Loblaw profit falls amid changes
Grocery giant hit by flat sales, charges
TORONTO — Loblaw Cos. Ltd.’ s merger of its popular loyalty programs led to some consumer headaches and profit- sapping charges in the fourth quarter, but the retailer is pleased overall with the transition to PC Optimum, its CEO said Thursday.
The news came as Canada’s biggest grocer reported $ 230 million in charges related to its loyalty program in the period ended Dec. 31 and a $ 25 gift card giveaway to customers, as Loblaw heads into what’s expected to be a fiercely competitive year in the supermarket business.
More than six million customers have signed on to PC Optimum since the loyalty programs at Loblaw and Shoppers Drug Mart merged on Feb. 1, Galen Weston told analysts on a conference call, on track with the company’s expectations.
“We are very happy with the way it’s going,” said Weston, though he acknowledged that the process led to some technical hiccups. Those prompted frustrated consumers to take to social media in the days following the loyalty merger, complaining of difficulty in linking their accounts.
“This is a massive technological conversion process taking place with millions of people in a very short period of time,” Weston said. “At the fringes, there’s no question we have had some disappointed customers with processes that have been more complex than we would certainly like for them.”
Merging the programs had been anticipated since Loblaw bought the Shoppers chain in 2014. PC’s card and app had about 11 million members and Shoppers had about 8 million members. TD Bank analyst Michael Van Aelst said about half of the 19- million total member base already belonged to both programs. Loblaw is seeking to convert those who didn’t belong to both into the new program, a rich source of data about customer shopping habits.
Loblaw said net earnings in the quarter fell to $ 19 million, or 5 cents per share, from $ 201 million, ( 50 cents), a year earlier.
In December, the retailer admitted that it was the whistleblower as one of the players in a widespread industry scheme to fix bread prices, and it incurred a slew of charges in the period totalling $ 230 million, or 61 cents per share. Executives on the call Thursday did not discuss the price- fixing allegations, citing the ongoing Competition Bureau investigation into the matter.
Charges associated with merging its PC Plus and Shoppers Optimum programs amounted to $ 154 million in the fourth quarter and restructuring costs were $ 123 million. The $ 25 gift card offered by Loblaw to customers affected by the bread price fixing had an impact of $ 79 million in the quarter. Those costs were offset by the favourable impact of asset impairments, tax changes and income from the wind- down of PC Financial banking services, Loblaw said.
Adjusted earnings were $ 1.13 per share, compared with 97 cents a year ago, higher than the analyst consensus of $ 1.11 for the period. Loblaw’s shares fell about one per cent in early afternoon trading Thursday to $ 64.51.
Revenue slid 0.9 per cent to $ 11.03 billion and retail segment sales fell 1.2 per cent to $ 10.7 billion after the sale of some gas stations. Disposing of the gas bar operations had a negative sales impact of $ 350 million in the period, Loblaw said.
Food same- store sales, a key measure of industry performance that strips out the effects of square footage changes, were flat, up just 0.5 per cent excluding gas. Samestore sales at Shoppers Drug Mart were more promising, rising 3.9 per cent in the pharmacy and 3.5 per cent in the front of the store.
“The ( Shoppers) purchase looks genius now,” said Jim Danahy, CEO of Toronto- based retail consultancy Customer Lab. Notwithstanding the revenue- depleting effects of government drug reform on pharmacy revenue, “a drugstore business is still a more profitable business than selling rutabagas and meat,” he said.
“Grocery is cyclical and there are up and downs in the marketplace. Right now we happen to be in a period where you have got to decide if you are in the market share business or the profit business and that happens in grocery more than it does in other categories.”
Loblaw’s loyalty program is ultimately expected to boost topline revenue, Weston said. That’s key given the performance of non- traditional food retailers such as Costco Wholesale Corp. and Walmart Inc. taking up an increased share of the grocery business in Canada. Walmart Canada said Tuesday that its same- store sales were up 2.9 per cent in the quarter ended Jan. 31 as its food market share continued to grow.
In the meantime, Loblaw, Walmart, Sobeys Inc. and Metro Inc. are all expanding their grocery e- commerce businesses in anticipation of Amazon’s growth in the food market. Loblaw said Thursday that 300 of its stores offered “click and collect” pickup of online orders at the end of the fourth quarter and it was adding roughly one store a day to the mix.