Financial Accounting Blog

Sunday, October 12, 2003

This WSJ article has it all...goodwill impairment, the impact of a foreign company restating their books to be in accordance with US GAAP, and other accounting improprieties:

Ahold Posts Loss Linked to Concerns Over Accounting
Deborah Ball. Wall Street Journal. (Eastern edition).New York, N.Y.: Oct 3, 2003. pg. B.5

Copyright (c) 2003, Dow Jones & Company, Inc.

LONDON -- Shares in Ahold NV climbed yesterday, despite a posted loss of 1.2 billion euros ($1.41 billion) for 2002, due largely to accounting improprieties disclosed earlier this year.

It was the company's first release of results in nearly a year, and the retailer said its underlying business has weathered the scandal at its U.S. Foodservice unit. Investors seemed to agree. Shares in the Dutch retailer rose as some analysts said they planned to raise their price targets on the stock.

Ahold's net loss, reported under Dutch accounting standards, was largely due to impairment of goodwill and other intangible assets amounting to 1.3 billion euros. That loss will swell to about 4.4 billion euros under U.S. Generally Accepted Accounting Principles, as a result of additional goodwill impairment of about 3.2 billion euros. The gap stems largely from the different treatment of the impairment at Ahold's U.S. Foodservice subsidiary, the unit that sparked a massive accounting scandal earlier this year, when its executives were found to have inflated vendor rebates. Sales came in at 62.7 billion euros, up 16%.

In Amsterdam trading, the share price rose 7%, to close at 8.81 euros, on relief that the underlying business appears to be holding up relatively well. Ahold is the third-largest supermarket group in the world by sales, trailing U.S.-based Wal-Mart Stores Inc. and France's Carrefour SA, and is the fifth-largest in the U.S., with chains such as Stop & Shop and Giant.

"This draws a line under recent events and enables us to move forward," said Anders Moberg, the company's newly appointed chief executive.

The company has been under a cloud since February, when it disclosed one of Europe's worst accounting scandals. Ahold revealed that executives at U.S. Foodservice, the second-largest institutional food supplier in the U.S. after Sysco Corp., had booked inflated figures for vendor rebates. Those revelations were followed by disclosures of a series of smaller improprieties, including improper consolidation of joint ventures and fraud in some of its Latin American operations. The company is under investigation by the U.S. Securities and Exchange Commission and the U.S. attorney's office in Manhattan.

The company also announced that last week it suspended 20 midlevel employees at U.S. Foodservice for suspected involvement in the rebate scheme. Ahold already ousted the unit's top officials, including the chief executive, earlier this year. It said yesterday that it expects to announce a new CEO within the next 10 days. It will release first- half results within the next two weeks and expects to present a strategic and financial plan for the company's future midmonth.

The figures it reported yesterday include major restatements of 2000 and 2001 results due to the accounting irregularities. Net sales for 2001 were lowered to 54.2 billion euros from an originally reported 66.6 billion euros, while net profit was lowered to 750 million euros from 1.1 billion euros. Restated net sales for 2000 came in at 40.8 billion euros, compared with the original 51.5 billion euros, while net profit was 920 million euros, compared with 1.1 billion euros.

Despite the restatements, the figures contained some reassuring numbers, particularly for Ahold's U.S. supermarket business and U.S. Foodservice, which together account for about 75% of global sales. U.S. Foodservice posted an operating margin of 1.7%, up from 0.9% in 2001. While that is far lower than the original 4% operating margin reported for 2001 and trails Sysco's 5% level, it was higher than most had expected. Furthermore, the supermarkets division posted a rise in operating margin to 5.4% from 5.3%, despite laggard performance at Tops, BI-LO and Bruno's, three U.S. chains, due to the economic downturn and competition from Wal-Mart. Organic growth at the supermarket division was 5%, higher than growth at some rivals.

Ahold also reported 2002 net cash from operating activities of 2.5 billion euros and suggested that cash flows have been relatively healthy this year, enabling it to repay a 678 million euro convertible bond that matured this week without tapping an unsecured tranche of an emergency credit facility hastily arranged in February.

The healthier cash flow sent a positive signal regarding the financial restructuring. That package will consist of a rights issue, asset sales and possibly a convertible bond to cut its 11.6 billion euros in debt. Analysts say good cash flow could help contain the size of the rights issue. That, however, is balanced by Ahold's disclosure yesterday that it expects to have to pay at least 1.3 billion euros to buy out its partners in the Scandinavian ICA Ahold chain when their put option matures next May. As a result, analysts expect the company to seek a rights issue of anywhere between 2 billion and 4 billion euros when it announces its financial plan in a couple of weeks.

While many analysts are awaiting the first-half results and the financial package's details before setting new price targets, they said yesterday's news could spark an upward rerating of the stock, which hit a record low of 2.47 euros in March.

"If you look at the fundamentals of the company, you still have a huge credibility discount," said Jurgen Veenker, analyst with Fortis Bank, who has a buy on the stock with a price target of 12 euros. "With every set of figures that comes out, you have some relief and some more steps towards normalization."