Loblaw Posts Disappointing Q3

TORONTO -- Loblaw Cos., Ltd. here posted a same-store sales increase of 2.8 percent for the third quarter of fiscal 2007, excluding the impact of lower tobacco sales. But gross margin at the Canadian retailer plummeted about CAN $60 million (US $60.7 million) compared to the year ago period -- representing 0.7 percent of sales -- which the company attributed to such factors as targeted price reductions to provide value to customers and changes in sales mix.

Sales for the quarter ended Oct. 6, 2007 grew 1.4 percent, or CAN $127 million (US $128.5 million), to CAN $9.14 billion (US $9.25 billion) compared with the year ago, with total sales increases realized across all regions of the country and strong food and drug store sales, according to the retailers.

In the third quarter of 2006, a major tobacco supplier began shipping directly to certain customers of Loblaw's cash-and-carry and wholesale club network, negatively affecting sales. This loss of sales will not affect comparisons to 2006 sales after this quarter, the company said.

Net earnings for the third quarter fell CAN $86 million (US $87.0 million), or 42.4 percent, to CAN $117 million (US $118.4 million), from $203 million (US $205.4 million) in the third quarter of 2006; and plunged CAN $247 million (US $250.0 million), or 46.0 percent, to CAN $290 million (US $293.5 million) year to date, from CAN $537 million (US $543.4 million) last year.

Operating income was CAN $250 million (US $253.0 million) in the third quarter of 2007, vs. CAN $398 million (US $301.6 million) in the year-ago period, a reduction of CAN $148 million (US $149.8 million), with sales increases in the quarter insufficient to offset margin declines and cost increases, the company noted.

Loblaw executive chairman Galen G. Weston said in a statement that the company was focused on four major initiatives: a business reorganization known as Project Simplify; Fix the Basics, a program to upgrade store technology and infrastructure; Credit for Value, a price-lowering strategy; and optimizing the Real Canadian Superstore banner.

"The third quarter saw significant advances towards these initiatives, but at a cost of reduced profitability, much of which is an investment in our future," Weston observed.

According to Weston, Loblaw anticipates a total of 80 renovations, expansions, and conversions during 2007, 22 of which are slated to be completed in the fourth quarter.

The company said it further expects to invest an estimated CAN $700 million (US $708.4 million) to CAN $800 million (US $809.6 million) in capital expenditures net of any fixed asset sales in 2008, with most of those funds going to remodeling existing stores, driving same-store sales, and improving supply chain and information technology infrastructure.

"This quarter was heavily affected by the costs of implementing our initiatives for the future, including our continued investment in pricing," noted Weston. "Our team is settling into their new functions and responsibilities. Our core initiatives are on track and we are satisfied with progress so far, but our three- to five-year turnaround effort will inevitably have bumps along the way."

Loblaw, Canada's largest food distributor, is a leading provider of general merchandise products, drug store, and financial products and services.
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