Grocery Business

 

November 3, 2014

 

Loblaw stymied on price increases

Many Canadians are refusing to pay more for food

 

Canada’s largest grocer is feeling the heat from strapped Canadians, who are refusing to pay more for food, officials suggested in an analyst conference call today. Food inflation at Loblaw Companies Ltd.  ran at near 2.8% in the third quarter roughly in line with Statistics Canada’s Consumer Price Index data. However same store sales rose by 2.6%, which means that volumes actually shrank.

 

Galen Weston, Loblaw president and executive chairman, put a positive face on the results, citing the Shoppers Drug Mart acquisition, cuts in selling, general and administrative expenses and implementation of a new IT system, as signalling progress going forward.

 

“We continued to advance strategic initiatives (during the quarter) and improve market position,” said Weston. “We delivered solid performance across our businesses, recognized efficiencies, realized significant synergies, and remained on track with deleveraging targets.”

 

Weston noted growing demand and a willingness among some customers to pay more in the high quality fresh and ready-to-eat segments. However he also acknowledged that in today’s tough market, in which total square footage growth is likely to slow in coming years, that Loblaw is unlikely to see major overall market share gains. The company is thus counting on marketing, merchandizing and administrative initiatives to chip away at competitors.

 

Canadians craving more

Some of these efforts are starting to pan out. According to Richard Dufresne, Loblaw’s chief financial officer, qualitative and quantitative measures indicate that the Crave More marketing campaign, launched in September, has struck a chord with Canadians.

 

Traffic on the President’s Choice web-site has increased more than threefold and the company charted strong sales lifts that coincided with TV and digital launches. In fact initial results are so positive that officials expect Crave More to become a sustained, longer-term success. Loblaw is also expanding its “Box” small-store discount concept, modeled in part on a similar effort in the UK, to see if there is a hole in the market that it can exploit.

 

However company officials, who confirmed that head office staff had been cut by 1,200 posts during the past few two years, from 6,100 posts to 4,900, are counting heavily on administrative moves to maintain profitability. 

 

Drinking from a fire hose

Those efforts, which include installing a SAP enterprise resource planning system, will take time though. Dufresne confirmed that the technology has now been put into 440 Loblaw stores, and that recent conversions have gone smoothly. However the company continues to simultaneously run its legacy IT systems, so right now there is actually more work (not less). Furthermore, leveraging all the information produced by the SAP system, which one official likened to “drinking out of a fire hose,” will take time.

 

That said, Loblaw’s biggest challenge will be digesting the Shoppers Drug Mart acquisition. Officials say that the company has already generated almost half of the $100 million in projected synergies. However Loblaw took on huge debt, when it removed the non-channel competitor from the market and now owes close $13.5 billion. Grocery sector stakesholders will be watching closely to see how that plays out. 

 

*****

 

Loblaw Companies 2014 Third Quarter Highlights

  • Revenue of $13,599 million increased 35.9% over the third quarter of 2013. Excluding the impact of Shoppers Drug Mart, revenue increased by 2.0% compared to the third quarter of 2013.

  • Retail sales growth of 36.9% compared to the third quarter of 2013. Excluding the impact of Shoppers Drug Mart, retail sales grew by 2.2% and same-store sales(3) growth was 2.6%.

  • Shoppers Drug Mart sales were $3,387 million in the third quarter. On a same-store basis, Shoppers Drug Mart sales increased by 2.5%, with same-store pharmacy sales increasing by 3.5% and same-store front store sales increasing by 1.6% over the third quarter of 2013.

  • In the third quarter of 2014, the Company realized approximately $44 million of net synergies associated with the acquisition of Shoppers Drug Mart.

  • Adjusted EBITDA(2) up 56.9% to $1,001 million compared to $638 million in the third quarter of 2013. Excluding the impact of Shoppers Drug Mart, adjusted EBITDA(2) increased $8 million compared to the third quarter of 2013.

  • Adjusted operating income(2) up 74.2% to $669 million compared to $384 million in the third quarter of 2013. Excluding the impact of Shoppers Drug Mart, adjusted operating income(2) increased by $10 million, or 2.6%, compared to the third quarter of 2013.

  • Adjusted basic net earnings per common share(2) up 23.3% to $0.90 compared to $0.73 in the third quarter of 2013.

  • Basic net earnings per common share(3), including charges of $0.56 per common share related to certain Shoppers Drug Mart acquisition-related amounts and certain other adjustments(i), was $0.34 compared to basic net earnings per common share(3) of $0.53 in the third quarter of 2013.

  • Free cash flow(2) was $216 million for the third quarter of 2014 and $597 million year-to-date.

  • During the third quarter of 2014, the Company recorded $46 million (2013 - $3 million) in restructuring and reorganization costs primarily associated with the reduction of corporate and store-support positions, the departure of certain executives and the realignment of certain of the Company's central office functions.

  • The Company continued to make progress and is on track towards its debt reduction targets, with an adjusted debt(2) decrease of approximately $300 million in the third quarter of 2014. In the third quarter of 2014, the Company repaid $350 million of its term loan facility, which was partially offset by draws on the $500 million senior unsecured committed credit facility ("Choice Properties Credit Facility") in the amount of $40 million.

 

 

peter@peterdiekmeyer.com

 

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