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Ahold USA a winner. (Spotlight).

ZAANDAM, the Netherlands -- Both sales and operating profits rose at a double-digit pace at its divisions in the United States in the third quarter of 2002, but the advances could not prevent a comparable plunge in net income for Ahold NV. As a result, the company reversed its earlier earnings forecast, projecting a 6%-to-8% decline in net income while launching an initiative to cut costs and restore earnings growth.

Ahold USA Inc.'s retail side listed a 23.6% jump in operating earnings to $365.3 million for the 12 weeks ended October 6, as sales grew 11.3% to $5.97 billion. Year-to-date profits soared 25.4% to $1.16 billion, on a 14.1% rise in sales to $20 billion.

Factoring out the effects of a sale and leaseback transaction at Landover, Md.-based Giant Food Inc. in both years, adjusted operating earnings gained 15.6% in the quarter to $336.7 million and soared 22.8% for the 40 weeks to $1.13 billion.

Adjusted operating margin expanded 0.2 points to 5.6% for the quarter while growing 0.4 points to 5.6% for the year to date.

According to management, the top-line increase stemmed from both organic growth and the consolidation of Bruno's Inc. However, organic sales growth slowed to 3.4% from a 7% rate in the prior-year quarter. Hampering growth was a loss of momentum in comparable-store results, which inched up 0.6%, after a 3.8% advance last year. At the same time, identical-store sales dipped 0.2%, in contrast to a 3.4% gain in 2001.

The amelioration in operating results once again was driven by greater synergies, effective margin management and cost controls at most of the six U.S. chains. As usual, Stop & Shop Cos., Giant Food and Giant Food Stores Inc. of Carlisle, Pa., performed strongly, while Mauldin, S.C.-based Bi-Lo Inc. lagged. Meanwhile, operating losses at Peapod Inc., Ahold's Internet grocery operation, were sliced by 33.3% to $7.4 million in the quarter.

At Ahold's U.S. Foodservice Inc. unit operating income for the 12 weeks soared 83.7% to $208.1 million, while year-to-date profit registered an increase of 64% to $587 million. Management attributes the strong gains to the consolidation of Alliant as well as cost cuts and purchasing synergies.

Third quarter sales were up 43.1% to $4 billion, while results for the 40 weeks climbed 50.2% to $13.52 billion.

The large increase stemmed solely from the consolidation of Alliant, with organic food service sales falling 6.1% in the quarter. Ahold president and chief executive officer Cees van der Hoeven pointed out at a news conference that sales were heavily impacted by Alliant's intentional exit from unprofitable businesses as well as lost sales due to restructuring, including $300 million in intercompany sales between Alliant and U.S. Foodservice.

"Earnings at both U.S. Foodservice and U.S. retail were excellent; the positive impact of the integration of Alliant, as well as strong results in the base business, were reflected in our food service operating earnings," commented van der Hoeven. "At U.S. retail the trend from the previous quarters was sustained."

The U.S. results were unable to offset a plethora of factors, mostly nonoperating, that impacted the parent company's bottom line. Net profit dropped 15.3% in the quarter to 257.6 million euros. For the three quarter span earnings dove 58.9% to 388.1 million euros.

Companywide sales advanced 5.8% to 16.4 billion euros for the quarter, while the year-to-date top line grew 12.3% to 55.88 billion euros.

Although the bottom line shrank, corporate operating profits reflect the strength of the U.S. contribution, rising 13.3% during the quarter to 756.2 million euros and advancing 15.8% over the 40 weeks to 2.4 billion euros.

Management blamed the decline in earnings on several factors, including higher goodwill amortization expense resulting from the Alliant and Bruno's Supermarkets acquisitions in December 2001 and the decline in the value of the dollar, the Brazilian real and the Argentine peso.

Also playing a role were higher net financial expenses that resulted partly from the devaluation of the peso and inflation-adjustment losses in Argentina, as well as third-party debt and debt assumption related to the default of Ahold's joint-venture partner, Velox Retail Holdings. Because of resulting changes in the mix of earnings by country, increased income taxes resulted as well.

Factoring out the impact of currency exchange third quarter sales would have escalated 14.5% and operating earnings would have grown 24%. Because of increased financial expenses, a "substantially increased" average tax rate and weakening organic sales in both the U.S. and Europe, Ahold cut its outlook for fiscal 2002 earnings per share.

Excluding goodwill amortization, exceptional items and currency impact, the company now expects to see an EPS decline of 6% to 8%, in sharp contrast to the 5%-to-8% increase previously forecast.

As a result of the unfavorable trends, van der Hoeven announced the launch of a three-year initiative intended to achieve four objectives: organic sales growth, cost reduction, greater capital efficiency and portfolio review.

"These four main priorities combined should lead to substantial improvements in free cash flow, which after dividend payments will be available to reduce debt and strengthen the balance sheet," van der Hoeven said.

"All noncore business will be divested either in whole or in part. Consistently underperforming core business will be rigorously scrutinized with a view to significantly improved performance or divestment."

At the end of the third quarter Ahold was operating about 9,000 stores in 27 countries, including more than 1,220 supermarkets and about 400 convenience stores in the U.S.
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Title Annotation:Discusses financial performance
Geographic Code:1USA
Date:Dec 9, 2002
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