Loblaw says grocery prices to keep rising, as grocer reports profit increase amid inflation

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Loblaw Cos. Ltd. executives expect food prices to keep rising through the first half of this year, as cost pressures remain throughout the sector – an unwelcome sign for inflation-weary customers who are looking for relief on their grocery bills.

“We still have over 1,000 supplier requests on our desks for significant cost increases,” Loblaw chairman and president Galen Weston said on a conference call Thursday to discuss the company’s fourth-quarter earnings. “We continue to believe that these inflationary pressures are temporary and that they will ease with time. But predicting how long that will take is proving extremely challenging.”

Grocers have come under fire for not doing enough to combat food inflation, which has outpaced general inflation for 13 months in a row. This month, a House of Commons committee summoned the CEOs of Loblaw and competitors Metro Inc. and Empire Co. Ltd. to attend a hearing on the matter. The companies sent senior executives to past meetings, but their chief executives have never appeared at the hearings.

Loblaw reported Thursday that its internal food inflation measures were “generally in line” with the Consumer Price Index in the fourth quarter. Earlier this week, Statistics Canada reported that the cost of food at both grocery stores and restaurants rose 10.4 per cent year-over-year in January, up from a 10.1-per-cent increase in December.

Loblaw’s adjusted profits rose almost 12 per cent in the 12 weeks ended Dec. 31, 2022, as food sales grew and demand remained strong at Shoppers Drug Mart, the company’s retail pharmacy chain.

Loblaw has recently been trying to send the message that it is not to blame for higher food prices, stressing that inflation is a global issue and that prices have risen all along the supply chain, due to factors such as droughts, an outbreak of avian influenza and the war in Ukraine. On Thursday, chief financial officer Richard Dufresne stressed that prices on Loblaw’s store shelves have not risen as quickly as the retailer’s costs – that “the company is not taking advantage of inflation to drive profit.”

The company’s net earnings available to common shareholders decreased in the quarter because they compared with a period in the prior year when Loblaw recorded a one-time contribution of $301-million, the result of a favourable court decision in a tax matter. Loblaw reported net earnings of $529-million, or $1.62 per share, compared with $744-million, or $2.20 per share, in the same quarter in 2021. Excluding that prior-year benefit and adjusting for other items, adjusted net earnings rose 11.7 per cent.

Profit margins in Loblaw’s grocery business declined in the fourth quarter, Mr. Dufresne said, offset by higher margins at the company’s drugstores, particularly in categories such as beauty products and cold and flu medications. Overall, retail gross margin in the fourth quarter was 30.6 per cent, down from 30.9 per cent in the same period in 2021. The company does not separately report gross margins for the two retail businesses, and Mr. Dufresne declined to provide further details on those numbers.

The Brampton, Ont.-based retailer predicted Thursday that its profits will rise faster than sales in the coming year, with growth in adjusted earnings per common share forecast to be in the low double digits for the year, ahead of analysts’ expectations.

Loblaw’s stock price rose more than 1.8 per cent Thursday and has almost doubled over the past two years.

Customers have responded to higher prices by shopping more often at discount grocery stores and trading name-brand products for cheaper, private-label brands. Both trends help retailers such as Loblaw, which reported that its off-price stores such as No Frills, Maxi and Real Canadian Superstore “outperformed” in the fourth quarter.

Loblaw’s reported that its overall revenue grew 9.8 per cent to $14-billion in the fourth quarter. Same-store sales – an important metric that tracks sales growth not tied to new store openings – rose 8.4 per cent at the company’s grocery banners and 8.7 per cent at its drugstores. E-commerce sales grew 8.3 per cent.

Other grocers have reported that their suppliers continue to ask for price hikes. Last month, Metro chief executive officer Eric La Flèche said that after the retailer’s usual blackout period for price increases – from mid-November to the beginning of February – there were thousands of supplier requests in the system, so prices would continue to go up.

Mr. Weston said Loblaw is negotiating with vendors. “We will continue to push back on unjustified increases from suppliers,” he said.

For the full year, Loblaw’s revenue rose 6.3 per cent to $56.5-billion in 2022. Net earnings available to common shareholders were $1.91-billion, or $5.75 per share, up from $1.86-billion, or $5.45 per share, in 2021.