RISKS RELATING TO OUR STRATEGY
RISKS RELATING TO OUR LIQUIDITY
For additional discussion of our risk management, see
"Management's discussion analysis-Risk management
and use of financial instruments and derivatives" and Note
34 to our consolidated financial statements included in this
annual report.
If we do not successfully carry out our strategies for our
food retail and foodservice businesses, or if we are
unable to realize expected cost savings, this could have
a material adverse effect on our financial position,
results of operations and liquidity.
For 2006 and onward, we have defined a growth strategy
based on core values that our operating companies share
and core capabilities that we are improving. In 2005,
competitive and operating cost pressures in our retail
markets were greater than expected and the turnaround at
certain of our businesses was slower than planned. The
financial targets we originally set for retail in 2003 have
become increasingly challenging. Based on the retail trends
we have seen so far in 2006, we expect our retail net sales
growth in 2006 to be between 2.5% and 3.0% (assuming
constant currency exchange rates and excluding divestments
made in 2005). In addition, we expect that our retail
operating margin will be between 4.0% and 4.5% in 2006.
Our overall priority remains to drive net sales growth and
achieve a retail operating margin of 5%. We may encounter
difficulties or delays in implementing our strategic initiatives
and we may not be able to achieve the expected retail net
sales growth and retail operating margin. We may also incur
unanticipated costs in implementing our strategy. We have
planned certain levels of capital expenditures and launched
several strategic initiatives for our food retail business.
These include initiatives that we expect will allow us to
realize gross cost savings aggregating approximately EUR
650 million by the end of 2006. However, we may not be
able to reach the targeted levels or receive the expected
benefits of these cost savings and capital expenditures. If
we do not successfully carry out our strategy with respect to
our food retail business, this could have a material adverse
effect on our financial position, results of operations and
liquidity.
U.S. Foodservice accounts for a substantial portion of our
net sales. Although we are in the process of reorganizing
U.S. Foodservice into two operating companies to restore
its value and improve its profitability, our plan may not be
successful. For further information about our plans and
steps to reorganize U.S. Foodservice, see "Management's
discussion analysis -Road to Recovery 2003-2005."
We cannot assure you that we will be able to successfully
complete these plans or that when they are complete
U.S. Foodservice will satisfactorily improve its profitability.
We may be unable to complete successfully all or many of
U.S. Foodservice's initiatives, including its reorganization,
its implementation of a centralized supplier information
system intended to track corporate-based vendor allowance
programs, and its improvement of internal controls and its
information systems, which could have a material adverse
effect on our overall financial position, results of
operations and liquidity. Moreover, based upon the charges
already brought against former officers of U.S.
Foodservice and in the event of any adverse developments
in the pending investigations of U.S. Foodservice or its
current or former officers, U.S. Foodservice could suffer a
sudden and material loss of business among its customers
or be restricted from pursuing new business from
certain customers, particularly those customers that are
governmental entities or in the casino and gaming industries.
Our level of debt could adversely affect our financial
position, results of operations and liquidity and could
restrict our ability to obtain additional financing in
the future.
We have significantly reduced our debt as part of our Road
to Recovery strategy. However, we continue to have
substantial indebtedness and our total gross debt at the end
of 2005 was approximately EUR 7.7 billion. In addition to
the obligations recorded on our balance sheet, we also have
various commitments and contingent liabilities that may
result in significant future cash requirements. Although
some of our debt instruments and other arrangements place
conditions on our incurring further debt, we are not barred
from doing so. To the extent we incur incremental debt, our
leverage risk will increase. Our significant level of debt
could adversely affect our business in a number of ways,
including but not limited to, the following:
because we must dedicate a substantial portion of our
cash flow from operations to the payment of interest and
principal on our debt, we have less cash available for
other purposes;
our ability to obtain additional debt financing may be
limited and the terms on which such financing is obtained
may be negatively affected; or
we may be placed at a competitive disadvantage by our
limited flexibility to react to changes in the industry and
economic conditions and our financial resources may be
diverted away from the expansion and improvement of our
business. As a result, we could lose market share and
AHOLD ANNUAL REPORT 2005 41
