the last three years plus investing in lower price positioning in its flagship Food Lion brand in the U.S. as well as its other brands and we believe that lower prices are what customers want in the post-recession world.  There is solid evidence that its strategy is starting to take hold as indicated by stronger traffic and items sold and comparable store sales in most of DEG’s major banners in 2013.  In addition, DEG has a “Ft. Knox” balance sheet, which is among the least levered in the grocery industry.

A major attraction to DEG is its laser-focus on FCF.  This quote from the 2012 Annual Report highlights this focus:  “Strong free cash flow generation is a life blood of any business and Delhaize Group is no exception.  Facing the difficulties in 2012 and preparing for coming challenges ahead, Delhaize Group has emphasized the creation of strong free cash flow.  The important of this key financial indicator cannot be overestimated”.  A second quote by then CEO Pierre Oliver Becker shows management’s mindset: “In 2013, more than ever before, our focus will be on accelerating revenue growth and on value creation.  Further price investments, selective store openings and comparable store sales growth should result in an increased top line while a ruthless discipline in our capital allocation in combination with a new strategic cost plan and focus on free cash flow generation should result in value creation.”

 

We believe that during 2014 and 2015, DEG’s cumulative FCF could enable the Company to retire all of its net debt and be debt-free by year end 2015.  We believe DEG could increase its adjusted EBITDA to about 1.5b euros in 2015 and trade for 6x adjusted EBITDA or about 9b euros, or about 90 euros per share, versus today’s price of 50 euros per share (+80%).

 

(Please note, all numbers herein are stated in euros, unless otherwise noted; latest exchange rate is 1.35 U.S. dollars to one euro).

 

DEG’s store base is summarized below:

 

 

Number of stores

 

FYE   2011

FYE   2012

FYE   2013(1)

United   States

1,650

1,553

1,514

Belgium   & Luxembourg

821

848

852

Greece

251

268

281

Romania

105

193

296

Serbia

366

363

381

Bulgaria

42

43

54

Bosnia   and Herzegovina

44

41

39

Montenegro

 22

24

0

Indonesia

 89

103

117

Total

3,390

3,428

3,534

         

 

 

 

 

 

 

(1)     U.S. stores include Sweetbay, Harveys, and Reids store chains of about 150 stores, which are scheduled to be sold to Bi-Lo Holdings in the first half of 2014;  the remaining U.S. store base will include Food Lion, Hannaford, and Bottom Dollar Markets, with a total of about 1,350 stores.

 

DEG’s has three segments: U.S., Belgium, and Southeastern Europe, which are summarized below:

 

U.S. Segment

 

The U.S. segment (64% of LTM revenues and 66% of LTM underlying operating profit) is dominated by the Food Lion chain, which has over 1,100 stores located in the Southeastern and Mid Atlantic U.S.  Second is the Hannaford chain is located in Maine with over 180 stores in New England states.  Third is the Bottom Dollar Food chain is located in Philadelphia and Pittsburg and with about 60 stores.  DEG’s U.S. segment revenues were 14.6b euros in 2013. The Company’s stores are heavily concentrated in a handful of states in the Southeastern U.S. including North Carolina (507 stores), Virginia (312 stores), South Carolina (130 stores), Georgia (91 stores), and Maryland (79 stores).

 

Food Lion has undergone a major five-phase repositioning program over the past three years.  Over five separate geographic phases, DEG has significantly strengthened Food Lion’s value proposition to customers, in part by repositioning stores with reduced prices to provide the value that customers wanted.  Sales volumes at Food Lion stores which have been repositioned have been positive.  DEG has sought to develop a unique selling proposition at Food Lion shaped around Easy, Affordable, and Fresh.  DEG has focused on the opportunity to increase share of customers’ wallets by leveraging customer loyalty, proximity, small store format, and tailor cut promotions.  DEG has also sought to improve Food Lion’s variety and quality of assortment, fresh products offered, and consistent execution.  The Company has made similar targeted price investments at Hannaford chain and continues to refine the operating model at Bottom Dollar Food.

 

Belgium Segment

 

The Belgium segment (22% of revenues and 23% of underlying operating profit) represents DEG’s historical home market and at end of 2012 operated a multi-format network of 840 stores in Belgium and Luxembourg.  Belgian segment revenues in 2013 were 5b euros.  The Company’s market share in Belgium is about 27%.

 

The Belgium segment has faced key challenges of increasing differentiation, containing SG&A, improving performance of integrated stores, increasing market share, and dealing with an increasingly competitive landscape. In Belgium, the Company has sought to improve the shopping experience (Quality, Freshness, Assortment), store remodeling, improving the price image through price investments and private label brands, growth of the affiliated network, and ecommerce.  The Company is seeking to differentiate the store experience with 46 remodels over past two years and developing a new Proxy format.

 

Southeastern Europe Segment

 

The Southeastern Europe (SEE) segment (14% of revenues and 12% of underlying operating profit) includes the operations of Greece, Romania, Indonesia, and Maxi-operations in four Balkan countries (Serbia, Bulgaria, Bosnia, and Herzegovina).  In 2013, 3.2b euros of revenues came from the SEE segment.  The Company’s market share in Greece is about 17%.

 

The SEE segment is a potential source of growth for the Company, despite key challenges including difficult macro-economic conditions in SEE, integration of the Maxi chain (acquired in 2011) in Serbia, non-performing peripheral assets, and increased competition in Romania.  The Company has sought market share gains in Greece through price investments; gross margin improvements at Maxi due to supplier negotiations, larger private brands, and new distribution center; acceleration of growth in Romania; and divestment of peripheral assets.

 

The New Game Plan

 

In January 2010, the Company initiated a major strategic plan called The New Game Plan (“the Plan”) under CEO Pierre Olivier Beckers.  The Plan had three key elements: Growth, Efficiency, and Sustainability.  The Plan’s stated goal of gross annual cost saving of 500m euros by end of 2012 has been significantly exceeded.  The Plan also sought to strengthen brand equity in DEG stores through: a) price competitiveness; b) private brand; c) convenience through technology; and d) sustainability. The Plan had a strong focus on improving profitability and generating FCF.  Many unprofitable stores were closed.  Cost saving were largely reinvested in the business through more competitive prices offered to customers.  The table above shows the improving trends for comp store sales as a result of the Plan at the U.S. and Belgium segments, DEG’s two largest segments:

 

Under the Plan, Food Lion has been completely repositioned over the past three years, in five geographic and stated phases.  The first phase was in the Raleigh and Chattanooga markets covering about 200 stores in 2011.  Second and third phases were completed in 2012 and repositioned over 600 Food Lion stores.  Phase four was initiated in Q2 of 2013.  Phase five was the final phase and was initiated in November 2013.  Each of the five phases of repositioned stores showed positive comparable store sales in Q4 of 2013.  U.S. segment comparable store sales were 2.4% in Q4 of 2014, the fifth consecutive quarter of positive comparable store sales.

 

At Food Lion, with the store repositions, the Company has sought to develop a Unique Selling Proposition to differentiate Food Lion, emphasizing Easy, Fresh, and Affordable.  Easy includes proximity, small store format, quick shopping, and good experience.  Fresh includes the variety and quality of assortment and consistent execution.  Affordable includes tailored promotions and private brands.

 

The Plan and the price investments in DEG’s stores put pressure on margins and gross margin declined from 25.7% in 2010 to 25.4% in 2011 to 24.5% in 2012 as Food Lion and other chains invested in price.  However, gross margin stabilized in 2013 and was nearly flat at 24.5% as the reposition program at Food Lion and other chains started to be fully cycled.

FYE 12/31

Q1 2012

Q2 2012

Q3 2012

Q4 201

Q1 2013

Q2 2013

Q3 2013

Q4 2013

U.S. segment comp store sales

(0.6)%

(0.6)%

+1.6%

0.0%

+1.9%

+1.1%

+2.2%

 +2.8%

Belgium segment comp store sales

(0.9)%

+1.1%

+0.6%

+0.8%

+2.4%

+0.8%

+1.5%

+2.4%

SEE segment comp store sales

           

(1.2)%

(0.6)%

 

Under the Plan, the Company also sought to reverse a ten-year increase of SG&A expenses as a percentage of revenues, from 20.7% in 2006 to 21.5% in 2013 estimated.  DEG has also had a major focus on free cash flow generation through capital discipline, focus on working capital, and strict cost controls.

 

The Company continues to execute the Plan with key priorities in the following areas:

  • revenue priorities include strengthening its banners, targeted price investments, and accelerating organic growth;
  • free cash flow priorities include disciplined capital allocation, working capital improvements, and target 500m of FCF;
  • cost priorities include continued focus on reducing complexity and enhancing efficiency.

 

 

Delta Maxi Acquisition

 

DEG acquired Delta Maxi (“Maxi”) in July 2011 for close to 600m euros which included operations in Serbia, Bosnia, Herzegovina, Montenegro, and Albania .  Maxi operated approximately 350 stores in Serbia and was its largest food retailer.  Maxi operated approximately 450 total stores in Serbia, Bulgaria, Bosnia, and Herzegovina.  The Company combined Maxi with its existing businesses in Greece and Romania to help make it a leading player in the region, which has a stronger growth profile compared to the U.S. segment and the Belgium segment.  Maxi represented the largest acquisition undertaken by the Company in the past ten years.  Maxi’s acquisition has helped make the company a stronger regional supermarket player in the Southeastern European markets.

 

Competition

 

The food retailing industry is highly competitive and Food Lion competes against high-end stores like Whole Foods and Harris Teeter as well as price-oriented competitors like Wal-Mart.  The concern is that traditional supermarkets like Food Lion are stuck in the middle and losing share to both high-end and low-end players.  However, under The Plan, Food Lion has responded by seeking to reposition its stores as low price, with convenient locations, strong service, and high-quality produce.  In the Triangle area of North Carolina (Raleigh, Durham, Chapel-Hill), grocery market shares in 2011 were Wal-Mart 23%, Food Lion 19%, Harris Teeter 16%, Kroger 9%, Lowes Foods 6%, and Sam’s Clubs 5%.  (Kroger recently purchased Harris Teeter for $2.5b as discussed below).  Food Lion has traditionally been known as a low-price player in its markets and under the Plan has sought to reestablish this position.  We believe Food Lion has substantially reduced the price gap with Wal-Mart under the Plan with lower prices on about 6,500 core items in its stores while emphasizing smaller and more convenient stores and fresh produce.  In fact, Food Lion has actually run TV ads showing comparison prices against Wal-Mart.  We believe Food Lion has strongly improved its value-proposition to customers in the past three years and this should improve its competitive position.  Food Lion’s convenient locations are potentially a strong competitive advantage in its markets.

 

Attractive Valuation For A Stable Franchise

 

DEG is trading at about 50 euros per share and has about 101m shares outstanding for a market value of about 5b euros.  DEG’s net debt is about 1.7b euros for an EV of about 6.7b euros.  We believe this EV is very attractive considering the Company generated 772m and 670m euros of FCF in 2012 and 2013, respectively.  Although both FCF numbers include some working capital benefits, we believe the Company can sustainably generate 600m+ euros per year of FCF over the next three years.  We believe 2013 adjusted EBITDA is about $1.4b euros, so DEG is trading at about 4.8x adjusted EBITDA for 2013.  DEG generated cash from operations of 1.3b euros in 2013, so DEG is trading at 5.1x 2013 cash from operations.  Management is effectively deploying cash from operations in a more focused, profit-oriented, and FCF-oriented manner.  We expect the strong generation of cash from operations and FCF and the effective allocation thereof to become increasingly clear to shareholders during 2014 and 2015, resulting in a much higher valuation.

 

From 2009 to 2013, the Company generated cumulative free cash flow of about 3b euros or almost 50% of the current EV.  We note this is after spending about 3.5b euros on capital expenditures or about 2.9% of total revenues, which is consistent with other retail grocery chains.  We believe DEG will generate strong free cash flows of 600m+ in 2014 and 2015.

 

We believe that during 2014 and 2015 cumulative FCF could retire all net debt, leaving DEG debt-free by year end 2015.  Further, we believe DEG could increase its adjusted EBITDA to about 1.5b euros in 2015 and trade for 6x adjusted EBITDA or about 9b euros, or about 90 euros per share, versus today’s price of 50 euros per share (+80%).

 

Steadily Declining Net Debt and Improving Balance Sheet

 

With the acquisition of Maxi in 2011, DEG’s net debt peaked at about 2.6b euros at year end 2011.  Since this time, however, the Company has used its strong free cash flow to steadily and rapidly reduce its net debt position to about 1.7b euros estimated at year end 2013, representing a 40% reduction from the peak level of 2.6b at year end 2011.  We expect net debt to continue to decline in 2014 and 2015.  The sale of non-core U.S. food retailing assets to Bi-Lo Holdings for about 200m euros is expected to close in the first half of 2014.  We also believe the Company can generate FCF of at least 600m euros in both 2014 and 2015.  Based on these assumptions, we believe DEG could nearly be debt-free by year end 2015, or in less than two years. 

 

We believe the Company’s “Ft. Knox” balance sheet will give its Board steadily increasing options to enhance shareholder value through dividends, share repurchases, accretive acquisitions, or internal growth projects.  We believe management has been much more disciplined in capital allocation under the Plan and we believe this new mindset, combined with DEG’s “Ft. Knox” balance sheet and strong free cash flow, will eventually result in a much stronger stock market valuation over the next couple of years.

 

Strong Q4 Results

 

DEG reported preliminary Q4 results on January 23, 2014 and they were very solid.  Consolidated revenue grew 3.0% at constant exchange rates with solid Q4 comparable store sales growth in the U.S. segment driven by continued strong performance at Food Lion despite retail deflation.  Q4 comparable stores sales growth was 2.4% in the Belgium segment and -0.6% in the Southeastern Europe (SEE) segment.

 

For Fiscal 2013, consolidated revenue grew 2.6% at constant exchange rates and preliminary underlying operating profit was approximately 770m euros at constant exchange rates.  Fiscal 2013 free cash flow was extremely strong at approximately 670m euros at constant exchange rates.

 

Management noted that U.S. volume growth was positive and was especially pleased with Food Lion’s momentum.  The phase repositioning undertaken at Food Lion almost three years ago was meeting management’s expectations and management was looking forward to further developing the Food Lion customer proposition in 2014.

 

Q4 Segment Results Show Evidence of Turnaround

 

For the U.S. segment, Q4 revenues increased by 2.8% to 4.3b euros and comp store sales growth was 2.8% despite retail inflation turning negative (-0.4%) due to additional price investments as a result of Phase 4 in Q2 and Phase 5 in November at Food Lion and an overall low inflationary environment.  At Hannaford, both comp store sales growth and real growth were positive as a result of price investments and increased promotions, despite a more competitive environment in the Northeast.

 

For the U.S. segment, 2013 revenues were 12.9b euros or an increase of 1.9% over prior year in local currency due to comp store sales growth of 2.0%.

 

For the Belgium segment, Q4 revenues were 1.3b euros, or an increase of 2.5% over prior year, with comparable store sales growth of 2.4% mainly driven by retail inflation (2.1%) and solid year-end sales.

 

For the Belgium segment, 2013 revenues were 5.1b euros, or an increase of 3.0% compared to prior year, resulting from comparable store sales growth of 1.8% and network growth.  For 2013, Belgium segments market share remained stable compared to prior year at 25.5%.

 

For the Southeastern Europe (SEE) segment, Q4 revenues increased by 4.5% to 852m euros, due to positive comparable store sales growth in Greece and expansion in Romania, partially offset by negative volume growth in Serbia.  Q4 comparable stores sales growth was -0.6% for the segment.

 

For the SEE segment, 2013 revenues increased by 5.1% to 3.1b euros, mainly as a result of volume growth in Greece and store expansion in Romania, which added 103 stores.  Comparable stores sales growth was -0.3% for 2013.

 

Strong Cash Flow Generation and Solid Business Model

 

The Company’s retail food store assets have generated large amounts of free cash flow over the past five years and this is after significant capital expenditures to upgrade and improve DEG’s global store base.  (Capital expenditures have averaged about 640m euros per year or about 3% of total revenues, consistent with industry averages).  From 2009 through 2013, DEG generated about 3b in cumulative FCF or about 50% of the current EV.  Much of this was through an extremely difficult economic environment.  We believe the local market orientation, established customer base, and price-competitive focus of DEG’s grocery stores will protect its business franchise and FCF going forward.

 

The local orientation of grocery stores and the Company’s long established market locations and customer relationships help to create a steady business model which can reliably generate revenues, adjusted EBITDA, and free cash flow, even under adverse economic conditions.  It also helps create a barrier to entry for new market competitors who are forced to try to take business from entrenched competitors.

 

Major Reposition Program of Food Lion and Other Banners Creates Stronger Value Proposition

 

Food Lion is the largest and most important DEG brand with about 1,100 stores in the U.S.  Under The Plan, management has aggressively repositioned the entire store base of Food Lion in five separate phases. Food Lion stores which have been repositioned are showing consistently higher comparable store sales and profitability.  The repositioning plan has included simplified and improved operations and lower prices so that Food Lion is more of a price leader in its markets.  We think this strategy makes sense and since the recession consumers want low prices in addition to convenient and well-merchandised stores.  We think the Company will realize stronger market share and growth over the next few years as a result of the investment program Food Lion has undergone.  The repositioned Food Lion stores are seeing meaningful uplifts in transactions, volumes, and comparable store sales growth.  Customer feedback has indicates improved perception of service levels in the stores and variety in fresh produce and private label.  Perception of price has also improved.

 

Industry Consolidation Prospects/ Strong Acquisition Valuation for Harris Teeter

 

Kroger’s recent purchase of Harris Teeter indicates the potential value in the grocery business.  Harris Teeter is an upscale regional grocer with 212 stores concentrated in the Carolinas and Washington, D.C. areas.  Kroger paid $2.5b for Harris Teeter which had annual sales in 2012 of about $4.5b or about 55% of revenues.  Kroger paid about 8x Harris Teeter’s LTM EBITDA.  These valuations are well above DEG’s current multiples of 30% of revenues and 4.8x EBITDA.  Kroger cited consolidation savings opportunities by retaining the consumer facing portions of Harris Teeter’s business while consolidating back-office type operations to achieve expense savings.  We believe in the slow growth environment for grocery retailing in the U.S. there is likely to be further consolidation as the largest players continue to seek scale to achieve cost savings in the absence of revenue growth opportunities.  We think Food Lion and Hannaford may be good consolidation opportunities for other players.

  

2013 Results Provide Solid Momentum for 2014

 

The Company’s performance in 2013 was very solid.  The Company generated total revenues of 22.7b, underlying operating profit of 770m euros, and free cash flow of 670m euros, after spending 565m euros on capital expenditures.  We estimate adjusted EBITDA for 2013 was about 1.3b to 1.4b euros.  The Company also sharply improved its balance sheet during 2013 as net debt went from 2.2b euros at year end 2012 to about 1.5b euros (our estimate) at year end 2013.  Gross margin during 2013 was relatively flat versus prior year after declining in previous years and SG&A expense as a percentage of revenues was also held steady.  Operating performance improved throughout the year, as evidenced by the comparable store sales trends shown in the chart above in both the U.S. and Belgium segments, with the strongest performance in Q4 for both segments.  We believe this reflects the completion of the five reposition phases at Food Lion and similar actions in the Belgium segment.  Overall, we believe the Company has strong momentum into 2014 in all of its three segments.

 

Lastly, we believe impact on margins from price investments at U.S. segment and Belgium segment, which were felt in 2012 and 2013, will likely moderate in 2014 as all five phase repositions are completed at Food Lion.  DEG will also benefit from continued cost reductions and improved comparable stores sales results in 2014.

 

Excellent Potential for Share Repurchase or Dividends

 

DEG has not repurchased significant shares to date.  However, as DEG’s balance sheet continues to deleverage, we believe a major share repurchase program will be more seriously considered.  DEG’s strong cash generation and under-leveraged balance sheet give management several levers to drive shareholder value if its stock price remains depressed.

 

Accrued Employee Benefit Obligations

 

DEG had about 200m euros of accrued employee benefit obligations at year end 2012.  These represent retirement plan obligations primarily to existing and former employees.

 

Conclusion and Target Price

 

Based on 6x our adjusted EBITDA estimate of 1.5b for 2015 and a projected zero net debt position at year-end 2015, we believe DEG could trade for a market cap of close to 9b euros or about 90 euros per share versus 50 euros per share today (+80%).  If DEG’s food retailing assets perform as we expect, we think our target prices can be achieved.  Further, DEG’s assets are well-established in attractive markets and could be attractive to a strategic acquirer.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share Ownership

 

 

Shares

%

Silchester International

10,237

10.0%

BlackRock Institutional

5,053

5.0%

Norges Bank Invest.

2,582

2.5%

Vanguard Group

1,283

1.3%

ValueInvest Asset

1,016

1.0%

       

 

 

 

Avg   Daily Volume

Price per share

47

   

532,000

 

Shares outstanding

101

 

 

Market value

4,747

 

 

 

52 week range

35

54

 

             
 

Income statements

           

9mos

9mos

FYE 12/31

2007

2008

2009

2010

2011

2012

2012

2013

Sales

18,943

19,024

19,938

20,850

21,110

22,737

15,656

15,770

Gross profit

4,789

4,820

5,125

5,353

5,361

5,567

3,812

3,829

Adjusted EBITDA (1)

1,411

1,378

1,457

1,619

1,533

1,456

1,036

1,007

Adjusted EBIT (1)

937

904

942

1,044

947

810

589

571

Net income

401

485

520

574

475

103

274

81

EPS – continuing ops

3.80

4.65

5.00

5.68

4.68

1.04

2.72

1.21

Adjusted EBITDA %

7.4%

7.2%

7.3%

7.8%

7.2%

5.8%

6.6%

6.4%

Gross margin

25.3%

25.3%

25.7%

25.7%

25.4%

24.5%

24.4%

24.3%

Cash   flow statements

   

 

FYE 12/31

2007

2008

2009

2010

2011

2012

2012

2013

Net income

425

485

520

574

475

103

274

81

Dep & amort

474

474

515

575

586

650

486

454

Non cash adjust

95

156

50

250

295

240

(66)

232

Working capital chgs

(63)

(188)

92

(80)

(196)

428

127

(27)

Cash fr operations

932

927

1,176

1,317

1,106

1,408

821

740

Capital expenditures

(729)

(714)

(520)

(658)

(762)

(688)

(523)

(324)

Dividends

(133)

(147)

(152)

(161)

(173)

(180)

(180)

(142)

Share repurchases

(36)

0

0

0

0

0

0

0

Acquisitions

120

(100)

(147)

0

(591)

0

0

0

Est. free cash flow

203

213

656

659

350

720

297

416

Balance sheets

 

 

FYE 12/31

2007

2008

2009

2010

2011

2012

9/23/13

 

Cash

249

320

439

758

432

932

959

 

Total assets

8,821

9,700

9,748

10,902

 12,292

11,936

11,446

 

Total debt

2,605

2,407

2,547

2,925

3,014

2,925

2,853

 

Shareholder equity

3,676

4,195

4,409

5,069

5,419

5,193

5,042

 
                 

Net debt

2,350

2,087

2,109

2,167

2,647

2,060

1,894

 
 

 

Shares outstanding

100.6

100.6

100.8

101.2

101.4

101.1

101.1

 
                         
 

 

 

Valuation & Valuation Ratios

 

Market value

5,050

EV / Adjusted EBITDA

4.8

Net debt

1,700

Enterprise Value / Adjust EBIT

8.2

Preferred

0

Enterprise Value / Cash from Ops

4.9

Enterprise value

6,750

Enterprise Value / Revenues

30%

 

 

Price per share

50

 

Shares outstanding

101

 

Market value

5,050

Avg Daily Volume

 

   

132,000

 

52 week range

35

53

 

 

 

                 

 

 

 

 

 

 

 

 

 

 

 

                   
 

 

 

 

                   

 

 

 

 

 

                   

 

                                               

 

 

Detailed Income Statements

 

 

2006

2007

2008

2009

2010

2011

2012

9mos 2012

9mos 2013

Revenues

19,225

18,957

19,024

19,938

20,850

21,110

22,737

15,656

15,770

Cost of sales

14,372

14,162

14,204

14,813

15,497

15,749

17,170

11,844

11,941

               

 

 

Gross profit

4,853

4,795

4,820

5,125

5,353

5,361

5,567

3,812

3,829

 

25.2%

25.3%

25.3%

25.7%

25.7%

25.4%

24.5%

24.4%

24.3%

               

 

 

SG&A expense

3,970

3,930

3,962

4,192

4,394

4,497

4,871

3,327

3,352

SG&A expense %

20.7%

20.7%

20.8%

21.0%

21.1%

21.3%

21.4%

21.3%

21.3%

Other operating expense

(62)

(70)

(36)

9

65

50

305

148

242

Operating profit

946

937

904

942

1,024

813

390

424

330

Operating margin

4.9%

4.9%

4.8%

4.7%

4.9%

3.9%

1.7%

2.7%

2.1%

               

 

 

Finance costs

296

347

213

208

215

203

258

174

149

Income before taxes and disc ops

671

605

702

740

821

633

149

270

190

Income tax expense

245

204

217

228

245

156

24

(5)

64

Net profit before disc ops

426

401

485

512

576

477

125

275

126

 

 

 

 

 

 

 

 

 

 

Underlying EBITDA

 

1,411

1,387

1,457

 1,599

1,520

1,456

 1,035

1,007

Underlying EBITDA %

 

7.4%

7.3%

7.3%

7.7%

7.2%

6.4%

6.6%

6.4%

 

 

 

 

 

 

 

 

 

 

Underlying operating profit

 

937

904

942

1,024

937

810

589

571

UOP %

 

4.9%

4.8%

4.9%

4.9%

4.4%

3.6%

3.8%

3.6%

 

 

 

 

 

 

 

 

 

 

Free cash flow

 

203

213

626

665

343

772

326

463

               

 

 

 

 

 

 

 

 

 

               

 

 

               

 

 

 

               

 

 

 

               

 

 

 

                               

Detailed Quarterly Income Statements

 

 

3/11

6/11

9/11

12/11

3/12

6/12

9/12

12/12

3/13

6/13

9/13

Revenues

5,044

5,107

5,328

5,634

5,442

5,267

5,369

5,763

5,521

5,298

5,339

Cost of sales

3,754

3,827

3,978

4,193

4,091

3,997

4,062

4,360

4,156

4.013

4,059

                 

 

 

 

 

Gross profit

1,290

1,280

1,350

1,441

1,351

1,270

1,307

1,403

1,365

1,285

1,280

 

25.6%

25.1%

25.3%

25.6%

24.8%

24.1%

24.4%

24,3%

24.7%

24.3%

24.0%

                 

 

 

 

 

SG&A expense

1,090

1.089

1,127

1,192

1,206

1,120

1,111

1,206

1,185

1,128

1,137

Other operating expense

(18)

(18)

(16)

102

120

10

(2)

278

96

9

204

Operating profit

218

209

238

147

32

173

225

(50)

115

176

(20)

Operating margin

4.3%

4.1%

4.5%

2.6%

0.6%

3.3%

4.2%

(0.9%)

2.1%

3.3%

(0.4%)

                 

 

 

 

 

Finance costs

47

43

51

40

65

57

54

75

51

52

49

Income before taxes and disc ops

171

166

187

108

(21)

122

174

(127)

65

129

(66)

Income tax expense

45

49

54

8

19

35

19

(24)

5

27

(12)

Net profit before disc ops

126

117

133

100

(2)

87

193

(151)

60

102

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

350

 384

 438

 350

 331

 377

382

 369

340

320

Adjusted EBITDA %

 

6.9%

7.2%

7.8%

6.4%

6.3%

7.0%

6.6%

6.7%

6.4%

6.0%

 

 

 

 

 

 

 

 

 

 

 

 

Underlying operating profit

200

191

222

249

190

182

225

213

214

193

176

UOP %

 

 

 

 

 

3.5%

4.2%

 

 

3.6%

3.3%

 

 

 

 

 

 

 

 

 

 

 

 

Free cash flow

 

 

 

 

87

44

195

449

255

66

142

                 

 

 

 

 

 

 

 

 

 

 

                 

 

 

 

                                                                   

 

 

 

 

 

 

 

 

Detailed Quarterly Balance Sheets

 

 

9/10

12/10

3/11

6/11

9/11

12/11

3/12

6/12

9/12

12/12

3/13

6/13

9/13

 

Cash and equivalents

0.8

      0.8

0.9

0.8

0.5

0.4

0.4

0.3

 0.4

0.9

1.0

0.8

1.0

 

A/R

0.7

     0.7

0.6

0.7

0.8

0.8

0.8

0.9

0.8

 0.8

0.8

 0.7

0.7

 

Inventories

1.4

    1.5

1.4

1.4

1.6

1.7

1.6

1.6

1.5

1.4

1.4

1.4

1.4

 

Prepaids and other

0

       0

 0.1

 0

 0.1

 0.2

 0.1

 0.1

 0.1

 0.1

0.2

0.5

0.4

 

 

 

                   

 

 

 

Total current

2.9

     3.0

3.0

2.9

3.0

3.1

2.9

2.9

2.8

3.2

3.4

3.4

3.5

 

 

 

                   

 

 

 

PPE, net

3.9

      4.1

3.9

3.9

4.5

4.6

4.4

4.6

4.5

4.3

4.3

4.0

3.9

 

Other asset

 

       3.8

3.7

 3.5

4.1

4.3

 

4.3

4.3

 

4.5

4.4

3.9

 

Total assets

10.5

10.9

10.6

10.4

12.0

12.3

11.8

12.1

11.9

11.9

12.2

11.8

11.4

 

 

 

                   

 

 

 

A/P

1.5

     1.6

1.5

0.6

1.7

1.9

1.6

1.7

1.7

1.9

1.9

1.9

1.8

 

Accrued expenses

0.7

 0.6

0.7

1.5

0.8

0.8

0.8

0.8

0.7

0.7

0.8

0.7

0.8

 

CPLTD

0.1

    0

0

0.1

0.6

0.1

0.1

0.2

0.1

0.2

0.1

0.2

0.3

 

 

 

                   

 

 

 

Total current

2.4

 2.3

2.2

2.3

3.0

2.8

2.6

2.8

2.6

2.8

2.8

2.9

2.9

 

 

 

                   

 

 

 

Accrued emp bene.

 

                   

 

0.4

 

LTD

2.6

    2.7

2.5

2.4

2.7

3.0

3.0

 3.0

2.9

2.9

3.0

2.6

2.5

 

Other liabilities

 

 

1.0

0.9

 

1.0

1.0

1.0

0.9

   

0.9

0.4

 

 

 

                   

 

 

 

Shareholder equity

4.8

5.1

5.0

4.8

5.2

5.4

5.2

5.3

5.4

5.2

5.4

5.2

5.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net   debt

1.9

1.9

1.6

1.7

2.8

2.6

2.7

2.9

2.6

2.2

2.0

2.0

1.8

 

 

 

                   

 

 

 

 

 

                   

 

 

 
 

 

                   

 

 

 
 

 

                   

 

 

 
                                                     

 

 

 

 

 

 

 

 

 

 

Segment Reporting

 

Revenues

 

 

2007

2008

 2009

2010

2011

2012

9mos         2012

9mos       2013

U.S.

13,259

13,081

13,618

14,187

13,815

14,632

9,856

9,738

Belgium

4,346

4,407

4,616

4,800

4,845

4,922

3,619

3,736

Southeastern Europe

1,318

1,536

1,704

1,863

2,450

3,183

2,181

2,296

Total revenue

18,943

19,024

19,938

20,850

21,110

 22,737   

15,656

15,770

Operating   Profit

 

 

 

       

 

 

 

 

 

 

2007

2008

 2009

2010

2011

2012

9mos

2012

9mos

2013

U.S.

746

721

729

753

662

548

411

388

Belgium

168

166

185

236

231

197

144

147

Southeastern Europe

56

49

58

68

84

105

61

64

Corporate

(32)

(31)

(30)

(33)

(40)

(41)

(21)

(28)

Total operating earnings

937

904

942

1,024

937

810

589

571

                   

 

 

 

 

 

 

 

 

 

 

Industry Comparable Public Companies

 

     

Delhaize Group (DEG)

Carrefour S.A. (CA.PA)

Safeway (SWY)

Kroger (KR)

Koninklike   Ahold Nv. (AHONY)

 

 

     

Belgium based food retailer with   supermarkets in Belgium, the U.S. (Southeast and MidAtlantic), and   Southeastern Europe (Greece, Serbia, Romania) with 3,350 stores at Dec 2013.

Operates hypermarkets,   supermarkets, convenience stores, and cash and carry stores, offering food   products and non- food products.  At   Dec 2013, operated about 10,000 stores under its banners.

Operates food and drug retailer   with 1,688 stores, mostly in western U.S., Chicago, and Mid Atlantic   region.  Canadian retail operations   located in British Columbia and other states.

Operates retail food and drug   stores, jewelry stores, and convenience stores in U.S. Operates supermarkets   under two dozen banners.  At Feb 2013,   operated 2,424 supermarkets & 786 convenience stores

Operates retail stores that offer   food and non-food products in U.S. and Europe.  At Dec 2013, operated about 3,074 stores.

   
     

 

 

   
     

 

 

   
     

 

 

   
     

 

 

   

Cash

E 1.0b

$4.2b

$0.5b

$0.3b

$5.0b

   

LTD

E 2.8b

$10.1b

$5.6b

$8.3b

$4.0b

   

 

 

 

   

Price

E 50

$27

$33

$37

$18

   

Shares

101m

688m

239m

517m

1b

   

Market Cap

E 5.05b

$18.6b

$7.8b

$19b

$18b

   

Enter. Value (EV)

E 6.7b

$24.5b

$12.8b

$27b

$17b

   

 

 

 

   

Rev - LTM

E 22.7b

$76.4b

$44b

$99.4b

$43b

   
             

 

 

 

   

Adj EBITDA – 2013

E 1.4b

$2.3b

$2.2b

$4.5b

$2.8b

 

Adj EBITDA – 2012

E 1.5b

$

$

$

 

 

Adj EBITDA – 2011

 

$

$

$

 

 

EV to Adj EBITDA

4.8x

10.4x

5.8x

6.0x

6.1x

 

 

EV to LTM Revenues

0.29x

0.32x

0.29x

0.27x

0.40x

 

LTM Capital   Expenditures

E 0.56b

$1.5b

$0.7b

$2.3b

$1.7b

 

Cap Ex to Revenues

2.5%

2.0%

1.6%

2.3%

4.0%

 

LTM Free Cash Flow

E 0.77b

$0.8b

$0.8b

$1.1b

$1.1b

 

FCF to EV

11%

3%

6%

4%

6%

 

                             

 

Catalysts

  1. Low valuation (10%+ unleveraged FCF yield; 4.8x LTM EBITDA; 0.3x LTM revs).
  2. Steady deleveraging of balance sheet (1.7b net debt or about 1.3x EBITDA).  (Net debt could decline to zero at FYE 2015)
  3. Improved margins in 2014 and 2015 as price investment program in U.S. and Belgium markets cycle through.
  4. Projected 2015 EBITDA of 1.5b from stronger comparable store sales, stable gross margins, and stable SG&A expenses.
  5. Share repurchases and dividends from excess cash and FCF generation.
  6. Possible acquisition of DEG by a strategic or financial purchaser.
  7. Increased analyst coverage and recognition of DEG’s steady turnaround.

Risks

 

  1. The U.S. and/or global economy declines.
  2. Competition in DEG’s markets, including Food Lion’s Southeastern/North Atlantic markets, intensifies and DEG is not able to respond successfully.
  3. DEG’s two largest markets, U.S. and Belgium, are mature and low-growth markets in grocery retailing.
  4. Food Lion’s stores are heavily concentrated in a handful of Southeastern states (NC, VA, SC, GA, and MD) and cities.
  5. Misallocation of capital into a poor acquisition
  6. Management turnover (CEO and CFO have changed in past 12 months)

 

 

 

Disclaimer

 

Disclaimer:  We own shares of DEG.  We may buy or sell these shares at any time without notice.  The information in the write-up is believed to be correct as of the date written but VIC members should do their own verification of this information and analysis of this potential investment.  We undertake no obligation to update this write-up if new information arises at a future date.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

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    Description

    Delhaize Group (DEG or DELB.BR)  

     

    Summary

     

    Our fund generally focuses on smaller companies with Ft. Knox balance sheets and large & sustainable free cash flow yields.  We are often seeking a mid-teens FCF yield or higher on an unleveraged basis.  The objective is for the sustainable FCF to eventually drive up the share price to a more reasonable valuation through share buybacks, debt reductions, dividends, or accretive acquisitions.  Obviously, it is important we have a management team that cares about shareholder value.

     

    We think Delhaize Group (ticker is DEG in U.S. dollars) (ticker is DELB.BR in euros) is an attractive larger cap stock with an unleveraged FCF yield of 10%, a “Ft. Knox” balance sheet, and a stable, cash-generative business model.  DEG is a Belgium-based food retailer with almost two-thirds of its total revenues and adjusted EBITDA generated in the U.S.  The Company operates supermarkets in Belgium, the U.S. (Southeast and Mid-Atlantic as well as Northeast), Greece, Serbia, Bosnia and Herzegovina, Albania, Bulgaria, Romania, and Indonesia.  The Company retails both branded and private label nutritional and household products, among others.  The Company operates different supermarket brands and formulas:  Food Lion, Bottom Dollar Food, and Hannaford supermarkets in the U.S.; Delhaize, AD Delhaize, Delhaize City, Proxy, Red Market, Shop n’ Go, and Tom & Co. in Belgium and Luxembourg; Maxi, Tempo, and Mini-Max in Montenegro; Maxi and Tempo in Serbia, among others. 

     

    In May 2013, DEG reached an agreement with Bi-Lo Holdings on the divestiture of its Sweetbay, Harvey’s, and Reid’s chains (165 total stores) in the U.S. for $265m or about 200m euros.  This transaction is expected to close in first half of 2014 and will further reduce net debt.   The sale of these non-core banners will allow DEG to focus completely on its highest return opportunities in the U.S. segment.

     

    As we describe in more detail below, notwithstanding the well-known challenges that “traditional” grocery retailers in mature markets like the U.S. and Belgium face, we believe DEG is a tremendous cash-generating machine, which we think can sustainably generate 600m euros of FCF per year or more in the future, even after making very significant capital expenditures of 600m euros per year to maintain and even improve its competitive position.  Management has spent the last three years plus investing in lower price positioning in its flagship Food Lion brand in the U.S. as well as its other brands and we believe that lower prices are what customers want in the post-recession world.  There is solid evidence that its strategy is starting to take hold as indicated by stronger traffic and items sold and comparable store sales in most of DEG’s major banners in 2013.  In addition, DEG has a “Ft. Knox” balance sheet, which is among the least levered in the grocery industry.

    A major attraction to DEG is its laser-focus on FCF.  This quote from the 2012 Annual Report highlights this focus:  “Strong free cash flow generation is a life blood of any business and Delhaize Group is no exception.  Facing the difficulties in 2012 and preparing for coming challenges ahead, Delhaize Group has emphasized the creation of strong free cash flow.  The important of this key financial indicator cannot be overestimated”.  A second quote by then CEO Pierre Oliver Becker shows management’s mindset: “In 2013, more than ever before, our focus will be on accelerating revenue growth and on value creation.  Further price investments, selective store openings and comparable store sales growth should result in an increased top line while a ruthless discipline in our capital allocation in combination with a new strategic cost plan and focus on free cash flow generation should result in value creation.”

     

    We believe that during 2014 and 2015, DEG’s cumulative FCF could enable the Company to retire all of its net debt and be debt-free by year end 2015.  We believe DEG could increase its adjusted EBITDA to about 1.5b euros in 2015 and trade for 6x adjusted EBITDA or about 9b euros, or about 90 euros per share, versus today’s price of 50 euros per share (+80%).

     

    (Please note, all numbers herein are stated in euros, unless otherwise noted; latest exchange rate is 1.35 U.S. dollars to one euro).

     

    DEG’s store base is summarized below:

     

     

    Number of stores

     

    FYE   2011

    FYE   2012

    FYE   2013(1)

    United   States

    1,650

    1,553

    1,514

    Belgium   & Luxembourg

    821

    848

    852

    Greece

    251

    268

    281

    Romania

    105

    193

    296

    Serbia

    366

    363

    381

    Bulgaria

    42

    43

    54

    Bosnia   and Herzegovina

    44

    41

    39

    Montenegro

     22

    24

    0

    Indonesia

     89

    103

    117

    Total

    3,390

    3,428

    3,534

             

     

     

     

     

     

     

    (1)     U.S. stores include Sweetbay, Harveys, and Reids store chains of about 150 stores, which are scheduled to be sold to Bi-Lo Holdings in the first half of 2014;  the remaining U.S. store base will include Food Lion, Hannaford, and Bottom Dollar Markets, with a total of about 1,350 stores.

     

    DEG’s has three segments: U.S., Belgium, and Southeastern Europe, which are summarized below:

     

    U.S. Segment

     

    The U.S. segment (64% of LTM revenues and 66% of LTM underlying operating profit) is dominated by the Food Lion chain, which has over 1,100 stores located in the Southeastern and Mid Atlantic U.S.  Second is the Hannaford chain is located in Maine with over 180 stores in New England states.  Third is the Bottom Dollar Food chain is located in Philadelphia and Pittsburg and with about 60 stores.  DEG’s U.S. segment revenues were 14.6b euros in 2013. The Company’s stores are heavily concentrated in a handful of states in the Southeastern U.S. including North Carolina (507 stores), Virginia (312 stores), South Carolina (130 stores), Georgia (91 stores), and Maryland (79 stores).

     

    Food Lion has undergone a major five-phase repositioning program over the past three years.  Over five separate geographic phases, DEG has significantly strengthened Food Lion’s value proposition to customers, in part by repositioning stores with reduced prices to provide the value that customers wanted.  Sales volumes at Food Lion stores which have been repositioned have been positive.  DEG has sought to develop a unique selling proposition at Food Lion shaped around Easy, Affordable, and Fresh.  DEG has focused on the opportunity to increase share of customers’ wallets by leveraging customer loyalty, proximity, small store format, and tailor cut promotions.  DEG has also sought to improve Food Lion’s variety and quality of assortment, fresh products offered, and consistent execution.  The Company has made similar targeted price investments at Hannaford chain and continues to refine the operating model at Bottom Dollar Food.

     

    Belgium Segment

     

    The Belgium segment (22% of revenues and 23% of underlying operating profit) represents DEG’s historical home market and at end of 2012 operated a multi-format network of 840 stores in Belgium and Luxembourg.  Belgian segment revenues in 2013 were 5b euros.  The Company’s market share in Belgium is about 27%.

     

    The Belgium segment has faced key challenges of increasing differentiation, containing SG&A, improving performance of integrated stores, increasing market share, and dealing with an increasingly competitive landscape. In Belgium, the Company has sought to improve the shopping experience (Quality, Freshness, Assortment), store remodeling, improving the price image through price investments and private label brands, growth of the affiliated network, and ecommerce.  The Company is seeking to differentiate the store experience with 46 remodels over past two years and developing a new Proxy format.

     

    Southeastern Europe Segment

     

    The Southeastern Europe (SEE) segment (14% of revenues and 12% of underlying operating profit) includes the operations of Greece, Romania, Indonesia, and Maxi-operations in four Balkan countries (Serbia, Bulgaria, Bosnia, and Herzegovina).  In 2013, 3.2b euros of revenues came from the SEE segment.  The Company’s market share in Greece is about 17%.

     

    The SEE segment is a potential source of growth for the Company, despite key challenges including difficult macro-economic conditions in SEE, integration of the Maxi chain (acquired in 2011) in Serbia, non-performing peripheral assets, and increased competition in Romania.  The Company has sought market share gains in Greece through price investments; gross margin improvements at Maxi due to supplier negotiations, larger private brands, and new distribution center; acceleration of growth in Romania; and divestment of peripheral assets.

     

    The New Game Plan

     

    In January 2010, the Company initiated a major strategic plan called The New Game Plan (“the Plan”) under CEO Pierre Olivier Beckers.  The Plan had three key elements: Growth, Efficiency, and Sustainability.  The Plan’s stated goal of gross annual cost saving of 500m euros by end of 2012 has been significantly exceeded.  The Plan also sought to strengthen brand equity in DEG stores through: a) price competitiveness; b) private brand; c) convenience through technology; and d) sustainability. The Plan had a strong focus on improving profitability and generating FCF.  Many unprofitable stores were closed.  Cost saving were largely reinvested in the business through more competitive prices offered to customers.  The table above shows the improving trends for comp store sales as a result of the Plan at the U.S. and Belgium segments, DEG’s two largest segments:

     

    Under the Plan, Food Lion has been completely repositioned over the past three years, in five geographic and stated phases.  The first phase was in the Raleigh and Chattanooga markets covering about 200 stores in 2011.  Second and third phases were completed in 2012 and repositioned over 600 Food Lion stores.  Phase four was initiated in Q2 of 2013.  Phase five was the final phase and was initiated in November 2013.  Each of the five phases of repositioned stores showed positive comparable store sales in Q4 of 2013.  U.S. segment comparable store sales were 2.4% in Q4 of 2014, the fifth consecutive quarter of positive comparable store sales.

     

    At Food Lion, with the store repositions, the Company has sought to develop a Unique Selling Proposition to differentiate Food Lion, emphasizing Easy, Fresh, and Affordable.  Easy includes proximity, small store format, quick shopping, and good experience.  Fresh includes the variety and quality of assortment and consistent execution.  Affordable includes tailored promotions and private brands.

     

    The Plan and the price investments in DEG’s stores put pressure on margins and gross margin declined from 25.7% in 2010 to 25.4% in 2011 to 24.5% in 2012 as Food Lion and other chains invested in price.  However, gross margin stabilized in 2013 and was nearly flat at 24.5% as the reposition program at Food Lion and other chains started to be fully cycled.

    FYE 12/31

    Q1 2012

    Q2 2012

    Q3 2012

    Q4 201

    Q1 2013

    Q2 2013

    Q3 2013

    Q4 2013

    U.S. segment comp store sales

    (0.6)%

    (0.6)%

    +1.6%

    0.0%

    +1.9%

    +1.1%

    +2.2%

     +2.8%

    Belgium segment comp store sales

    (0.9)%

    +1.1%

    +0.6%

    +0.8%

    +2.4%

    +0.8%

    +1.5%

    +2.4%

    SEE segment comp store sales

               

    (1.2)%

    (0.6)%

     

    Under the Plan, the Company also sought to reverse a ten-year increase of SG&A expenses as a percentage of revenues, from 20.7% in 2006 to 21.5% in 2013 estimated.  DEG has also had a major focus on free cash flow generation through capital discipline, focus on working capital, and strict cost controls.

     

    The Company continues to execute the Plan with key priorities in the following areas:

    • revenue priorities include strengthening its banners, targeted price investments, and accelerating organic growth;
    • free cash flow priorities include disciplined capital allocation, working capital improvements, and target 500m of FCF;
    • cost priorities include continued focus on reducing complexity and enhancing efficiency.

     

     

    Delta Maxi Acquisition

     

    DEG acquired Delta Maxi (“Maxi”) in July 2011 for close to 600m euros which included operations in Serbia, Bosnia, Herzegovina, Montenegro, and Albania .  Maxi operated approximately 350 stores in Serbia and was its largest food retailer.  Maxi operated approximately 450 total stores in Serbia, Bulgaria, Bosnia, and Herzegovina.  The Company combined Maxi with its existing businesses in Greece and Romania to help make it a leading player in the region, which has a stronger growth profile compared to the U.S. segment and the Belgium segment.  Maxi represented the largest acquisition undertaken by the Company in the past ten years.  Maxi’s acquisition has helped make the company a stronger regional supermarket player in the Southeastern European markets.

     

    Competition

     

    The food retailing industry is highly competitive and Food Lion competes against high-end stores like Whole Foods and Harris Teeter as well as price-oriented competitors like Wal-Mart.  The concern is that traditional supermarkets like Food Lion are stuck in the middle and losing share to both high-end and low-end players.  However, under The Plan, Food Lion has responded by seeking to reposition its stores as low price, with convenient locations, strong service, and high-quality produce.  In the Triangle area of North Carolina (Raleigh, Durham, Chapel-Hill), grocery market shares in 2011 were Wal-Mart 23%, Food Lion 19%, Harris Teeter 16%, Kroger 9%, Lowes Foods 6%, and Sam’s Clubs 5%.  (Kroger recently purchased Harris Teeter for $2.5b as discussed below).  Food Lion has traditionally been known as a low-price player in its markets and under the Plan has sought to reestablish this position.  We believe Food Lion has substantially reduced the price gap with Wal-Mart under the Plan with lower prices on about 6,500 core items in its stores while emphasizing smaller and more convenient stores and fresh produce.  In fact, Food Lion has actually run TV ads showing comparison prices against Wal-Mart.  We believe Food Lion has strongly improved its value-proposition to customers in the past three years and this should improve its competitive position.  Food Lion’s convenient locations are potentially a strong competitive advantage in its markets.

     

    Attractive Valuation For A Stable Franchise

     

    DEG is trading at about 50 euros per share and has about 101m shares outstanding for a market value of about 5b euros.  DEG’s net debt is about 1.7b euros for an EV of about 6.7b euros.  We believe this EV is very attractive considering the Company generated 772m and 670m euros of FCF in 2012 and 2013, respectively.  Although both FCF numbers include some working capital benefits, we believe the Company can sustainably generate 600m+ euros per year of FCF over the next three years.  We believe 2013 adjusted EBITDA is about $1.4b euros, so DEG is trading at about 4.8x adjusted EBITDA for 2013.  DEG generated cash from operations of 1.3b euros in 2013, so DEG is trading at 5.1x 2013 cash from operations.  Management is effectively deploying cash from operations in a more focused, profit-oriented, and FCF-oriented manner.  We expect the strong generation of cash from operations and FCF and the effective allocation thereof to become increasingly clear to shareholders during 2014 and 2015, resulting in a much higher valuation.

     

    From 2009 to 2013, the Company generated cumulative free cash flow of about 3b euros or almost 50% of the current EV.  We note this is after spending about 3.5b euros on capital expenditures or about 2.9% of total revenues, which is consistent with other retail grocery chains.  We believe DEG will generate strong free cash flows of 600m+ in 2014 and 2015.

     

    We believe that during 2014 and 2015 cumulative FCF could retire all net debt, leaving DEG debt-free by year end 2015.  Further, we believe DEG could increase its adjusted EBITDA to about 1.5b euros in 2015 and trade for 6x adjusted EBITDA or about 9b euros, or about 90 euros per share, versus today’s price of 50 euros per share (+80%).

     

    Steadily Declining Net Debt and Improving Balance Sheet

     

    With the acquisition of Maxi in 2011, DEG’s net debt peaked at about 2.6b euros at year end 2011.  Since this time, however, the Company has used its strong free cash flow to steadily and rapidly reduce its net debt position to about 1.7b euros estimated at year end 2013, representing a 40% reduction from the peak level of 2.6b at year end 2011.  We expect net debt to continue to decline in 2014 and 2015.  The sale of non-core U.S. food retailing assets to Bi-Lo Holdings for about 200m euros is expected to close in the first half of 2014.  We also believe the Company can generate FCF of at least 600m euros in both 2014 and 2015.  Based on these assumptions, we believe DEG could nearly be debt-free by year end 2015, or in less than two years. 

     

    We believe the Company’s “Ft. Knox” balance sheet will give its Board steadily increasing options to enhance shareholder value through dividends, share repurchases, accretive acquisitions, or internal growth projects.  We believe management has been much more disciplined in capital allocation under the Plan and we believe this new mindset, combined with DEG’s “Ft. Knox” balance sheet and strong free cash flow, will eventually result in a much stronger stock market valuation over the next couple of years.

     

    Strong Q4 Results

     

    DEG reported preliminary Q4 results on January 23, 2014 and they were very solid.  Consolidated revenue grew 3.0% at constant exchange rates with solid Q4 comparable store sales growth in the U.S. segment driven by continued strong performance at Food Lion despite retail deflation.  Q4 comparable stores sales growth was 2.4% in the Belgium segment and -0.6% in the Southeastern Europe (SEE) segment.

     

    For Fiscal 2013, consolidated revenue grew 2.6% at constant exchange rates and preliminary underlying operating profit was approximately 770m euros at constant exchange rates.  Fiscal 2013 free cash flow was extremely strong at approximately 670m euros at constant exchange rates.

     

    Management noted that U.S. volume growth was positive and was especially pleased with Food Lion’s momentum.  The phase repositioning undertaken at Food Lion almost three years ago was meeting management’s expectations and management was looking forward to further developing the Food Lion customer proposition in 2014.

     

    Q4 Segment Results Show Evidence of Turnaround

     

    For the U.S. segment, Q4 revenues increased by 2.8% to 4.3b euros and comp store sales growth was 2.8% despite retail inflation turning negative (-0.4%) due to additional price investments as a result of Phase 4 in Q2 and Phase 5 in November at Food Lion and an overall low inflationary environment.  At Hannaford, both comp store sales growth and real growth were positive as a result of price investments and increased promotions, despite a more competitive environment in the Northeast.

     

    For the U.S. segment, 2013 revenues were 12.9b euros or an increase of 1.9% over prior year in local currency due to comp store sales growth of 2.0%.

     

    For the Belgium segment, Q4 revenues were 1.3b euros, or an increase of 2.5% over prior year, with comparable store sales growth of 2.4% mainly driven by retail inflation (2.1%) and solid year-end sales.

     

    For the Belgium segment, 2013 revenues were 5.1b euros, or an increase of 3.0% compared to prior year, resulting from comparable store sales growth of 1.8% and network growth.  For 2013, Belgium segments market share remained stable compared to prior year at 25.5%.

     

    For the Southeastern Europe (SEE) segment, Q4 revenues increased by 4.5% to 852m euros, due to positive comparable store sales growth in Greece and expansion in Romania, partially offset by negative volume growth in Serbia.  Q4 comparable stores sales growth was -0.6% for the segment.

     

    For the SEE segment, 2013 revenues increased by 5.1% to 3.1b euros, mainly as a result of volume growth in Greece and store expansion in Romania, which added 103 stores.  Comparable stores sales growth was -0.3% for 2013.

     

    Strong Cash Flow Generation and Solid Business Model

     

    The Company’s retail food store assets have generated large amounts of free cash flow over the past five years and this is after significant capital expenditures to upgrade and improve DEG’s global store base.  (Capital expenditures have averaged about 640m euros per year or about 3% of total revenues, consistent with industry averages).  From 2009 through 2013, DEG generated about 3b in cumulative FCF or about 50% of the current EV.  Much of this was through an extremely difficult economic environment.  We believe the local market orientation, established customer base, and price-competitive focus of DEG’s grocery stores will protect its business franchise and FCF going forward.

     

    The local orientation of grocery stores and the Company’s long established market locations and customer relationships help to create a steady business model which can reliably generate revenues, adjusted EBITDA, and free cash flow, even under adverse economic conditions.  It also helps create a barrier to entry for new market competitors who are forced to try to take business from entrenched competitors.

     

    Major Reposition Program of Food Lion and Other Banners Creates Stronger Value Proposition

     

    Food Lion is the largest and most important DEG brand with about 1,100 stores in the U.S.  Under The Plan, management has aggressively repositioned the entire store base of Food Lion in five separate phases. Food Lion stores which have been repositioned are showing consistently higher comparable store sales and profitability.  The repositioning plan has included simplified and improved operations and lower prices so that Food Lion is more of a price leader in its markets.  We think this strategy makes sense and since the recession consumers want low prices in addition to convenient and well-merchandised stores.  We think the Company will realize stronger market share and growth over the next few years as a result of the investment program Food Lion has undergone.  The repositioned Food Lion stores are seeing meaningful uplifts in transactions, volumes, and comparable store sales growth.  Customer feedback has indicates improved perception of service levels in the stores and variety in fresh produce and private label.  Perception of price has also improved.

     

    Industry Consolidation Prospects/ Strong Acquisition Valuation for Harris Teeter

     

    Kroger’s recent purchase of Harris Teeter indicates the potential value in the grocery business.  Harris Teeter is an upscale regional grocer with 212 stores concentrated in the Carolinas and Washington, D.C. areas.  Kroger paid $2.5b for Harris Teeter which had annual sales in 2012 of about $4.5b or about 55% of revenues.  Kroger paid about 8x Harris Teeter’s LTM EBITDA.  These valuations are well above DEG’s current multiples of 30% of revenues and 4.8x EBITDA.  Kroger cited consolidation savings opportunities by retaining the consumer facing portions of Harris Teeter’s business while consolidating back-office type operations to achieve expense savings.  We believe in the slow growth environment for grocery retailing in the U.S. there is likely to be further consolidation as the largest players continue to seek scale to achieve cost savings in the absence of revenue growth opportunities.  We think Food Lion and Hannaford may be good consolidation opportunities for other players.

      

    2013 Results Provide Solid Momentum for 2014

     

    The Company’s performance in 2013 was very solid.  The Company generated total revenues of 22.7b, underlying operating profit of 770m euros, and free cash flow of 670m euros, after spending 565m euros on capital expenditures.  We estimate adjusted EBITDA for 2013 was about 1.3b to 1.4b euros.  The Company also sharply improved its balance sheet during 2013 as net debt went from 2.2b euros at year end 2012 to about 1.5b euros (our estimate) at year end 2013.  Gross margin during 2013 was relatively flat versus prior year after declining in previous years and SG&A expense as a percentage of revenues was also held steady.  Operating performance improved throughout the year, as evidenced by the comparable store sales trends shown in the chart above in both the U.S. and Belgium segments, with the strongest performance in Q4 for both segments.  We believe this reflects the completion of the five reposition phases at Food Lion and similar actions in the Belgium segment.  Overall, we believe the Company has strong momentum into 2014 in all of its three segments.

     

    Lastly, we believe impact on margins from price investments at U.S. segment and Belgium segment, which were felt in 2012 and 2013, will likely moderate in 2014 as all five phase repositions are completed at Food Lion.  DEG will also benefit from continued cost reductions and improved comparable stores sales results in 2014.

     

    Excellent Potential for Share Repurchase or Dividends

     

    DEG has not repurchased significant shares to date.  However, as DEG’s balance sheet continues to deleverage, we believe a major share repurchase program will be more seriously considered.  DEG’s strong cash generation and under-leveraged balance sheet give management several levers to drive shareholder value if its stock price remains depressed.

     

    Accrued Employee Benefit Obligations

     

    DEG had about 200m euros of accrued employee benefit obligations at year end 2012.  These represent retirement plan obligations primarily to existing and former employees.

     

    Conclusion and Target Price

     

    Based on 6x our adjusted EBITDA estimate of 1.5b for 2015 and a projected zero net debt position at year-end 2015, we believe DEG could trade for a market cap of close to 9b euros or about 90 euros per share versus 50 euros per share today (+80%).  If DEG’s food retailing assets perform as we expect, we think our target prices can be achieved.  Further, DEG’s assets are well-established in attractive markets and could be attractive to a strategic acquirer.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Share Ownership

     

     

    Shares

    %

    Silchester International

    10,237

    10.0%

    BlackRock Institutional

    5,053

    5.0%

    Norges Bank Invest.

    2,582

    2.5%

    Vanguard Group

    1,283

    1.3%

    ValueInvest Asset

    1,016

    1.0%

           

     

     

     

    Avg   Daily Volume

    Price per share

    47

       

    532,000

     

    Shares outstanding

    101

     

     

    Market value

    4,747

     

     

     

    52 week range

    35

    54

     

                 
     

    Income statements

               

    9mos

    9mos

    FYE 12/31

    2007

    2008

    2009

    2010

    2011

    2012

    2012

    2013

    Sales

    18,943

    19,024

    19,938

    20,850

    21,110

    22,737

    15,656

    15,770

    Gross profit

    4,789

    4,820

    5,125

    5,353

    5,361

    5,567

    3,812

    3,829

    Adjusted EBITDA (1)

    1,411

    1,378

    1,457

    1,619

    1,533

    1,456

    1,036

    1,007

    Adjusted EBIT (1)

    937

    904

    942

    1,044

    947

    810

    589

    571

    Net income

    401

    485

    520

    574

    475

    103

    274

    81

    EPS – continuing ops

    3.80

    4.65

    5.00

    5.68

    4.68

    1.04

    2.72

    1.21

    Adjusted EBITDA %

    7.4%

    7.2%

    7.3%

    7.8%

    7.2%

    5.8%

    6.6%

    6.4%

    Gross margin

    25.3%

    25.3%

    25.7%

    25.7%

    25.4%

    24.5%

    24.4%

    24.3%

    Cash   flow statements

       

     

    FYE 12/31

    2007

    2008

    2009

    2010

    2011

    2012

    2012

    2013

    Net income

    425

    485

    520

    574

    475

    103

    274

    81

    Dep & amort

    474

    474

    515

    575

    586

    650

    486

    454

    Non cash adjust

    95

    156

    50

    250

    295

    240

    (66)

    232

    Working capital chgs

    (63)

    (188)

    92

    (80)

    (196)

    428

    127

    (27)

    Cash fr operations

    932

    927

    1,176

    1,317

    1,106

    1,408

    821

    740

    Capital expenditures

    (729)

    (714)

    (520)

    (658)

    (762)

    (688)

    (523)

    (324)

    Dividends

    (133)

    (147)

    (152)

    (161)

    (173)

    (180)

    (180)

    (142)

    Share repurchases

    (36)

    0

    0

    0

    0

    0

    0

    0

    Acquisitions

    120

    (100)

    (147)

    0

    (591)

    0

    0

    0

    Est. free cash flow

    203

    213

    656

    659

    350

    720

    297

    416

    Balance sheets

     

     

    FYE 12/31

    2007

    2008

    2009

    2010

    2011

    2012

    9/23/13

     

    Cash

    249

    320

    439

    758

    432

    932

    959

     

    Total assets

    8,821

    9,700

    9,748

    10,902

     12,292

    11,936

    11,446

     

    Total debt

    2,605

    2,407

    2,547

    2,925

    3,014

    2,925

    2,853

     

    Shareholder equity

    3,676

    4,195

    4,409

    5,069

    5,419

    5,193

    5,042

     
                     

    Net debt

    2,350

    2,087

    2,109

    2,167

    2,647

    2,060

    1,894

     
     

     

    Shares outstanding

    100.6

    100.6

    100.8

    101.2

    101.4

    101.1

    101.1

     
                             
     

     

     

    Valuation & Valuation Ratios

     

    Market value

    5,050

    EV / Adjusted EBITDA

    4.8

    Net debt

    1,700

    Enterprise Value / Adjust EBIT

    8.2

    Preferred

    0

    Enterprise Value / Cash from Ops

    4.9

    Enterprise value

    6,750

    Enterprise Value / Revenues

    30%

     

     

    Price per share

    50

     

    Shares outstanding

    101

     

    Market value

    5,050

    Avg Daily Volume

     

       

    132,000

     

    52 week range

    35

    53

     

     

     

                     

     

     

     

     

     

     

     

     

     

     

     

                       
     

     

     

     

                       

     

     

     

     

     

                       

     

                                                   

     

     

    Detailed Income Statements

     

     

    2006

    2007

    2008

    2009

    2010

    2011

    2012

    9mos 2012

    9mos 2013

    Revenues

    19,225

    18,957

    19,024

    19,938

    20,850

    21,110

    22,737

    15,656

    15,770

    Cost of sales

    14,372

    14,162

    14,204

    14,813

    15,497

    15,749

    17,170

    11,844

    11,941

                   

     

     

    Gross profit

    4,853

    4,795

    4,820

    5,125

    5,353

    5,361

    5,567

    3,812

    3,829

     

    25.2%

    25.3%

    25.3%

    25.7%

    25.7%

    25.4%

    24.5%

    24.4%

    24.3%

                   

     

     

    SG&A expense

    3,970

    3,930

    3,962

    4,192

    4,394

    4,497

    4,871

    3,327

    3,352

    SG&A expense %

    20.7%

    20.7%

    20.8%

    21.0%

    21.1%

    21.3%

    21.4%

    21.3%

    21.3%

    Other operating expense

    (62)

    (70)

    (36)

    9

    65

    50

    305

    148

    242

    Operating profit

    946

    937

    904

    942

    1,024

    813

    390

    424

    330

    Operating margin

    4.9%

    4.9%

    4.8%

    4.7%

    4.9%

    3.9%

    1.7%

    2.7%

    2.1%

                   

     

     

    Finance costs

    296

    347

    213

    208

    215

    203

    258

    174

    149

    Income before taxes and disc ops

    671

    605

    702

    740

    821

    633

    149

    270

    190

    Income tax expense

    245

    204

    217

    228

    245

    156

    24

    (5)

    64

    Net profit before disc ops

    426

    401

    485

    512

    576

    477

    125

    275

    126

     

     

     

     

     

     

     

     

     

     

    Underlying EBITDA

     

    1,411

    1,387

    1,457

     1,599

    1,520

    1,456

     1,035

    1,007

    Underlying EBITDA %

     

    7.4%

    7.3%

    7.3%

    7.7%

    7.2%

    6.4%

    6.6%

    6.4%

     

     

     

     

     

     

     

     

     

     

    Underlying operating profit

     

    937

    904

    942

    1,024

    937

    810

    589

    571

    UOP %

     

    4.9%

    4.8%

    4.9%

    4.9%

    4.4%

    3.6%

    3.8%

    3.6%

     

     

     

     

     

     

     

     

     

     

    Free cash flow

     

    203

    213

    626

    665

    343

    772

    326

    463

                   

     

     

     

     

     

     

     

     

     

                   

     

     

                   

     

     

     

                   

     

     

     

                   

     

     

     

                                   

    Detailed Quarterly Income Statements

     

     

    3/11

    6/11

    9/11

    12/11

    3/12

    6/12

    9/12

    12/12

    3/13

    6/13

    9/13

    Revenues

    5,044

    5,107

    5,328

    5,634

    5,442

    5,267

    5,369

    5,763

    5,521

    5,298

    5,339

    Cost of sales

    3,754

    3,827

    3,978

    4,193

    4,091

    3,997

    4,062

    4,360

    4,156

    4.013

    4,059

                     

     

     

     

     

    Gross profit

    1,290

    1,280

    1,350

    1,441

    1,351

    1,270

    1,307

    1,403

    1,365

    1,285

    1,280

     

    25.6%

    25.1%

    25.3%

    25.6%

    24.8%

    24.1%

    24.4%

    24,3%

    24.7%

    24.3%

    24.0%

                     

     

     

     

     

    SG&A expense

    1,090

    1.089

    1,127

    1,192

    1,206

    1,120

    1,111

    1,206

    1,185

    1,128

    1,137

    Other operating expense

    (18)

    (18)

    (16)

    102

    120

    10

    (2)

    278

    96

    9

    204

    Operating profit

    218

    209

    238

    147

    32

    173

    225

    (50)

    115

    176

    (20)

    Operating margin

    4.3%

    4.1%

    4.5%

    2.6%

    0.6%

    3.3%

    4.2%

    (0.9%)

    2.1%

    3.3%

    (0.4%)

                     

     

     

     

     

    Finance costs

    47

    43

    51

    40

    65

    57

    54

    75

    51

    52

    49

    Income before taxes and disc ops

    171

    166

    187

    108

    (21)

    122

    174

    (127)

    65

    129

    (66)

    Income tax expense

    45

    49

    54

    8

    19

    35

    19

    (24)

    5

    27

    (12)

    Net profit before disc ops

    126

    117

    133

    100

    (2)

    87

    193

    (151)

    60

    102

     

     

     

     

     

     

     

     

     

     

     

     

     

    Adjusted EBITDA

     

    350

     384

     438

     350

     331

     377

    382

     369

    340

    320

    Adjusted EBITDA %

     

    6.9%

    7.2%

    7.8%

    6.4%

    6.3%

    7.0%

    6.6%

    6.7%

    6.4%

    6.0%

     

     

     

     

     

     

     

     

     

     

     

     

    Underlying operating profit

    200

    191

    222

    249

    190

    182

    225

    213

    214

    193

    176

    UOP %

     

     

     

     

     

    3.5%

    4.2%

     

     

    3.6%

    3.3%

     

     

     

     

     

     

     

     

     

     

     

     

    Free cash flow

     

     

     

     

    87

    44

    195

    449

    255

    66

    142

                     

     

     

     

     

     

     

     

     

     

     

                     

     

     

     

                                                                       

     

     

     

     

     

     

     

     

    Detailed Quarterly Balance Sheets

     

     

    9/10

    12/10

    3/11

    6/11

    9/11

    12/11

    3/12

    6/12

    9/12

    12/12

    3/13

    6/13

    9/13

     

    Cash and equivalents

    0.8

          0.8

    0.9

    0.8

    0.5

    0.4

    0.4

    0.3

     0.4

    0.9

    1.0

    0.8

    1.0

     

    A/R

    0.7

         0.7

    0.6

    0.7

    0.8

    0.8

    0.8

    0.9

    0.8

     0.8

    0.8

     0.7

    0.7

     

    Inventories

    1.4

        1.5

    1.4

    1.4

    1.6

    1.7

    1.6

    1.6

    1.5

    1.4

    1.4

    1.4

    1.4

     

    Prepaids and other

    0

           0

     0.1

     0

     0.1

     0.2

     0.1

     0.1

     0.1

     0.1

    0.2

    0.5

    0.4

     

     

     

                       

     

     

     

    Total current

    2.9

         3.0

    3.0

    2.9

    3.0

    3.1

    2.9

    2.9

    2.8

    3.2

    3.4

    3.4

    3.5

     

     

     

                       

     

     

     

    PPE, net

    3.9

          4.1

    3.9

    3.9

    4.5

    4.6

    4.4

    4.6

    4.5

    4.3

    4.3

    4.0

    3.9

     

    Other asset

     

           3.8

    3.7

     3.5

    4.1

    4.3

     

    4.3

    4.3

     

    4.5

    4.4

    3.9

     

    Total assets

    10.5

    10.9

    10.6

    10.4

    12.0

    12.3

    11.8

    12.1

    11.9

    11.9

    12.2

    11.8

    11.4

     

     

     

                       

     

     

     

    A/P

    1.5

         1.6

    1.5

    0.6

    1.7

    1.9

    1.6

    1.7

    1.7

    1.9

    1.9

    1.9

    1.8

     

    Accrued expenses

    0.7

     0.6

    0.7

    1.5

    0.8

    0.8

    0.8

    0.8

    0.7

    0.7

    0.8

    0.7

    0.8

     

    CPLTD

    0.1

        0

    0

    0.1

    0.6

    0.1

    0.1

    0.2

    0.1

    0.2

    0.1

    0.2

    0.3

     

     

     

                       

     

     

     

    Total current

    2.4

     2.3

    2.2

    2.3

    3.0

    2.8

    2.6

    2.8

    2.6

    2.8

    2.8

    2.9

    2.9

     

     

     

                       

     

     

     

    Accrued emp bene.

     

                       

     

    0.4

     

    LTD

    2.6

        2.7

    2.5

    2.4

    2.7

    3.0

    3.0

     3.0

    2.9

    2.9

    3.0

    2.6

    2.5

     

    Other liabilities

     

     

    1.0

    0.9

     

    1.0

    1.0

    1.0

    0.9

       

    0.9

    0.4

     

     

     

                       

     

     

     

    Shareholder equity

    4.8

    5.1

    5.0

    4.8

    5.2

    5.4

    5.2

    5.3

    5.4

    5.2

    5.4

    5.2

    5.0

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Net   debt

    1.9

    1.9

    1.6

    1.7

    2.8

    2.6

    2.7

    2.9

    2.6

    2.2

    2.0

    2.0

    1.8

     

     

     

                       

     

     

     

     

     

                       

     

     

     
     

     

                       

     

     

     
     

     

                       

     

     

     
                                                         

     

     

     

     

     

     

     

     

     

     

    Segment Reporting

     

    Revenues

     

     

    2007

    2008

     2009

    2010

    2011

    2012

    9mos         2012

    9mos       2013

    U.S.

    13,259

    13,081

    13,618

    14,187

    13,815

    14,632

    9,856

    9,738

    Belgium

    4,346

    4,407

    4,616

    4,800

    4,845

    4,922

    3,619

    3,736

    Southeastern Europe

    1,318

    1,536

    1,704

    1,863

    2,450

    3,183

    2,181

    2,296

    Total revenue

    18,943

    19,024

    19,938

    20,850

    21,110

     22,737   

    15,656

    15,770

    Operating   Profit

     

     

     

           

     

     

     

     

     

     

    2007

    2008

     2009

    2010

    2011

    2012

    9mos

    2012

    9mos

    2013

    U.S.

    746

    721

    729

    753

    662

    548

    411

    388

    Belgium

    168

    166

    185

    236

    231

    197

    144

    147

    Southeastern Europe

    56

    49

    58

    68

    84

    105

    61

    64

    Corporate

    (32)

    (31)

    (30)

    (33)

    (40)

    (41)

    (21)

    (28)

    Total operating earnings

    937

    904

    942

    1,024

    937

    810

    589

    571

                       

     

     

     

     

     

     

     

     

     

     

    Industry Comparable Public Companies

     

         

    Delhaize Group (DEG)

    Carrefour S.A. (CA.PA)

    Safeway (SWY)

    Kroger (KR)

    Koninklike   Ahold Nv. (AHONY)

     

     

         

    Belgium based food retailer with   supermarkets in Belgium, the U.S. (Southeast and MidAtlantic), and   Southeastern Europe (Greece, Serbia, Romania) with 3,350 stores at Dec 2013.

    Operates hypermarkets,   supermarkets, convenience stores, and cash and carry stores, offering food   products and non- food products.  At   Dec 2013, operated about 10,000 stores under its banners.

    Operates food and drug retailer   with 1,688 stores, mostly in western U.S., Chicago, and Mid Atlantic   region.  Canadian retail operations   located in British Columbia and other states.

    Operates retail food and drug   stores, jewelry stores, and convenience stores in U.S. Operates supermarkets   under two dozen banners.  At Feb 2013,   operated 2,424 supermarkets & 786 convenience stores

    Operates retail stores that offer   food and non-food products in U.S. and Europe.  At Dec 2013, operated about 3,074 stores.

       
         

     

     

       
         

     

     

       
         

     

     

       
         

     

     

       

    Cash

    E 1.0b

    $4.2b

    $0.5b

    $0.3b

    $5.0b

       

    LTD

    E 2.8b

    $10.1b

    $5.6b

    $8.3b

    $4.0b

       

     

     

     

       

    Price

    E 50

    $27

    $33

    $37

    $18

       

    Shares

    101m

    688m

    239m

    517m

    1b

       

    Market Cap

    E 5.05b

    $18.6b

    $7.8b

    $19b

    $18b

       

    Enter. Value (EV)

    E 6.7b

    $24.5b

    $12.8b

    $27b

    $17b

       

     

     

     

       

    Rev - LTM

    E 22.7b

    $76.4b

    $44b

    $99.4b

    $43b

       
                 

     

     

     

       

    Adj EBITDA – 2013

    E 1.4b

    $2.3b

    $2.2b

    $4.5b

    $2.8b

     

    Adj EBITDA – 2012

    E 1.5b

    $

    $

    $

     

     

    Adj EBITDA – 2011

     

    $

    $

    $

     

     

    EV to Adj EBITDA

    4.8x

    10.4x

    5.8x

    6.0x

    6.1x

     

     

    EV to LTM Revenues

    0.29x

    0.32x

    0.29x

    0.27x

    0.40x

     

    LTM Capital   Expenditures

    E 0.56b

    $1.5b

    $0.7b

    $2.3b

    $1.7b

     

    Cap Ex to Revenues

    2.5%

    2.0%

    1.6%

    2.3%

    4.0%

     

    LTM Free Cash Flow

    E 0.77b

    $0.8b

    $0.8b

    $1.1b

    $1.1b

     

    FCF to EV

    11%

    3%

    6%

    4%

    6%

     

                                 

     

    Catalysts

    1. Low valuation (10%+ unleveraged FCF yield; 4.8x LTM EBITDA; 0.3x LTM revs).
    2. Steady deleveraging of balance sheet (1.7b net debt or about 1.3x EBITDA).  (Net debt could decline to zero at FYE 2015)
    3. Improved margins in 2014 and 2015 as price investment program in U.S. and Belgium markets cycle through.
    4. Projected 2015 EBITDA of 1.5b from stronger comparable store sales, stable gross margins, and stable SG&A expenses.
    5. Share repurchases and dividends from excess cash and FCF generation.
    6. Possible acquisition of DEG by a strategic or financial purchaser.
    7. Increased analyst coverage and recognition of DEG’s steady turnaround.

    Risks

     

    1. The U.S. and/or global economy declines.
    2. Competition in DEG’s markets, including Food Lion’s Southeastern/North Atlantic markets, intensifies and DEG is not able to respond successfully.
    3. DEG’s two largest markets, U.S. and Belgium, are mature and low-growth markets in grocery retailing.
    4. Food Lion’s stores are heavily concentrated in a handful of Southeastern states (NC, VA, SC, GA, and MD) and cities.
    5. Misallocation of capital into a poor acquisition
    6. Management turnover (CEO and CFO have changed in past 12 months)

     

     

     

    Disclaimer

     

    Disclaimer:  We own shares of DEG.  We may buy or sell these shares at any time without notice.  The information in the write-up is believed to be correct as of the date written but VIC members should do their own verification of this information and analysis of this potential investment.  We undertake no obligation to update this write-up if new information arises at a future date.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

    see above
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