PRESS RELEASE: Fitch:Ahold Outlook Now Positive Vs Stable
24-10-2005 16:28
The following is a press release from Fitch Ratings: Fitch Changes Ahold's Outlook to Positive; Affirms Ratings
London-24 October 2005: Fitch Ratings has today changed Netherlands-based food retailer Koninklijke Ahold NV's ("Ahold") Outlook to Positive from Stable. Its ratings are affirmed at Senior Unsecured 'BB' and Short-term 'B'.
The Outlook change results from the continued improvement in the group's financial profile as a result of the greater than anticipated business disposal proceeds. Ahold's ratings are, however, still affected by its exposure to both food retail and food service environments, which are subject to material price deflation and on-going execution risk linked to the group's 'Road to Recovery' turnaround strategy that is underway.
While Ahold has been impressive in reducing debt through a combination of its 2003 emergency rights issue and disposals of assets and non-core operations, any further substantial improvement will rely on a strong recovery in the financial performance of its core food retail chains and US Foodservice ("USF").
While USF was the cause of Ahold's troubles, which came to light in early 2003, the strength of its US food retail operations is more critical to its financial health. Ahold's two remaining foods retail arenas, Stop&Shop/Giant-Landover and Giant-Landover/Tops have continued to struggle during FY04 and the first half of FY05. Competition has appeared to intensify, as illustrated by the acquisition of Shaw's by Albertsons. This increased competition has led to gross margin erosion despite Ahold's cost cutting programme that has generated gross cost savings of EUR330 million at H105. Similar to most other major food retailers in the current deflationary environment Ahold is looking to increase the penetration of private label products in its stores. While these may depress headline sales, they will be mitigated by the likely volume growth as shoppers look for bargain deals while sales margins will benefit. This pattern has been repeated in Ahold's home market, the Netherlands, where consumers are demanding lower prices. Ahold's Albert Heijn format has been more successful than its US operations in that it has been able to grow market share despite the downturn, putting its largest competitor, Laurus, under financial pressure.
It is currently difficult to assess the success of the group's measures in making USF profitable. Much of the supplier contract renegotiation was not completed until the end of FY04 and thus any benefits have not had the opportunity to emerge. While USF was loss-making at the operating profit level in FY04 it has been able to report modest profits for the first two quarters of FY05 as a result of the contract renegotiations, central purchasing and a slight increase in more profitable 'street' sales. The group's target of reaching a 1.7% operating margin no later than 2006 is likely to be hampered by the elevated oil price and pricing pressure from customers.
Recent trading figures have caused concern, given both the weak like-for-like sales data and the substantial margin erosion highlighted in the interim results. Competition from both traditional supermarket operators as well as Every-Day-Low-Price formats, such as those operated by Wal-Mart, will remain a challenge for Ahold and will result in continued margin pressure.
The group has reduced its reported net debt to EUR6.3 billion at FYE04 from over EUR12bn at FYE02. This has had a positive effect on Ahold's credit metrics. Operating EBITDAR/net fixed charges improved to 2.1x in FYE04 (FY03: 1.8x) while FFO adjusted net leverage fell to 3.7x (FYE03: 4.8x). To further improve these credit metrics, Ahold is likely to have to rely on its operating companies showing tangible financial improvement, rather than on further asset disposals.
(END) Dow Jones Newswires
October 24, 2005 10:28 ET (14:28 GMT)