Cost cuts pay off with profit at Metro

Grocer beats analysts’ expectations

TORONTO • Grocer Metro Inc. surprised the market again on Tuesday, eking out higher- than- expected second- quarter profits despite a period of corrosive food price deflation and intense rivalry between Canada’s supermarket chains.

The Montreal- based retailer’s shares bounced seven per cent in afternoon trading after reporting a 10- percent surge in earnings while it held on to merchandise margins and controlled its expenses.

The price of the company’s average food basket deflated by two per cent in the period ended March 11, compared with price inflation of three per cent in the same period of last year, and sagging core food prices were the most influential factor on results in the quarter, chief executive Eric La Flèche told a conference call with investors Tuesday.

“( Deflation) was double what we experienced in the first quarter — in produce, mostly, but also meat and dairy prices were down, versus last year,” he said.

“Our basket deflated less than ( the Consumer Price Index) because of the mix of products sold.” While Metro is still experiencing deflation, “the worst appears to be behind us,” he said.

The quarterly performance, according to retail analyst Keith Howlett at Desjardins Securities, “reflects Metro’s operating rigour.”

Howlett estimates that Statistics Canada’s CPI for food deflation during the same period was significantly higher, about 3.5 per cent.

Metro earned 56 cents, or $ 1 32.4- million, compared with profit of 51 cents ($ 124.9 million), beating average analyst estimates of 53 cents, according to Thomson Reuters data.

Revenue nudged up 0.7 per cent to $2.9-billion from $ 2.88- billion in last year’s quarter. Same- store sales rose 0.3 per cent, compared with five per cent a year ago.

Canada’s grocery market has become even more competitive over the last year, with Walmart, Loblaw, Metro and Sobeys all lowering prices on selected items. That doesn’t appear to be letting up. “Promotional activity remains extremely aggressive,” La Flèche said.

Mass merchant Costco, for one, has expanded its footprint in Ontario, “and clearly we are feeling that,” he told analysts.

La Flèche also gave a promising update about Metro’s online grocery business. E- commerce will be offered by Metro in most of Quebec’s larger cities by the end of this year, the CEO said, and will expand to Ontario “at some point later.”

The program is still “very small” relative to overall business, he noted. “Delivery is expensive, it’s early days and we don’t have the scale yet to be profitable.”