¢ 66% Food retail
¢ 34% Foodservice
¢ 26% European Operations
¢ 74% U.S. Operations
Ahold Annual Report 2006
• Energy cost increases. Profit margins and operating expenses are negatively impacted by increases in transportation costs, caused by high fuel prices and energy costs that exceed the rate of food price inflation.
The increase in fuel costs has also affected the purchasing power of consumers, resulting in a negative impact on food sales.
Significant factors affecting Ahold’s results of operations and financial position
Ahold’s results of operations and financial position have been impacted by the following significant factors relating specifically to the Company:
The agreements to settle the securities class action and litigation with the Vereniging van Effectenbezitters (“VEB”) In November 2005, Ahold entered into an agreement to settle the securities class action (the “Securities Class Action”) arising out of the events announced on February 2, 200, which resulted in the restatement of the Company’s financial position and results of operations for 2001 and 2000. Under the terms of the agreement, the lead plaintiffs agree to settle all claims against the Company for the sum of USD 1.1 billion (EUR 97 million). This amount includes USD 9 million (EUR 8 million) as compensation to the VEB for facilitating the global settlement. The settlement covers Ahold, its subsidiaries, individual defendants and the underwriters.
As a result of the settlement, the Company recorded a charge to operating income in 2005 of EUR 80 million, net of insurance proceeds.
The Company also reached an agreement to settle the litigation with the VEB, pursuant to which VEB has terminated certain legal proceedings relating to its annual financial statements for the years 1998 through 2002.
In June 2006, the U.S. District Court for the District of Maryland entered a final order and judgment approving the Company’s agreement with the lead plaintiffs to settle the Securities Class Action. The final order and judgment approving the settlement are no longer subject to appeal.
With this settlement Ahold has dealt with the last material outstanding litigation with significant financial exposure arising out of the events of 200.
In September 2006, the U.S. Department of Justice (the
“DOJ”), through the U.S. Attorney’s Office for the Southern District of New York confirmed in connection with a non-prosecution agreement that it will not be criminally prosecuting Ahold and U.S. Foodservice in connection with events leading to the events of 200. From 200 to 2006, the DOJ brought securities fraud and other criminal charges against certain individuals, all of them either former U.S. Foodservice employees or former employees of vendors that sold food and food-related products to U.S. Foodservice.
For a further discussion of these settlements, see Note
to the consolidated financial statements included in this Annual Report.
Results of operations
The tables summarizing the consolidated results below are followed by discussions of the consolidated results and the results of operations for each of the Company’s business segments. These discussions should be read in conjunction with the consolidated financial statements and the notes thereto, which are included in this Annual Report.
The following discussions contain certain non-GAAP financial measures which are further discussed in
“Reconciliation of non-GAAP financial measures” included in this Annual Report.
Consolidated results summary
The following table summarizes the consolidated statements of operations for 2006, 2005 and 200:
2006 2005 200
EUR in millions, except percentages and per share data (52 weeks) % of net sales (52 weeks) % of net sales (5 weeks) % of net sales
Net sales 44,872 100.0 ,979 100.0 ,00 100.0
Gross profit 9,331 20.8 9,106 20.7 9,116 20.7
Operating expenses (8,038) 17.9 (8,85) 20.1 (8,19) 18.5
Operating income 1,293 2.9 25 0.6 967 2.2
Net financial expense (518) 1.1 (650) 1.5 (270) 0.6
Share in income of joint ventures and associates 152 0.3 118 0. 10 0.2
Income taxes (91) 0.2 21 0.5 (10) 0.
Income (loss) from continuing operations 836 1.9 (65) 0.1 661 1.5
Income from discontinued operations 79 0.1 211 0. 222 0.5
Net income 915 2.0 16 0. 88 2.0
Income (loss) per share from continuing operations attributable to common shareholders
Basic 0.53 (0.06) 0.2
Diluted 0.52 (0.06) 0.2
Management’s discussion and analysis
Net sales
In 2006, consolidated net sales increased 2 percent compared to 2005, and at constant exchange rates were up 2.7 percent. Net sales growth was negatively impacted by divestments, including the sale of Wilson Farms and SugarCreek convenience stores in the Giant-Carlisle/Tops Arena and U.S. Foodservice’s Sofco business in 2005 and the sale and closure of Tops stores in the Adirondacks and Northeast Ohio areas in 2006 and 2005. Excluding the impact of currency exchange rates and these divestments, consolidated net sales in 2006 were .1 percent higher than last year primarily due to improved net sales at Giant-Carlisle, Albert Heijn and U.S. Foodservice, including the impact of stores acquired from Clemens Markets, Konmar and Julius Meinl.
In 2005, consolidated net sales were almost unchanged from the prior year; however, excluding the effects of week 5 of 200 net sales increased 1.6 percent. Net sales growth was primarily due to improved net sales at Stop &
Shop and Albert Heijn; the divestments in the Giant-Carlisle/
Tops Arena and U.S. Foodservice were a partial offset.
Gross profit
In 2006, gross profit increased EUR 225 million primarily due to improved net sales at Giant-Carlisle, Albert Heijn and U.S. Foodservice. Gross profit increased in 2006 to 20.8 percent of net sales primarily due to higher margins at U.S. Foodservice; retail gross profit margin was relatively flat year-over-year.
Gross profit margin was stable in 2005 compared to 200, with higher gross profit margin at U.S. Foodservice partially offset by lower margins in retail.
Operating expenses
In 2006, operating expenses decreased EUR 815 million from 2005 primarily due to the one-time charge of EUR 80 million for the settlement of the Securities Class Action in 2005. Excluding the settlement charge, operating expenses decreased from 18. percent of net sales in 2005 to 17.9 percent in 2006.
In 2005, operating expenses increased EUR 70 million compared to 200 primarily due to the one-time charge for the settlement of the Securities Class Action of EUR 80 million. Excluding the settlement charge, operating expenses decreased from 18.5 percent of net sales in 200 to 18. percent in 2005.
Selling expenses
In 2006, selling expenses of EUR 6.5 billion decreased as a percentage of net sales from 1.7 percent in 2005 to 1.5 percent. The improvement was primarily the result of cost reductions and efficiency improvements within the Albert Heijn Arena and U.S. Foodservice.
In 2005, selling expenses of EUR 6.5 billion increased as a percentage of net sales from 1.5 percent in 200 to 1.7 percent. The increase was primarily due to higher expenses in the Company’s retail operations.
General and administrative expenses
In 2006, general and administrative expenses of
EUR 1.6 billion decreased as a percentage of net sales from
.6 percent in 2005 to .5 percent in 2006. The decrease was primarily attributable improved efficiency and cost reductions at the Albert Heijn Arena, U.S. Foodservice and Group Support Office; costs of EUR 91 million related to an exit of Tops from the Northeast Ohio market was a partial offset.
In 2005, general and administrative expenses of
EUR 1.6 billion decreased as a percentage of net sales from
percent in 200 to .6 percent in 2005. The decrease was in part attributable to reductions in restructuring and related charges and impairment of assets, and an increase in gains on the sale of assets, as further discussed below.
Restructuring and other related charges
In 2006, restructuring and other related charges of EUR 107 million were incurred and related primarily to the closure of a distribution facility in the Stop & Shop/Giant-Landover Arena and Tops’ exit from the Northeast Ohio market.
In 2005, restructuring and other related charges of EUR 18 million were incurred in the Stop & Shop/Giant-Landover Arena and related primarily to the restructuring of the Giant-Landover supply chain and the closing of four Super-G stores, and EUR 51 million at U.S. Foodservice primarily related to the closure and consolidation of operating and support office facilities.
In 200, restructuring and other related charges of EUR million were incurred and related primarily to the integration of Giant-Landover, Stop & Shop and U.S. retail support services.
Impairment of assets
The Company recorded the following impairments and reversals of impairments of non-current assets in 2006, 2005 and 200:
EUR in millions 2006 2005 200
Stop & Shop/Giant-Landover Arena 5 8 9
Giant-Carlisle/Tops Arena 5 8 0
Albert Heijn Arena 10 6 17
Central Europe Arena 7 2 11
Schuitema 5 7
Total Retail 61 105 171
U.S. Foodservice (7) 18 –
Group Support Office – 1 6
Total 54 124 217
In 2006, the majority of impairment of assets consisted of impairments for underperforming stores in the Central Europe Arena.
In 2005, the most significant impairments were at the Giant-Carlisle/Tops Arena due to a weak economic environment and strong competition, particularly in Northeast Ohio and eastern New York, and at U.S. Foodservice related to office locations and warehouses as part of the administrative restructuring discussed above.
5 Ahold Annual Report 2006
In 200, the most significant impairments consisted of impairments for underperforming stores in the U.S. retail businesses, capitalized commercial expenses and loan receivables at Schuitema, and loans to joint ventures and associates in the Group Support Office.
Gains/losses on the sale of assets
The Company recorded the following gains (losses) on the sale of non-current assets in 2006, 2005 and 200:
EUR in millions 2006 2005 200
Stop & Shop/Giant-Landover Arena 17 7 2
Giant-Carlisle/Tops Arena 19 1
Albert Heijn Arena 6 5
In 2006, the most significant gains on the sale of assets were the sale of two distribution facilities in the Stop & Shop/Giant-Landover Arena and the sale of an office facility and warehouse at U.S. Foodservice.
In 2005, the most significant gains on the sale of assets included the disposal of a shopping center in the Central Europe Arena, the disposal of stores in the Giant-Carlisle/Tops Arena and the sale of U.S. Foodservice’s Sofco business.
In 200, the most significant gain on the sale of assets was from the sale of a shopping center in the Central Europe Arena.
Operating income
In 2006, operating income increased EUR 1.0 billion from the same period last year to EUR 1. billion. Excluding the EUR 80 million impact of the Securities Class Action settlement in 2005, the increase was EUR 27 million or 22. percent. Retail operating income was up
EUR 0 million at EUR 1.2 billion, an operating margin of
.9 percent. Excluding the impact of impairment of assets, gains/losses on the sale of assets and restructuring and other related charges, retail operating income was
. percent of net sales compared to .1 percent in 2005.
U.S. Foodservice operating income was up EUR 172 million to EUR 258 million, an operating margin of 1.7 percent compared to 0.6 percent in the same period last year.
Group Support Office costs of EUR 116 million were down EUR 5 million compared to last year, excluding the Security Class Action settlement.
Operating income decreased in 2005 compared to 200
mainly due to impact of the settlement of the Securities Class Action of EUR 80 million. Retail operating income
decreased EUR 52 million at EUR 1.1 billion, an operating margin of .9 percent compared to .1 percent in 200.
U.S. Foodservice operating income was up EUR 2 million to EUR 86 million, an operating margin of 0.6 percent compared to 0. percent in 200. Group Support Office
costs were down EUR 109 million compared to 200, excluding the Securities Class Action settlement, in part due to a EUR 7 million release of a legal provision in 2005.
Net financial expense
In 2006, net financial expense decreased EUR 12 million compared to 2005 primarily as a result of lower interest expense and a one-time cost of EUR 5 million relating to a bond buyback in 2005. Interest expense decreased EUR 118 million in 2006 compared to 2005 mainly due to lower outstanding debt balances resulting from significant debt repayments in 2005 totaling EUR 2. billion.
In 2005, net financial expense increased EUR 80 million compared to 200 primarily due to the non-repetition of the 200 net gain of EUR 79 million relating to a ICA put option transaction.
For further information about interest and borrowings, see Notes 10 and 26 to the consolidated financial statements included in this Annual Report.
Income taxes
In 2006, Ahold recognized an income tax expense of EUR 91 million compared to a EUR 21 million benefit last year. The effective tax rate, calculated as a percentage of income (loss) before income taxes, decreased to 9.8 percent (76.7 percent in 2005). The lower effective tax rate in 2006 was primarily attributable to the non-recurrence of the charge in 2005 related to the settlement of the Securities Class Action and the subsequent partial reallocation of that charge from the Group Support Office to U.S. Foodservice in 2006. Furthermore, rulings with the tax authorities and developments in Dutch tax laws enabled Ahold to reduce its tax contingency reserve, which had a positive impact on the effective tax rate in 2006.
In 2005, the income tax benefit amounted to
EUR 21 million; the effective tax rate was 76.7 percent (17.5 percent in 200). The main factor contributing to the increase in effective tax rate in 2005 compared to 200
was the impact of the charge relating to the settlement of the Securities Class Action recorded at the Group Support Office, which significantly reduced Ahold’s income before taxes in 2005.
For more information on the Company’s accounting treatment of income taxes, see Notes and 11 to the consolidated financial statements included in this Annual Report.
Share in income of joint ventures and associates
In 2006, the Company’s share in income of joint ventures and associates increased 28.8 percent to EUR 152 million.
The improvement was attributable to strong net sales and improved margins at ICA, particularly in Sweden, and an increase in gains on the sale of assets, most significantly the sale of ICA’s foodservice business, ICA Meny. In 2006, net gains on the sales of assets at ICA increased EUR 2 million from 2005.
Management’s discussion and analysis
In 2005, the Company’s share in income of joint ventures and associates increased 1.5 percent to EUR 118 million primarily due to the sale of Ahold’s share in a real estate joint venture.
Income from discontinued operations
In 2006, income from discontinued operations, which consisted of operational results from discontinued operations and results on divestments, decreased EUR 12 million to EUR 79 million. The decrease was attributable to lower results on divestments. In 2005 net gains on divestments were EUR 172 million compared to a net loss of EUR 10 million in 2006.
In 2005, income from discontinued operations decreased to EUR 211 million compared to EUR 222 million in 200, primarily as a result lower gains on divestments. In 200 net gains on divestments were EUR 28 million compared to net gains of EUR 172 million in 2005.
For more information on discontinued operations, see Note 12 to the consolidated financial statements included in this Annual Report.
Net income attributable to common shareholders of Ahold In 2006, net income attributable to common shareholders of Ahold was EUR 899 million compared to EUR 120 million in 2005. The improvement was primarily attributable to the impact in 2005 of the settlement of the Securities Class Action.
Net income attributable to common shareholders of Ahold in 2005 was EUR 120 million compared to EUR 870 million in 200. The decrease was primarily attributable to the settlement of the Securities Class Action and the positive impact of a EUR 79 million net gain related to a ICA put option transaction in 200.
Adjustments to conform to US GAAP
The consolidated financial statements have been prepared in accordance with IFRS, which differs in certain significant respects from US GAAP. For 2006, 2005 and 200, net income under IFRS was EUR 915 million, EUR 16 million and EUR 88 million, respectively, compared to net income (loss) under US GAAP of EUR 97 million, EUR (20) million and EUR 75 million, respectively. Under US GAAP, net income (loss) per common share – basic was EUR 0.60, EUR (0.0) and EUR 0.02 in 2006, 2005 and 200, respectively.
The most significant items in reconciling net income under IFRS to net income (loss) under US GAAP in 2006, 2005 and 200 are set forth below:
EUR in millions 2006 2005 200
Items increasing (decreasing) net income in accordance with IFRS:
Goodwill 2 17 (158)
Non-current assets held for sale
and discontinued operations 24 (19) (2) Investments in joint ventures and
associates, net of tax (19) (2) (261)
Derivative instruments and loans 58 67 19 Pensions and other
The most significant items in reconciling shareholders’
equity under IFRS to shareholders’ equity under US GAAP in 2006 and 2005 are set forth below:
EUR in millions 2006 2005
Items increasing (decreasing) shareholders’ equity in accordance with IFRS:
Goodwill 3,305 ,62
Investments in joint ventures
and associates, net of tax 1,370 1,70
Other intangible assets 435 50
For more information about the significant items in reconciling IFRS and US GAAP, see Note 5 to the consolidated financial statements included in this Annual Report.
Business segment results
The following is a discussion of the results of operations, including net sales and operating income, for the Company’s business segments.
Stop & Shop/Giant-Landover Arena
The following table sets forth net sales information and operating income for the Stop & Shop/Giant-Landover Arena in 2006, 2005 and 200:
2006 2005 200
In millions, except percentages (52 weeks) (52 weeks) (5 weeks) Net sales in EUR 13,089 1,161 12,99
Net sales in USD 16,438 16,6 16,105
Change in identical sales:
Stop & Shop (1.3%) 0.2%
Giant-Landover (1.6%) (.0%)
Change in comparable sales:
Stop & Shop (0.8%) 0.7%
Giant-Landover (1.2%) (2.%)
Operating income in EUR 670 686 665
Operating income in USD 839 85 828
Operating income as
a percentage of net sales 5.1% 5.2% 5.1%
7 Ahold Annual Report 2006
Net sales
• Net sales increased 0.6 percent in 2006 (.5 percent in 2005 when excluding the additional week in 200) to USD 16. billion. The increases were largely attributable to the opening of new and replacement stores.
• Excluding gasoline net sales, Stop & Shop identical sales decreased 2 percent in 2006 and 0. percent in 2005.
Giant-Landover does not currently sell gasoline.
• Identical sales were negatively impacted in both 2006 and 2005 by pressure from new competitor store openings, increased competitive promotional campaigns and increased competition from alternative retail formats, including traditional discount stores and wholesale club outlets. To address this, the arena is implementing its Value Improvement Program, which will improve its price positioning and product and service offerings, as discussed in “Strategy” in this Annual Report.
• Net sales growth in 2006 and 2005 was impacted by net sales made to BI-LO, Bruno’s and Wilson Farms. In 2005, net sales of USD 108 million were made to these entities, which prior to their divestments in 2005, were eliminated as intercompany sales. No sales were made to these entities subsequent to 2005.
Operating income
• In 2006, operating income decreased USD 15 million to USD 89 million. Operating income was lower primarily due to increased competitor activity and price investments related to the roll-out of the Value Improvement Program.
• In 2005, operating income increased USD 26 million to USD 85 million due to restructuring charges of USD 5 million incurred in 200 related to the restructuring of the Giant-Landover supply chain and the closing of four Super-G stores and a USD 8 million decrease in impairment losses incurred in 2005 compared to 200. Lower margins due to competitive pressures and increased promotional activity was a partial offset.
Giant-Carlisle/Tops Arena
The following table sets forth net sales information and operating income for the Giant-Carlisle/Tops Arena in 2006, 2005 and 200:
2006 2005 200
In millions, except percentages (52 weeks) (52 weeks) (5 weeks)
Net sales in EUR 4,778 ,989 5,209
Net sales in USD 5,999 6,201 6,80
Change in identical sales:
Giant-Carlisle 3.9% .6%
Tops (5.5%) (.7%)
Change in comparable sales:
Giant-Carlisle 6.0% 5.1%
Tops (4.8%) (.9%)
Operating income in EUR 51 72 11
Operating income in USD 62 90 11
Operating income as
a percentage of net sales 1.0% 1.5% 2.2%
Net Sales
• Net sales decreased . percent in 2006 (2. percent in 2005 when excluding the additional week in 200) to USD 6.0 billion. The decreases were largely attributable to the divestments of Wilson Farms and SugarCreek convenience stores in the second quarter of 2005 and the divestment or closure of Tops stores in the Adirondacks and Northeast Ohio areas in 2005 and 2006.
Excluding these divestments, net sales increased .
percent in 2006. The increase in net sales was due in part to the acquisition of 1 Clemens Markets stores in the fourth quarter of 2006.
• Excluding gasoline net sales, Giant-Carlisle identical sales increased 2.1 percent in 2006 and 2.6 percent in 2005, while at Tops they decreased 6.6 percent in 2006 and 6.2 percent in 2005.
• The decline in identical sales at Tops was primarily caused
• The decline in identical sales at Tops was primarily caused