A Haize-y Future
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Succeeding in large-scale business in America is tough. It's even tougher if you're in retail, with its traditional penny-thin margins and constant need for hands-on inventory management. The latest foreign company to have a tough time of it is Delhaize (NYSE: DEG). The Belgian food retailer announced its plans to shutter more than 100 of its U.S. stores, in which the bulk of its 5,000 worldwide job cuts will be concentrated.
It's not that Delhaize is new to this and experiencing growing pains. The company entered the huge, potential-rich American market in the mid-1970s when it bought a regional supermarket chain. Over the years Delhaize grew steadily through new store openings and the occasional acquisition (namely New England food outlet Hannaford and Florida's Sweetbay), to the point where it operated nearly 1,600 stores, or 65% of its worldwide total.
Their business was never easy. Compared to the company's home base in Europe, this is a more demanding market with a higher number of competitors. The American pie is big, indeed, but it has to be cut into many slices.
One disadvantage Delhaize had against its increasingly big rivals was geography -- the firm's domestic operations were concentrated heavily in only a few regions (essentially the mid-Atlantic, and to a lesser extent New England and Florida). Larger homegrown supermarket chains like Kroger (NYSE: KR) and Safeway (NYSE: SWY) spread their business wide across the nation, for the most part; not so the American wing of Delhaize.
On the bright side, the company is being clear-eyed about its future in the U.S. Rather than swallowing weakened results for years in the hopes of eventually getting a secure piece of that tasty pie, it's getting rid of some of the less appetizing stores. Compare this with the strategy of British retailer Tesco (LSE: TSCO), with its small, regionalized clique of Fresh & Easy food outlets that have sunk deeper in the red since their launch in 2007. At the moment Tesco seems determined and very optimistic, and appears convinced it will begin to stem those losses in the very near future.
Delhaize has been in retreat before. In 2007, it sold its once-promising Delvita supermarket chain in the Czech Republic, a country with a healthy economy camouflaging a frugal customer base. It's not that Delvita was doing badly, necessarily, it's just that the tight spending habits of the locals greatly limited potential upside. So up went the FOR SALE sign.
So basically, the company is a conservative operator that quits while it's more or less ahead. This is encouraging, as it shows that management is thinking years in advance and cutting its losses before they happen. Delhaize is still profitable and expected to be so in the upcoming fiscal year. What's more, its margins in the most recent fiscal year were basically double that of Kroger and Safeway, its days of inventory kept pace with its two American rivals, and (before the closures were announced, anyway) it had a significantly better cash-to-debt metric. On the other side of the coin, however, the company seems risk-adverse and unwilling to be as aggressive and expansionary as its American competitors, as is often necessary in this market.
At the moment, not surprisingly, Delhaize is cheap on a forward P/E basis -- it currently stands at just under 8, compared to Kroger and Safeway, both of which hover around 12. So it seems the market retreat has been priced into the stock. Does this mean it's a contrarian buy? It's probably too early to tell; let's see where the company lands after the divestments. But despite the recent setback, the firm has a long track record and active, although conservative, management. So don't count it down and out just yet. There's still plenty of pie to go around.
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