NEW YORK (CNN/Money) -
Shares of Ahold lost nearly two-thirds of their value Monday after the world's No. 3 retailer said it overstated profits by half a billion dollars at its U.S. food distribution service and said its chief executive and chief financial officer were quitting.
"How do you spell Ahold now -- E-N-R-O-N?" a trader with Madoff Securities in London said. "The company had been fairly forthcoming about its problems, so this was a real shocker." He added: "It remains to be seen if Ahold can recover from this credibility crisis."
After the announcement, Ahold's (AHO: Research, Estimates) American shares tumbled $6.53, or 61 percent, to close at $4.16 on the New York Stock Exchange.
The accounting irregularities could draw scrutiny from the Securities and Exchange Commission.
"If any company makes a restatement of earnings, the commission staff is going to look at it," SEC spokesman Herb Perone said, according to Reuters. But Perone declined to say if Ahold would be specifically targeted by the regulatory agency.
The announcement by Ahold, which owns the Stop & Shop, Giant and BI-Low supermarket chains in the United States as well as Dutch supermarket leader Albert Heijn, thumped its bonds as well as its stock as investors fled a market shaken by a string of accounting scandals.
The company said the overstatements of income were primarily related to discount programs at U.S. Foodservice, the No. 2 U.S. food service distributor to restaurants, hotels, schools and other institutions.
Ahold, which owns or has interests in about 9,000 supermarkets as well as discount and specialty stores in some 25 countries in Asia, Europe, and the Americas, is also the world's largest food distributor.
Henry de Ruiter, chairman of Ahold's supervisory board and acting CEO, said in a conference call that there were no plans to sell large units or break up the company at this time
CEO Cees van der Hoeven and Chief Financial Officer Michael Meurs will resign after auditors Deloitte & Touche uncovered irregularities during their audit of the 2002 accounts, he said. Van der Hoeven's tenure was marked by rumors that he would resign last year.
The Dutch retailer, which warned on earnings twice last year amid weak consumer demand, said 2002 net profit will be "significantly lower" than expected after the overstatement of earnings at its key U.S. business in 2001 and 2002. The overstatement could exceed $500 million, with most of that falling in fiscal 2002, Ahold said. The company, which operates 1,600 stores on the East Coast, makes 60 percent of its profit in the United States.
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Ahold also said it is investigating financial irregularities at its Argentine subsidiary, Disco.
Meanwhile, Standard & Poor's cut Ahold's long-term debt rating to BB+, or junk status, and Fitch Ratings also cut Ahold's debt and said it was still reviewing its ratings.
Ahold said the full financial impact of the investigations on its earnings could not be determined until the process is completed. Ahold postponed its 2002 results indefinitely. The company, which has about $12 billion in net debt, previously forecast a 6 to 8 percent drop in 2002 earnings. Ahold was to report full-year results March 5.
Some industry watchers, citing Ahold's $79 billion in sales in 2002, said it was unlikely the company will collapse because of the overstatement.
Others saw less of a silver lining. Merrill Lynch analyst Andrew Fowler, in a note titled, "The beginning of the End," said, "The emergence of the accounting irregularities and the fact that Ahold will now be a forced seller in a global bear market prevents us to turn any more positive on its shares." Merrill Lynch has a "neutral" rating on the stock.
Meanwhile, Robert Summers, analyst with Banc of America Securities, said investors shouldn't think that Ahold's revelations are endemic to the U.S. supermarket industry, which is facing increasing pricing pressure from aggressive discounters like Wal-Mart (WMT: down $1.26 to $47.64, Research, Estimates).
"The problem with supermarket chains like Kroger (KR: down $0.30 to $13.47, Research, Estimates), Albertson's (ABS: down $0.45 to $19.00, Research, Estimates) and Safeway (SWY: down $0.67 to $20.27, Research, Estimates) is that they need to find a way to compete with Wal-Mart," Summers said. "The economy is partly responsible because price matters more in a weak economy, so consumers tend to over-leverage the discount channels."
Added Summers, "Ahold's problem is more company-specific, primarily because it's in the food service side and not the food retailing part of the industry. So there is no direct correlation there."
-- from staff and wire reports