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Sears, Metro regroup in face of intense competition

It has been a rough year for the nation's retailers and this week we will see some key financial details from two of the largest players.

On Wednesday, both Sears Canada Inc. and Metro Inc. post quarterly results, and the numbers are likely to be mixed.

For Sears, the news will reflect the first full-quarter performance for the company under the new chief executive officer, Calvin McDonald, hired from the senior ranks of Loblaw Cos. Ltd. last June.

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Mr. McDonald made it clear to employees from the start that the veteran retailer faces an identity crisis and requires sweeping changes if it is going to compete successfully with an onslaught of new competition. His overhaul of the company includes reorganizing catalogue operations, refocusing marketing, rejigging store presentations and investing in customer research to respond more sharply to shoppers' demands.

"Our stores are too difficult to shop. We have inconsistent execution and too much clutter. In many cases, we don't offer the right products in the right market," he wrote in an internal memo shortly after taking the helm.

The early effects of Mr. McDonald's busy four months are unlikely to show up in the financials. Keith Howlett of Desjardins Securities is expecting Sears to report a 5 per cent decline in sales to $4.69-billion for the year and a 47 per cent decline in earnings before interest, depreciation and amortization (EBITDA), to $170-million.

Weak consumer confidence hurt the company's performance in the first half of the year, punctuated by a $2.7-million loss in the second quarter, compared with a $20.5-million profit a year earlier, as same-store sales fell almost 6 per cent. Third-quarter conditions aren't forecasted to be much better, because shoppers are expected to have cut back spending from the previous back-to-school season. Shares of Sears Canada are down 35 per cent over the last year.

Management may express greater optimism for next year, however, partly due to new initiatives but also to the fact that a major competitor is closing its doors. Last January, Target Corp. paid $1.8-billion to buy most of the leases of Zellers Inc. Next year, it will close and begin converting as many as 135 of them to stores carrying its own banner. Meanwhile, Wal-Mart Canada Corp. will close and convert 39 of the Zellers stores.

Mr. Howlett describes the coming months as a period of "deceptive peace" for Sears Canada. Beginning in 2013, the struggling retailer will feel the full force of the two U.S. giants' expansion into its home turf.

"We see no reason to own Sears Canada shares based on operating fundamentals," Mr. Howlett wrote in a note last month.

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Grocery-store operator Metro Inc. is a different story. As investors have sought shelter in defensive sectors, such as consumer staples, the company's shares have climbed 9 per cent this year, compared with the 9 per cent decline registered by the S&P/TSX Composite Index.

Metro offers a good read on spending patterns in Ontario and Quebec, where the company operates more than 600 food stores and 250 drug stores, under banners including Brunet, The Pharmacy and Drug Basics.

Analysts are expecting a 10 per cent gain in EBITDA on slim sales growth of a little more than 1 per cent.

Perry Caicco of CIBC World Markets Inc. estimates that same-store sales inched ahead by 1.5 per cent, building on increased volumes reported in the previous quarter. But expenses are likely to creep up about 2 per cent. As a result he recently trimmed his profit estimate by four cents to 95 cents a share. That would compare with 88 cents a share in the year-earlier period.

Metro and other big grocery chains are trying to pump up growth by moving into new niches. Investors will be keen to hear more details on Wednesday about Metro's deal announced last month to buy a 55 per cent in Marché Adonis, one of Quebec's biggest ethnic-food retailers. The move follows a deal two years ago by rival Loblaw, which bought Canada's biggest Asian food retailer, T&T Supermarket Inc., for $225-million.

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