Loblaw ‘ready’ for price war on strong profit
Beats estimates as it pressures suppliers
A move by Loblaw Cos. Ltd. to cut grocery prices in response to sliding food inflation is beginning to pay off, according to executive chairman Galen Weston.
The country’s largest grocery and drug retailer began making strategic price cuts at its top- tier stores in the second quarter after customers became increasingly resistant to paying higher food prices, Weston told analysts on Loblaw’s secondquarter conference call Wednesday.
“We had successive years of inflation leading up to high food prices and consumers were starting to feel a ceiling,” in the first quarter of 2016, Weston noted, and shoppers were tightening their belts and shifting into more discount brands and banners, particularly in areas of Western Canada hard hit by a downturn in the oil economy.
Loblaw made moves to strategically cut prices on some goods in the second quarter, which ended June 18, and also sent its major suppliers a l etter asking them to cut the amount they charge Loblaw for goods.
“We are well down the journey of investing (in price cuts) at this point,” Weston told analysts. “We will invest 100 per cent of the proceeds that come from this supplier ( request) back into the customer.”
Loblaw beat analysts’ estimates for adjusted net earnings in the period, which rose 20 per cent compared with a year ago.
Shares climbed 3.7 per cent to $ 73.45 on the news, which comes amid heightened competition and grocery market share gains from discounter Wal- Mart and warehouse club Costco.
“Price wars are generally not something that we look forward to, but we will certainly be ready if the marketplace heats up,” Weston said. “We are in a low- inflation environment and we don’t expect that to change.” In order to be successful in deflationary periods, retailers need to find ways to drive up customer traffic and sales volume, he added “because volume is the only thing that will make sure that your sales stay in positive territory.”
Net income was $158 million or 39 cents per share, down from $ 185 million ( 44 cents), largely due to higher interest expenses and financing charges.
Adjusted earnings rose to $ 412 million ($ 1.01) from $ 350 million ( 84 cents) in last year’s second quarter. That beat analysts’ mean estimates of 94 cents, according to Thomson Reuters.
Retail analyst Peter Sklar of BMO Capital Markets said one upside of the quarter was Loblaw’s turnaround on the amount of food being shipped to its stores.
“The earnings beat, driven by the reversal of a negative tonnage trend in the grocery business, continued solid sales growth at Shoppers, lower-than-expected expenses and higher-than-expected synergies, demonstrates a solid quarter for the company,” Sklar wrote in a note to clients.
Revenue rose 1.9 per cent to $ 10.7 million. Food retail same- store sales growth was 0.7 per cent, excluding gas bar sales. Shoppers Drug Mart was the strongest performer, with samestore sales climbing four per cent. Weston said Shoppers has benefited strongly f rom t he addition of Loblaw’s President Choice food brand into its stores, delivering higher sales and margins t han Shoppers’ now- di s c ontinued f ood brands.