Investments, consumer preferences, hit George Weston’s Q3 profits

Investments to improve its position in Canada’s intensely competitive grocery and bakery sectors, and changing customer preferences, hit George Weston Ltd.’s (TSX:WN) bottom line in the third quarter.

Company president Pavi Binning said the results reflected the “challenging environments in which both of its operating segments participate,” leading to lower operating profits despite good sales performance by subsidiaries Loblaw and Weston Foods.

“Their operating results reflected the investments required to execute their respective strategies in highly competitive sales environments,” he said.

Weston Foods, which has one of Canada’s largest bakery companies, suffered from declines at its frozen dough business and higher costs, partly offset by added manufacturing capacity and higher prices.

“We have seen a gradual trend with our retail customers, focusing more on thaw and sell and part-baked and less and frozen dough,” Binning said in a conference call with analysts.

“In the quarter this trend has accelerated, and in addition we have some operational challenges that impacted our profitability. We’re working hard to resolve the challenges in the operating segment, but it will take time to get this business back to a level of profitability that we are satisfied with.”

The company is working to deal with changing consumer preferences in that sector as well as the trend toward healthier and gluten-free products, but said it still expected moderate fourth quarter sales growth from Weston Foods.

“Pressures on adjusted operating margin in the fourth quarter are expected to be consistent with those experienced in the third quarter of 2013,” the company said.

Meanwhile, it noted that Loblaw has announced that it expects this year’s adjusted operating income will be flat compared with 2012.

“Loblaw remains committed to its strategy to drive its customer proposition, including investments in food margins, in the fourth quarter of 2013,” George Weston said.

The Toronto-based company, which is the largest shareholder of Loblaws Co. (TSX:L), had $286 million of net income in the third quarter, including $58 million from discontinued operations.

On a continuing basis, George Weston’s net income was $171 million under standard accounting, up from $156 million a year earlier, but its adjusted basic net earnings from continuing operations fell to $1.38 per share, down from $1.47 a year earlier.

George Weston’s adjusted profit was seven cents below estimates of $1.45 per share, according to data compiled by Thomson Reuters.

Overall sales rose 2.1 per cent to $10.38 billion, mostly from Loblaw plus $562 million from Weston Foods. A year earlier, George Weston had $10.16 billion of consolidated sales, including $541 million from Weston Foods.

The quarter included several transactions for George Weston and Loblaw.

Loblaw spun off its real estate holdings into a new publicly traded trust, Choice Properties (TSX:CHP.UN), during the summer. Loblaw and Weston remain the majority owners of the real estate business.

Meanwhile, Shoppers Drug Mart Corp. (TSX:SC) shareholders have voted in favour of a $12.4-billion friendly takeover offer from Loblaw Companies Ltd’, a stock and cash deal originally announced in July.

That deal will keep the Shoppers brand name in place as separate division of Loblaw (TSX:L). Some of the stores that Shoppers owns may be folded into Choice Properties.

As part of the financing for that purchase, George Weston agreed to subscribe for about $500 million of additional Loblaw common shares.

In relation to the Shoppers deal, Loblaw recorded acquisition costs of $9 million in operating income in the quarter. It’s also expecting to incur a $30 million charge in the fourth quarter after announcing it would cut 275 store-support jobs after the quarter’s end.

On the Toronto Stock Exchange Tuesday, shares in George Weston were trading down 45 cents at $81, while Loblaw stock was down four cents to $43.70.