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26 Sep 2005
MOODY'S AFFIRMS RATINGS OF DELHAIZE AMERICA (CORPORATE FAMILY RATING AT Ba1); CHANGES OUTLOOK FROM POSITIVE TO STABLE
Approximately $2.9 Billion in Debt Affected
New York, September 26, 2005 -- Moody's Investors Service affirmed the ratings of Delhaize America,
Inc. ("DZA"), including the corporate family
rating of Ba1, the Ba1 long-term senior unsecured ratings,
and speculative grade liquidity rating of SGL-1, but changed
the rating outlook from positive to stable. The change in outlook
reflects Moody's concern that the competitive and promotion retail
pricing environment will limit DZA's ability to generate robust
comparable store sales growth and to boost profit margins significantly
in the near term.
Corporate Family Rating (previously Senior Implied Rating) at Ba1
Senior unsecured and Medium Term Notes at Ba1
Senior unsecured shelf at (P)Ba1
Speculative Grade Liquidity Rating at SGL-1
The ratings of DZA reflect the company's extensive East Coast franchise,
solid free cash flow generation, investments in upgrading its store
base and its very good liquidity as evidenced by its SGL-1 rating.
The ratings also incorporate the competitive challenges to growing comparable
store sales and margins in the company's major trade areas,
as well as event risk from both acquisition opportunities and the potential
cash demands of a foreign parent.
DZA operates about 1535 supermarkets along the populous Eastern seaboard.
Operations are concentrated in the Carolinas and Virginia in the Food
Lion format (79.4% of total stores), in Florida with
the Kash n' Karry ("KNK") low cost banner (7%)
and in Hannaford's large store format in New England (9.4%).
The October 2003 acquisition of Harvey's 54 stores (4.2%)
greatly increased DZA's coverage of the important Georgia market.
DZA's Northeastern operations are in generally over-stored
markets, and its Southeastern stores compete against Wal-Mart
and some superior operators such as Publix. In fiscal 2004,
DZA's comparable store sales increases exceeded those of most major
supermarket chains, an especially noteworthy achievement given that
DZA's stores do not sell gasoline. Certainly, the company's
remodeling efforts, Hannaford's prominent position,
and the challenges facing some Southeastern competitors like Winn-Dixie
all contributed to last year's solid comparable store sales performance.
However, comparable store sales grew quite modestly in the first
quarter of fiscal 2005 (up 0.5%) and fell 0.4%
in the second quarter. The company's major banners,
with the exception of Hannaford and Sweetbay, have been hurt by
strong competitive activities and by adjustments in consumer behavior
due to higher gasoline prices. The price and promotional activities
at Food Lion, undertaken to stimulate sluggish comparable store
sales, further impacted profitability; operating margin in
the first half of fiscal 2005 was 5.1%, below the
prior year's 5.5%.
A number of strategic initiatives, especially at DZA's largest
division, are being implemented to boost sales and profitability
at the expense of some less well capitalized contenders. Food Lion's
Market Renewal program remodels all of the stores in an entire trade area
at the same time to maximize customer reaction. The fourth market
renewal is schedule for completion in 2005. In addition,
the implementation of the new inventory system and margin management processes
in 2004 in Food Lion and KNK continue to enhance shrink control and inventory
management. Underperformer KNK continues to re-brand its
stores as Sweetbay Supermarket. These efforts, however,
have not outweighed the impact of promotional pricing in a competitive
Despite the competitive challenges to supermarket operators from discounters
and from promotional pricing by peers, DZA has been able to generate
solid operating cash flow that easily covers appropriately aggressive
capital expenditures. Given cash balances of $538.6
million at July 2, 2005, in addition to the escrow balance
of $59.7 million to fund payments on Hannaford's heritage
debt, Delhaize America will likely be able to internally fund the
$563 million debt payment due in April 2006, in Moody's view.
DZA is a holding company, with operations conducted in its wholly
owned subsidiaries including Food Lion, Kash n' Karry,
Hannaford, and Harvey's. Funded debt is and will continue
to be concentrated at the holding company. Each material subsidiary
guarantees both DZA's public debt and its unrated $500 million
bank agreement. DZA is itself wholly owned by Belgium's Delhaize
Group and accounts for the majority of the Group's consolidated sales,
earnings and debt. There are some business dealings between DZA
and its parent and affiliates, including the use by DZA of an affiliated
company for insurance. The greatest impact of Group membership
for DZA is the event risk of future shareholder enhancement and the potential
for cross guarantees between the Group and DZA. Moody's notes that
DZA's public debt prohibits the issuance of cross guarantees if
the consequence will be a lower rating, a review for downgrade or
a downward adjustment of rating outlook for Delhaize America. In
addition, the company's bank agreement effectively precludes DZA
from issuing such a restricted guarantee if the ratings on DZA's
debt fall as a consequence.
The stable outlook reflects Moody's anticipation that operating
cash flow generation will remain solid, that comparable store sales
will not further diminish and that margins will stabilize over the intermediate
term as returns are realized from the company's market renewal expenditures,
efficiency initiatives and promotional activities.
The rating outlook could return to positive if operating margins rebound,
if the re-branding of KNK and the market renewal initiatives at
Food Lion yield robust and sustainable comparable store sales increases,
and if lease adjusted debt to EBITDAR falls below 3 times (versus 3.6
at fiscal year end January 1, 2005). Conversely, ratings
could be lowered if margins significantly deteriorate, if comparable
store sales become strongly negative, or if adjusted debt to EBITDAR
rises above 4 times.
Headquartered in Salisbury, North Carolina, Delhaize America,
Inc operates about 1535 supermarkets under the Food Lion, Hannaford,
Kash n' Karry and Harvey's banners along the East Coast of
the United States.
Corporate Finance Group
Moody's Investors Service
Elaine E. Francolino
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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