By Diana Mandia and Helen Reid
(Reuters) - Supermarket group Ahold Delhaize reported a stronger than expected fourth-quarter operating margin on Wednesday and said it will maintain "a relentless focus on cost" to protect profitability as slowing food inflation pressures grocers.
The group, which operates chains including Stop & Shop, Food Lion and Hannaford in the United States and Albert Heijn and Delhaize in the Netherlands and Belgium, reported an underlying operating margin of 4.3% for the fourth quarter, beating analysts' expectations of 4%.
That drove shares in Ahold up more than 4% by 0900 GMT, following a decline of around 16% over the last six months.
The group said it expects a margin of more than 4% this year and free cash flow of around 2.3 billion euros.
In November, Ahold Delhaize trimmed 2023 earnings guidance after flagging margin weakness in the United States after two years of inflation-driven profit gains across the sector.
"Today it has reassured on a number of bear points: sales growth in the U.S. hasn't fallen off a cliff, margin in the U.S. has been resilient... this reassures investors that what you're getting is more of the same," said Tom Lemaigre, European equities portfolio manager at Janus Henderson in London.
"A lot of the bear theses that were out there can be somewhat quashed with this set of results."
Ahold's fourth-quarter margin in the U.S. was 5.2%, up 0.4 percentage points, while its margin in Europe fell 0.3 percentage points to 3.7%.
"Inflation is coming down so our topline is under pressure, while the bottom line still has high inflation on cost, so that's the challenge we have," Chief Financial Officer Jolanda Poots-Bijl, who started in the role in October, said in an interview.
"What we do to improve our margin is, I think as we've done for the last decade, (keep) a relentless focus on cost."
Ahold Delhaize generated more than 1.25 billion euros in cost savings in 2023, and CEO Frans Muller said cost management is more important than ever as global conflicts disrupt supply chains and add to price volatility.
Wages, a significant portion of costs for the supermarket retailer, increased by an average of 10% in Europe last year, Poots-Bijl said, adding she expected wages to increase further in 2024 across Ahold's markets.
Ahold does not plan to reduce staff numbers, she added, but is working to improve productivity. The group targets cost savings of more than 1 billion euros this year.
"If they're able to take out that much cost last year and then come back with another expected billion, that also helps margins at a time when sales are slowing," said Lemaigre.
($1 = 0.9331 euros)