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The Globe and Mail

Loblaw profit falls as grocer races to revamp

Galen Weston, Executive Chairman of Loblaw Companies.


Loblaw Cos. Ltd. continued to struggle in its second quarter, with profit falling about 19 per cent although the giant grocer made modest sales gains.

For the 12 weeks ended June 18, profit dropped to $159-million or 57 cents a share from $197-million or 70 cents a share a year earlier. Sales increased 1.3 per cent to $7.375-million, below what analysts had expected, from $7,278 million.

Galen G. Weston, executive chairman at Loblaw, said in a statement Wednesday morning that the company continued to implement its turnaround plan, as it had anticipated doing.

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"We are beginning to gain traction on the top-line [sales], particularly in our core food and drug businesses, as we continued our disciplined approach to improving our customer proposition, Mr. Weston said. "We remain confident that our ongoing investments in infrastructure, including the completion of our IT [information technology] implementation, will enable efficiencies and expense leverage to drive future earnings growth.

"Our outlook for 2012 is unchanged – we continue to expect full-year net earnings to be down year-over-year."

Loblaw has been racing since late 2006 to turn around its operations under Mr. Weston's leadership after a failed attempt by the previous executive team. It added more discount super centres and worked to improve its distribution systems to take on titan Wal-Mart Canada Corp., which has been relentlessly beefing up its food offerings, but the initiatives often resulted in store shelves being empty.

Even so, Mr. Weston and his team have taken longer than expected to revamp the company's troubled technology and supply chain systems, squeezing profits and the company's share price. Last summer, it named a new president, Vicente Trius, to head the day-to-day operations and return Loblaw to its glory days as a food leader.

On Wednesday, Loblaw had more disappointing news on the profit front, with its second-quarter EBITDA [earnings before interest, taxes, depreciation and amortization] margin slipping to 6.4 per cent from 6.9 per cent a year earlier.

The company posted second-quarter incremental costs of $20-million tied to IT investments, including a $10-million charge for the transition of some Ontario conventional stores to more cost effective stores as a result of modified labour agreements.

On a brighter note, Loblaw's same-store sales, a key retail measure at outlets open a year or more, inched up 0.2 per cent compared with a drop of 0.4 per cent in the same period a year earlier.

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It said sales growth in food was moderate and "modest" in its drugstores, where it has put a big push to pump up the business. Sales at its gas stations declined marginally while sales in general merchandise declined moderately, except in its Joe Fresh apparel business, where sales were flat.

Loblaw experienced "modest" average quarterly internal food price inflation in the second quarter, lower than the 2.5 per cent food inflation as measured by Statistics Canada's consumer price index for food purchased in stores.

Analysts were expecting an average profit of 62 cents a share and revenue of $7,369.2 million, according to a survey by Thomson Reuters.

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