How FreshDirect Is Benefiting From Lower Inflation
The rising cost of food, the impact of Covid-19, and a price war in Belgium weighed on Dutch retailer Koninklijke Ahold Delhaize in 2022, dragging its stock down almost 8%.
But the grocer, which owns Stop & Shop, Hannaford, Food Lion, and online grocery-delivery operator FreshDirect in the U.S., is a strong defensive play because it is well-placed to combat a recession after posting an upbeat outlook. Its shares (ticker: AD. Netherlands) are up 14.4%, to 30.71 euros ($32.91), this year and could rise further.
While inflation is a key worry for European food companies, Ahold is in a better position than most because up to 63% of its sales—and 70% of its operating income—come from the U.S. (The grocer has American depositary shares that trade under the ticker ADRNY.)
The U.S. saw lower inflation than Europe in February. Profit margins at grocers are some of the thinnest in retail, so lower inflation will drive down costs.
“Cost inflation seems to have peaked at last in the U.S., which is the most important region,” Clément Genelot, an analyst at investment bank Bryan Garnier, wrote in a note. “Oil prices are flowing back, and the freight trucking index is falling.”
Analysts at Berenberg estimate that cost-saving could go some way toward offsetting increased expenses caused by inflation and other costs, but Ahold will still have to pass on some price hikes to customers.
The company has a cost-reduction target of €1 billion ($1.08 billion) for 2023, which seems achievable after it trimmed €979 million in 2022—€100 million more than forecast. Berenberg lead analyst Fulvio Cazzol wrote in a February note, “This suggests that management will need to implement average price increases of around 5% in 2023 to maintain comparable operating profit at the 2022 level. “We continue to believe that this will be achievable, owing to the company’s portfolio position (its geographic profile, store format, and competitive price points on everyday products).”
Genelot estimates that the stock could rise 13.52%, to €34, while ING has a €32.50 price target.
Ahold, which dates back to 1867, has a market value of €28.5 billion and employs more than 400,000 workers. It fetches a multiple of 11.5 times this year’s expected earnings and is valued in line with its peers.
The company posted net annual income of €2.5 billion for the year to Jan. 1, 2023, up from €2.2 billion for the same period in 2021. Net sales increased to €87 billion from €76 billion. Ahold has previously announced a €1 billion share-repurchase program for 2023.
CEO Frans Muller said in a statement this month that the company had made “substantial progress” in e-commerce and digitalization. He tells Barron’s that “we have a healthy outlook for 2023, with good momentum, and I am confident we will navigate whatever challenges and opportunities come our way.”
Ahold was a pioneer of ready-made meals in the Netherlands, and the scale and quality of its European private-label business adds value to its stock. A key advantage to having its own well-developed brand label is the flexibility to cut prices or make higher profit margins.
Cazzol wrote, “We think that the company can defend its market share through its smaller store formats and competitive pricing in its private label.”
Meanwhile, Ahold has put plans on hold for an initial public offering of its Bol.com e-commerce site, citing market conditions. Bol.com serves 13 million customers in the Netherlands and Belgium, says Ahold’s website. Much of the upside of a potential IPO had been priced into the stock, despite the pause.