Axfood AB Navigates Growth and Challenges in Q1 2025: A Strategic Crossroads

Axfood AB’s Q1 2025 results reveal a company at a pivotal juncture. While its core operations demonstrated resilience, the recent acquisition of City Gross has introduced complexities that test Axfood’s ability to balance growth with profitability. With net sales rising 4% year-over-year to SEK 719 million, the Swedish food retail giant is navigating a mix of strategic wins and operational hurdles.

Core Strengths and Strategic Momentum

Axfood’s Q1 performance was anchored by its core brands: Willys, Hemköp, and Snabro’s. Willys, the discount segment leader, saw sales grow by 3%, while its loyalty program membership surged 5.1% to 3.8 million. This growth underscores the segment’s enduring appeal in an inflationary environment, where price-sensitive consumers drive demand. The company’s focus on logistics improvements, including a newly operational high-bay warehouse in Borsa and plans for a Gothenburg-based automated logistics center by 2030, aims to deliver annual efficiency gains of SEK 200–300 million starting in Q2 2025. These initiatives position Axfood to capitalize on its discount strategy, a segment it deems critical to long-term success.

The broader food retail market grew 1.9% in Q1, but Axfood outperformed, gaining significant market share despite a 2.3% negative calendar effect due to Easter timing and leap-day adjustments. This outperformance signals effective execution in a competitive landscape.

The City Gross Challenge

The acquisition of City Gross in November 2024, which contributed SEK 290 million to Q1 sales, has been a double-edged sword. While expanding Axfood’s reach, City Gross faced operational struggles, including a 3.3% decline in like-for-like sales and store closures. These issues dragged down adjusted operating profit, which fell to SEK 757 million (3.6% margin) after excluding restructuring costs. Management aims to turn City Gross around by late 2026 through cost-cutting and integration efforts, but the division’s performance remains a near-term risk.

Financial Health and Valuation

Axfood’s financial metrics reveal both strength and vulnerability. Return on equity (ROE) of 31% and a 24-year dividend-paying streak signal strong capital allocation, while its P/E ratio of 24.5x suggests undervaluation relative to peers. However, net debt rose due to the City Gross acquisition and dividend payouts, compressing the equity ratio to 16.8%—a drop from prior periods.

Analysts forecast a FY2025 EPS of SEK 1.13, with a 5-year revenue CAGR of 11%, reflecting confidence in Axfood’s growth trajectory. Yet, risks persist: food inflation (up 3.8% annualized in Q1) pressures margins, and supply chain disruptions could further strain operations.

Outlook and Key Catalysts

Axfood’s outlook for 2025 remains “transitional,” with a focus on restructuring City Gross and executing logistics upgrades. The upcoming Capital Markets Day on September 18 will provide clarity on long-term strategies, potentially influencing investor sentiment. Meanwhile, the company’s ability to stabilize City Gross and sustain efficiency gains will be critical to meeting its profitability targets.

Conclusion: A Balanced Bet on Resilience

Axfood AB presents a compelling yet nuanced investment opportunity. Its core brands and logistics investments offer solid foundations for growth, while the discount segment’s expansion aligns with consumer trends. However, the City Gross integration and inflationary headwinds pose near-term risks.

Investors should weigh Axfood’s strong ROE (31%) and dividend history against its elevated debt and uncertain turnaround timeline for City Gross. With a P/E ratio below sector averages and a clear roadmap for efficiency gains, Axfood could emerge stronger post-restructuring. Yet, the path ahead demands patience, as the company’s Q1 results highlight both potential and the costs of ambition.

For those willing to ride the volatility, Axfood’s fundamentals—bolstered by a 11% revenue CAGR and strategic investments—suggest a favorable long-term profile. But short-term traders may wish to await clearer signs of stabilization at City Gross before committing capital.