Loblaw lowers profit projection, says competition has hit “critical mass”

TORONTO – The top brass at Loblaw Companies Ltd. (TSX:L) says it remains focused on winning over customers with lower prices and a bigger selection of fresh foods, but admits to disappointment that the grocery giant can no longer expect to grow its profits this year.

“As expected, in the third quarter, the competitive environment intensified significantly,” Loblaw executive chairman Galen G. Weston said during a conference call with analysts Wednesday.

“Increases in square footage from incumbents and new entrants reached critical mass. This combined with a shift in consumer expectations put significant pressure on our business,” Weston said.

“Balancing sales and margin in such a dynamic market is not easy. Despite this disappointment, as we move into 2014, we remain dedicated to our strategy.”

The company, which owns Loblaws, President’s Choice and several other grocery brands as well as the Joe Fresh clothing line, announced it has revised its outlook as it reported a 29 per cent drop in net income for the third quarter.

For the three-month period ended Oct. 5, Loblaw had $154 million, or 55 cents per share, of net income, down 28.6 per cent from 77 cents per share a year earlier.

The Brampton, Ont.,-based company said it was introducing three new financial measures beginning with the third-quarter report, that weren’t used in previous guidance — making comparisons with previous estimates more difficult.

Its adjusted earnings, one of the new measures that excludes certain, often one-time items that are part of standard accounting, were $220 million, or 78 cents per share, down 3.7 per cent from 81 cents per share. The earnings came in below what analysts were forecasting, according to Thomson Reuters.

Revenue for the 16-week period was up 1.9 per cent to $10 billion.

Weston, whose family is Loblaw’s biggest shareholder, said overall, same-store sales have increased three quarters in a row.

Despite the forecasted flat profit, Loblaw said will continue to invest in margins to lure customers into its stores. Translated, this could mean more competitive prices for shoppers as Loblaw pits itself against other domestic grocery chains, primarily Sobeys and Metro, and U.S. retailers such as Walmart, Target and Costco.

“As you look at our strategy, at the heart of it, its always been a strong focus on the customer and driving our business on what the customer wants and needs,” said Loblaw president Vicente Trius.

He added that the grocer will continue to appeal to customers with its PC Plus loyalty program,which was rolled out in Ontario in May and will eye how the recently launched online store for Joe Fresh is doing.

During the summer, Loblaw spun off its real estate holdings into a new publicly traded trust, Choice Properties (TSX:CHP.UN), which remains majority owned by the grocery company.

Loblaw is also in the process of acquiring Shoppers Drug Mart (TSX:SC), which will be operated as a separate division with complementary products.

The company said once the deal is finalized, Loblaw will see a tremendous amount of cash flow, estimated to be in the range of $1 billion, which it will use to pay down debt.

It expects to reduce its debt by about $1.5 billion over the first two years and will then look at how to return that shareholders via dividend increase or share buybacks, said Janet Craig, senior vice-president of investor relations with Loblaw.

Shares in Loblaw fell nearly 7.55 per cent or $3.61 to $44.23 Wednesday on the Toronto Stock Exchange.

Irene Nattel, an analyst with RBC Capital Markets, said that Loblaw’s results were an indicator of how intense the competition has become in the grocery sector.

“Further investment in margin is required to sustain top line (sales) performance,” she wrote in a note, adding that the Shoppers acquisition will help the grocery giant “broaden” its revenue and earnings next year.

Separately, Metro Inc. (TSX:MRU) reported later Wednesday that its sales for its fiscal fourth quarter ended Sept. 28 were down 1.1 per cent from a year earlier, same-store sales were down 1.8 per cent, but adjusted net earnings from continuing operations were up. The grocer’s stock closed down $3.71 or 5.65 per cent at $62.