A Metro grocery store in MontrealAndre Pichette
Supermarket giant Metro Inc. remains committed to expanding its pharmacy network despite the pending Ontario government changes that would significantly reduce proceeds to pharmacies from the sale of generic drugs.
The Ontario government is pushing forward with legislation that aims to save $500 million annually by eliminating professional allowances to pharmacists. Such payments from generic drug makers to pharmacies help defray the cost of dispensing drugs at drug stores.
The Ontario government says the lower payments will also lead to a reduction in prices for generic drugs paid for by the province in its publicly funded drug plan for seniors and others.
The measure could also force cost reductions in Quebec, where Metro is based.
Metro chief executive officer Eric LaFleche said the company will assess the impact once the final measures are adopted in Ontario, which is trying to control health spending and trim the province's $21-billion deficit.
"But we remain committed to that business and we think we're in a good position to grow in that business," he said Wednesday during a conference call to discuss the company's higher second-quarter profits.
The Montreal-based grocery retailer saw its profits grow during the period despite facing food price deflation. That prompted its board to raise its quarterly dividend by 23.6 per cent to 17 cents per share.
Metro earned $80.3-million or 74 cents per share, for the period ended March 13, up from year-earlier profits of $76.3-million or 68 cents per share.
The chain operates Pharmacy and Drug Basics stores inside 78 stores in Ontario. It also has 189 Brunet and CliniPlus stores in Quebec.
While the proposed generic drug price changes would have a significant impact on its Ontario drug division, Mr. LaFleche said the impact is "not that material to overall Metro but it's not insignificant." He declined to estimate the financial impact.
Last quarter's earnings came in ahead of analyst estimates, which called for earnings of 71 cents per share.
Metro recorded a slight uptick in net sales, which rose 1.1 per cent to about $2.58-billion compared to just under $2.45-billion posted a year ago. Sales figures were in line with analyst consensus.
The strong sales came despite price declines in produce, beef and pork, which pushed same-store sales down by 0.7 per cent during the quarter.
Last year's sales got a boost due to high food prices and the closing of some competing stores, the company said.
"We're pleased with our second quarter results, which were up on last year's very strong second quarter when we were seeing the highest food inflation in years," he told analysts.
Despite significant deflation, Mr. LaFleche said Metro modestly increased sales and margins mainly because of improved store conditions, execution and maintaining a lid on costs.
Deflation has continued into the current operating quarter but the chain said it is peeking and anticipates a return to more normal levels in the fall.
Irene Nattel of RBC Dominion Securities raised her price target by $2 to $49 because of the better than expected results.
"This quarter's outperformance is key, as (the previous quarter was) the first quarter during which Metro is cycling against inflation-flattered tough prior-year comparisons," she wrote in a report.
With annual sales exceeding $11-billion, Metro is one of the biggest supermarket chains in Canada, operating nearly 600 stores under the Metro, Metro Plus, GP, Super C and Food Basics banners.