Loblaw increases investment in upgrades, despite impact on profits in 2010

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TORONTO - Loblaw Companies Ltd. (TSX:L), the country's largest grocery chain, said Wednesday two of its toughest years are still ahead, after reporting its fourth quarter profits dropped 13.2 per cent.
Loblaw president and deputy chairman Allan Leighton said sales and margins will be challenged by increased competition throughout this year as Loblaw pushes through a period of dwindling revenues and costly upgrades.
I do have concerns still about the economy and unemployment does make a big difference to us, but household debt is also a big factor in what happens in food markets," Leighton told investors on a conference call Wednesday.
The grocery chain, which operates across Canada under numerous banners including Loblaws, Real Canadian Superstore, Zehrs, Provigo, No Frills and Atlantic Superstore, said it earned a profit of $165 million in the fourth quarter of 2009. That was down from a year-earlier $190 million, though the year-ago period contained an extra week.
Earnings per share fell 14.3 per cent to 60 cents from 70 cents, while revenue was down 5.6 per cent to $7.3 billion from $7.7 billion in the 13 weeks ended Jan. 3, 2009. Same stores sales were down 7.8 per cent.
Loblaw said that using a 12-week basis for comparison, food sales growth was flat, pharmacy sales growth was moderate, and apparel sales of its Joe Fresh clothing line and gas bar sales increased. General merchandise sales declined.
The company has appointed Joe Mimran, head of the store's successful private-label apparel to lead its general merchandise section in a move to beef up sales of electronics, furniture and other non-food items.
CIBC analyst Perry Caicco said the earnings continued Loblaw's general trend of relatively weak sales with strong margin control.
However, we have learned to take these warnings with a grain of salt," Caicco wrote in a note to clients.
Meanwhile, Loblaw will spend $1 billion on store renovations and infrastructure upgrades, with investments in technology and supply chain efficiencies reducing annual operating income by $185 million from last year's levels.
This is a massive program, currently the biggest retail infrastructure program of its type in the world," Leighton said. We continue to edge forward, but there's still more to do. The next two years, the final two of our renewal program, will be the toughest yet," Leighton said.
This will be happening against a backdrop of zero inflation to deflation in the first half of the year, and an increasingly competitive and soft market."
The company launched the revamp of its distribution facilities in 2007, in an attempt to resolve supply difficulties that had resulted in stock not reaching stores efficiently.
The reorganization was plagued with management troubles as the company hired costly consultants to oversee the process. Loblaw has since replaced many of those consultants with its own employees, resulting in lower operating costs.
But Leighton said when the new supply chain program is completed at the end of next year, the company will have transformed a data system that was once significantly below industry standards" into the best supply chain infrastructure in North America."
Investors seemed to react positively to the company's news Wednesday, pushing the stock up three per cent, or $1.12, to $38.04 with over 1.6 million shares traded on the Toronto Stock Exchange.
Robert Cavallo, a retail analyst with Research Capital, said the results were slightly positive, adding the company's five-year infrastructure upgrade program appears to be ahead of schedule, and the $185 million investment would help meet its end of 2011 deadline.
Even if there are some short term hiccups along the way, it's about getting the company to the next level, and if you have the financial ability to go through store refurbishments and supply chain and IT upgrades and the like in tough times, it's a long term pay off."
Despite market uncertainties, Loblaw is also pushing ahead with a program to revamp another 200 stores across the country after already completing renovations at two-thirds of its stores.
The store renovation program has hurt Loblaw's revenues, as stores in the midst of renovations had approximately 10 to 15 per cent less space to dedicate to core general merchandise in 2009.
The company said the renovations are now taking half as long to complete compared to a year ago, but they continue to decrease revenues.
The company says full-year earnings per share for the 52 weeks in 2009 were $2.39, up 18.9 per cent compared to a 53-week fiscal 2008.
Full-year sales declined a modest 0.2 per cent and same-store sales were down 1.1 per cent compared to last year. But comparing the years on a 52 week basis and excluding one time costs, overall sales increased 1.6 per cent and same-store sales increased 0.7 per cent.
Loblaw has more than 1,000 corporate and franchised stores across the country and a workforce of 139,000 full-time and part-time employees.

Organizations: Loblaw Companies Ltd., TSX, CIBC Toronto Stock Exchange Research Capital

Geographic location: TORONTO, Canada, North America

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Recent comments

  • tara
    February 06, 2014 - 17:07

    What a great work moral for them to keep going! It's not easy to keep putting time, effort and money into something that's not doing well. There should be more people like this in the world. Tara | http://www.clabrolabel.com/services.html