Competition in the Canadian grocery industry has reached a "historically high" level that is likely to remain unabated in the foreseeable future, Loblaw Companies Ltd. (TSX:L) said Wednesday as the country's largest supermarket chain reported lower first-quarter net earnings but easily beat expectations on adjusted profit.
"Looking ahead, in our core grocery operations, we see very little relief from the intensely competitive environment in which we operate," Loblaw president Vicente Trius said in a conference call with analysts.
Trius said Loblaw is looking to the rest of 2014 "with caution" as it takes into account a number of headwinds, including higher gasoline prices, a lower loonie and an increase in the minimum wage in Ontario, not to mention the deflationary pressure from prescription drug reforms.
Loblaw reported a 40 per cent drop in net earnings in its first quarter, mainly due to financing charges. Net earnings came in at $103 million or 37 cents per share, compared with $171 million or 61 cents per share in the same quarter of 2013.
However, adjusted net profits increased to $139 million or 49 cents in the first quarter, a 3.7 per cent hike from $134 million or 48 cents in the same period a year earlier.
Analysts on average had expected net income of $122 million, or 46 cents per share, on $7.32 billion of revenues, according estimates compiled by Thomson Reuters.
Slightly higher revenues in its financial services division, President's Choice Financial, helped boost revenues 1.2 per cent to $7.29 billion in the three-month period ended March 22. This compared with $7.2 billion in the same quarter in 2013.
The earnings gave the grocer confidence to increase its quarterly dividend by about 2.1 per cent to 24.5 cents per common share.
On the Toronto Stock Exchange, Loblaw shares closed up $1.85 or 4.04 per cent at $47.65 Wednesday.
In facing the competitive pressures, Trius said Loblaws would continue to work on differentiating itself from rivals, including Sobeys, owned by Empire Company Ltd. (TSX:EMP.A), Metro (TSX:MRU), Walmart and newcomer Target.
"We will have to remain extremely vigilant and on strategy to continue to deliver improved year-over-year comps, but we are comfortable we can do this with our balanced energy," he said.
A lower loonie against the U.S. dollar pressured the grocer to raise prices on certain foods in the quarter, particularly produce, and on beef and pork, which is facing a shortage in North America. The meat shortage has also had a "cascade effect," raising demand for chicken and deli meats. Trius said challenges in salmon and shrimp fisheries have also resulted in some inflation.
But it expects inflation to have stabilized for the year.
Loblaw said its drugstore business was impacted in the last quarter with a general decline in the use of generic drugs and a drop in the value of reimbursement rates for generic drugs as a result of ongoing regulatory reform.
In its financial services segment, Loblaw said revenue for the first quarter increased by 9.1 per cent compared with the first quarter of 2013, driven by higher interest income from credit card receivable balances and an increase in interest income yield, and higher other service fee related income.
It said its implementation of an expanded loyalty program, PC Plus, has shown a marked improvement in sales. The program currently has more than five million members, with half of them registered online. In Ontario, about 40 per cent of sales at all of its grocery banners are by PC Plus members.
"Our PC plus members make more trips, buy bigger baskets and shop more categories," said Trius.
Trius noted that this will be the last quarter Loblaw will report without any results from its recently-completed $12.4-billion acquisition of Shoppers Drug Mart Corp.
As the transition moves ahead, customers can expect to see more integration between the two companies, with President's Choice products being sold in Shoppers and Life brand products available on Loblaw shelves. Shoppers will also help Loblaw complement its offering in the health and beauty sector.
Trius said Loblaw has also seen positive indicators from its e-commerce efforts with clothing line Joe Fresh seeing online sales were double those in-store in the last quarter.
The grocer has been experimenting with ways to set itself apart from competitors, including an expansion of its e-commerce platform with a pilot "click-and-collect" program at three of its Toronto stores. The option, which is popular in the U.K., allows shoppers to buy food online and later pick up their order at the store.
It's also adding fresh juice bars in 100 of its locations in Ontario, Atlantic Canada and Quebec this spring and will be a cost-effective way to use up fruit from its supermarkets.
Loblaw has said its main goal remains an emphasis on its fresh foods offering, by increasing its assortment, merchandising and sourcing efforts to bring more customers into the stores.
Besides, its main grocery store business, Loblaw also operates the clothing line Joe Fresh and the real estate trust Choice Properties and acquired the drug store chain, Shoppers Drug Mart, a deal finalized last month. It also owns 22 different banners, including Independent, Zehrs, Superstore, Wholesale Club, Value-mart, No Frills, Maxi, Loblaws and Provigo.
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