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Ahold Delhaize Has More In Store (OTCMKTS:ADRNY)

This July, I published an article about Koninklijke Ahold Delhaize (English: Royal Ahold Delhaize (OTCQX:ADRNY)), which I considered a buy. Since then, the company has released its Q3 numbers and they were much better than last year. The stock, however, still trades below where it was this summer. For me a reason to add to my position. Everything considered, Ahold is still a buy.

Introduction

When I wrote my previous article on Ahold, the company was seeing increased traffic in its stores. Lockdowns reduced the options for people to spend their money, but groceries were an exception. So that industry was one to benefit from it, along with a few others. This could clearly be seen in the figures of companies such as Walmart (WMT), Dollar General (DG) and Kroger (KR).

But so far, Ahold’s share price is still down from its summer highs:

ChartData by YCharts

So have the tailwinds ended for Ahold? Earlier this November, the company released its third quarter results and nothing points to this. But more on that later. Recently, we’ve seen (partial) lockdowns being reintroduced in many countries worldwide and this is likely another reason to expect better figures from Ahold. Traditionally, the fourth quarter is the best one for grocery stores. This is of course due to the holiday season. With people having friends and family over, they spend more money on food and drinks. And if restaurants are closed due to COVID, the alternative to this becomes home cooking.

Looking at one of Ahold’s American subsidiaries, Food Lion, we can still see a good increase in foot traffic year-on-year:

Source: Placer.ai

As can be seen, foot traffic is up by on average a bit over ten percent YoY for the start of Q4 running to the first half of November. In my last article, I already mentioned that the US is with over 60 percent of revenue responsible for a sizable chunk of the group total. So that extra ten percent in store traffic is not to be discarded. That said, let’s return to the performance of the third quarter.

Third quarter results

On November 4th Ahold announced its Q3 results and they came in strong.

Source: Ahold Delhaize Investor Relations

On a constant currency basis, revenues were up 10.1% as compared to the same period last year. The dollar has retracted somewhat to the euro, so adjusting for that, net sales were up 6.8%.

Online sales have seen a big bump. This shouldn’t come as a surprise as food delivery companies have all seen a jump in demand. Still, a growth rate of over 50% is huge. Net consumer online sales now make up about 10% of net sales, so it’s no longer a small segment. Important to mention here is the fact that Ahold last week made an acquisition to expand on this online ambition. They bought FreshDirect, an online grocery active on the northern east coast. This should add over 600 mUSD of online sales to the company starting in 2021. The business seemed to be under some stress, so I expect a favorable price was paid. Ahold also seems like the right strategic buyer to incorporate this into their overall business model.

Going back to the Q3 numbers, net income is actually down compared to last year. The reason for this is the withdrawal of a US pension plan. A provision of 577 mEUR was taken for this. I think that with the extra influx of cash due to the events this year, now is a good time to reduce liabilities such as defined benefit pension plans. Without this provision net income would be significantly higher than last year. This also shows from the fact that the diluted underlying income per share from continuing operations is almost 16% higher on a constant currency basis.

Source: Ahold Delhaize Investor Relations

Comparing the balance sheets of the two periods shown is rather quick and easy. The main difference between them is an increase in working capital. Like a lot of businesses, Ahold has chosen to keep more cash in its bank accounts. Book value is down a bit, but again nothing too shocking. Apply the difference in exchange rate, buybacks and account for the fact that Ahold pays its semi-annual dividend in the third quarter to explain this small decrease.

In addition to the current 2020 buyback program, Ahold also announced a new one for the new year. Just like this year the authorization is for the amount of 1 bEUR. That’s about 4% of the current market cap of just under 25 bEUR. Personally, I might have expected a bit more, but with the cleaning up of the pension liabilities and expansion options it still seems like a reasonable amount.

Source: Ahold Delhaize Investor Relations

Free cash flow shows the biggest hit as compared to last year. But this is more a timing issue. The CFO maybe said it best during the Q3 call and there isn’t really that much for me to add:

Free cash flow in Q3 was €176 million, which compares to €484 million last year. The COVID-19 impact on profits drove a significant operating cash flow increase. This was offset in part by a €134 million unwind in working capital at the end of the quarter, as inventories in-store continued to return to more normalized levels after initial shortages experienced in the earlier stages of the COVID-19 crisis, particularly in the U.S. In Europe, the increase in inventory is mainly caused by Bol.com as we prepare for the high season in Q4. Taxes had an unfavorable impact of €145 million due to higher income from COVID-19 impacts, as well as tax payments in the Netherlands. If you recall, in the Netherlands were paid in full in Q1 2019, but have been paid out more evenly throughout the year in 2020

Source: Ahold Delhaize Investor Relations

Conclusion

Since my last article covering Ahold I’ve added to my position. The risks that I mentioned then are still there, but the potential return has actually grown. The company has reduced its share count further and is planning to do some more next year. Online sales are growing over 50% and Ahold is buying more market share in that space. With foot traffic up, but the share price down from this summer’s highs. Ahold looks good heading into this holiday season. Grab that discount because this grocer is a buy.

Disclosure: I am/we are long ADRNY, DG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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