Loblaw boosts dividend by most in over a decade
Chain reports 41% profit bump, crediting looser COVID limits, not food inflation
Loblaw Companies Ltd., the largest grocery chain in Canada, increased its dividend by the most in more than a decade after profits soared last quarter.
The company, controlled by the billionaire Weston family, said it will pay out an extra four cents per share, an 11-per-cent increase that put the quarterly dividend at 40.5 cents, widening the gap with its rivals in the Canadian grocery industry. The announcement was part of an earnings update on Wednesday, in which Loblaw reported a 41-per-cent increase in profit on revenues of $12.3 billion.
Loblaw said its higher profits were the result of operational improvements and looser pandemic restrictions that have allowed more people to go out, boosting demand for high-margin products such as cosmetics, not the steepest rise in food price inflation in 13 years.
“We have begun the year with momentum in our core retail businesses, a clear strategic agenda, and continued traction in our growth initiatives,” chief executive Galen Weston said in a news release.
Investors were mostly unmoved by the results, as shares were little changed from earlier in the week. Metro Inc. and Empire Co. Ltd., the other two members of Canada's grocery oligopoly, pay dividends of 27.5 cents per share and 15 cents per share, respectively.
Loblaw, a network of more than 2,400 stores that includes No Frills, Shoppers Drug Mart and Real Canadian Superstore, said it has raised its dividend 11 consecutive times since 2012. In that time, it's never raised the dividend by as much as 11 per cent. Last year, the increase was nine per cent. Between 2012 and 2022, annual dividend increases at Loblaw averaged 6.2 per cent.
As inflation pressures mount, retailers and food companies have been squabbling over who should absorb the brunt of cost increases, and major players such as Pepsico Inc. and Oreos owner Mondelēz International Inc. have pulled their products from shelves temporarily in protest over Loblaw's refusal to accept price increases.
The pressure from inflation pushed Metro to concede that it will have to start absorbing price increases by trimming margins in order to stay competitive and not risk losing sales. But Weston signalled that he believes Loblaw can sustain its margins going forward. In the quarter ended March 26, the company's gross margin for food and drug retail improved to 31.1 per cent from 30.3 per cent in the same period in 2021.
“We see signs that inflation is moderating,” Weston said on a call with analysts. “However, external forces are significant and complex, making accurate predictions difficult.”
Maple Leaf Foods Inc., the Canadian poultry and pork processor, also suggested that the challenges facing the food system could be starting to stabilize, but only after a volatile period that will leave prices elevated, as cost increases from earlier in the year are “now in the marketplace,” CEO Michael Mccain said.
“I actually don't recall ever facing the extraordinary instability that we all see: a global pandemic, burgeoning inflation like we've not seen in decades, extreme disruption in supply chains around the world, and now, emerging direct conflict (in Ukraine)," Mccain said on a Wednesday conference call to discuss his company's quarterly earnings with analysts.
Mccain described the last quarter in the food industry as “trying to operate a business with a third of your people missing one day, half of your ingredient supply not showing up the next, and suppliers jacking the price by 15 per cent of another set of ingredients the next day, all repeating itself over and over and over.”
Loblaw's internal gauge of price inflation is running slightly higher than Statistics Canada's consumer price index, which measured food inflation at 7.5 per cent in the quarter. Weston, who took over as CEO last year, said one reason for the change is Loblaw's recent push to stop running promotions that aren't attracting customers into stores or giving the retailer some other return on its investment. One example was selling cases of bottled water below cost, a spokesperson confirmed.
“We're getting out of what we call low-calorie sales, things that just were simply not giving us value for money,” Weston said. “As you optimize your promotional effectiveness, you're essentially spending less to get the equivalent value in the minds of the consumer.”
Loblaw booked net earnings of $473 million in the quarter, up from $335 million in the same period last year. Better-than-expected adjusted earnings per share of $1.36 were “driven by stronger than expected gross margin in retail,” according to RBC analyst Irene Nattel.
Loblaw said the profit growth was helped by favourable impacts from restructuring as well as value adjustments on fuel and foreign currency. On an adjusted basis, net earnings available to common shareholders were $459 million, a year-over-year increase of about 17 per cent.
Retail revenues reached about $12 billion in the quarter, an increase of $375 million or 3.2 per cent compared to last year. Samestore sales — a retail metric that gives a clear picture of year-overyear growth by ignoring results from new locations — increased by 2.1 per cent in Loblaw's food division.
“Food sales continued to benefit from higher than normal eat-athome levels,” Loblaw said in a news release on Wednesday.
We have begun the year with momentum in our core retail businesses, a clear strategic agenda, and ... traction in our growth initiatives.