Dutch retailer Ahold has said it expects to see its margins recover in the Netherlands after conceding they were "weaker than expected" in the first half.
Ahold this morning (22 August) booked an increase in first-half profits but its shares fell amid pressure on margins and the company's caution over future trading.
Earnings climbed 8.2% to EUR530m (US$665.6m) and operating income was up 3.2% to EUR742m on last year. However, underlying operating margin was 4.3% from 4.5% in the prior year period. In the Netherlands, underlying operating margin was 5.4% in the second half, compared to 6.2% last year.
Ahold CEO Dick Boer said it was "clear" the retailer was "not happy" with the retailer's performance in the Netherlands in the second quarter but insisted the company was working on improvements.
"Our team is working on more or less the recovery of some of the elements we have seen decline in the second quarter and margins is one of those," he said.
Margins at Albert Heijn were impacted by price investments, increased promotional activity and an "unsuccessful" European football championship campaign, the retailer said.
Petercam analyst Fernand de Boer said he was "disappointed" with the margins in the Netherlands.
"We understand that the consumer sentiment is weak and there is a need for price/promotions to drive sales. However, despite the market share gain so far, we consider the return on the investment as limited, but also realise that this is difficult to judge on a quarterly base."
Ahold chief De Boer, however, said he expects to see a "gradual" margin improvement in the coming quarters.
"I am always confident that for the business in the Netherlands 6% [margin] would be a more normal one. With the inclusion of Bol.com, we are on track to be close to 6%," he told analysts on the firm's earnings call.
Ahold acquired online retailer bol.com in February from private-equity firms Cyrte Investments and NPM Capital for EUR350m.
He added: "As the market becomes more stabilised ... and in the coming years as we see a little bit more confidence in this market, it might help stabilise the margins. We are also one of the lowest cost retail operations in Europe. We are a very efficient operator here in the Netherlands.
"It was a weaker than expected quarter in the Netherlands but in the US we expect margins around 4% and in the Netherlands close to 6% for the full year."
Separately, Boer said Ahold was in negotiations with manufacturers in the Netherlands over potential price increases on the back of increasing commodity costs.
"We weren't able to pass through cost inflation fully in the second quarter," he said, adding: "We continue to focus on negotiations with our manufacturers in the Netherlands. We will go back to manufacturers to discuss the increases or potential increases with them."
In the US, Boer said Ahold is likely to see more of an impact on commoditised products such as meat and milk in the wake of the drought, which has seen corn prices spiral.
The CEO said it is "hard to predict" what its cost price strategy will be for 2013 at the present time.
"During the last part of the year we will see what is going to happen and more into 2013 we will see what comes out. We managed it over the last year quite well."
Boer said he foresees consumer confidence will remain "on a low level" for the remainder of the year, but nonetheless sounded an upbeat note on Ahold's performance going forward.
"We are clear we are well-positioned to deliver on our strategy and outperform in the markets we are present. We will continue to deliver a growing market share... we have invested well in new initiatives and we are very pleased with the development of our online business."
Ahold's share price dropped 3.83% to EUR10.04 at 15:11 today.
