Loblaw Sees Q3 Progress, but Economic Worries Loom <br />

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Loblaw Sees Q3 Progress, but Economic Worries Loom <br />

Canadian grocer Loblaw Cos., Ltd. reported positive results for the third quarter of FY 2008, including same store sales of 3 percent. However, the chain's management warned that the months ahead promised to be challenging.

For the quarter ended Oct. 4, 2008, the grocer reported sales of CAN $9,493 million (US $7,835 million), vs. CAN $9,137 million (US 7,541 million) in year-ago period, a rise of 3.9 percent. Net earnings were CAN $155 million (US 128 million), a 32.5 percent jump compared with CAN $117 million (US $97 million) last year. Basic net earnings per common share were 56 cents, vs. 43 cents in last year's third quarter.

Same-store sales in the quarter rose 3.0 percent, although both sales and same-store sales growth in the third quarter of 2008 were adversely affected by about 0.7 percent because of the shift of the Thanksgiving holiday into the fourth quarter of 2008.

Total sales growth in both food and drug store were good in the quarter, but general merchandise sales decreased from last year due to unseasonable weather and the markdown of merchandise to sell through seasonal inventory.

Gas bar sales continued to be strong in the quarter, as a result of fuel price inflation and volume growth. Moderate internal retail food price inflation also contributed to the same-store sales rise.

Operating income grew CAN $61 million (US $50 million), or 24.4 percent, to CAN $311 million (US $257 million) in the third quarter of 2008, compared with $250 million in the third quarter of 2007. Operating margin was 3.3 percent for the third quarter of 2008 vs. 2.7 percent in 2007. Lower restructuring and net stock-based compensation costs, higher sales, and the impact of the grocer's cost-reduction initiatives contributed to the rise in operating income and operating margin.

"Third-quarter performance showed some signs of progress towards our goal of becoming an effective selling organization," noted Loblaw executive chairman Galen G. Weston. "We also continued to realize benefits from our improved buying, cost management, and operating procedures. However, we are preparing for a challenging close to the current year and start to the next, driven by the uncertain economy and continued competitive pressures."

On the positive side, the company said it was progressing well in all areas of its five-point plan to boost sales: the "Back-to-Best" food renewal in Ontario, western Canada refurbishment, local market merchandising, foundational infrastructure focus, and private label innovation. Additionally, buying synergies and more disciplined vendor management have resulted in lower purchase costs for both merchandise and not-for-resale items.

Loblaw's ongoing investment in lower food prices, however, continues to negatively affect earnings, the company admitted.

"While continued progress in cost and operating efficiencies are expected to support [the aforementioned] investments, it is anticipated that the unpredictable economy and aggressive competitive environment will further challenge results for the remainder of 2008 and into 2009," Loblaw noted.

As regards capital investment, the company is continuing to invest in renovations to its existing store base, with a focus on generating profitable same-store sales growth, and in upgrading its information technology and supply chain infrastructure. Loblaw's estimate of capital expenditures for the remainder of 2008 is about $300 million.

During the third quarter of 2008, eight new corporate and franchised stores opened and 15 closed, leading to a net decrease of 0.2 million square feet or 0.3 percent. For the latest four quarters, net retail square footage remained flat despite the opening of 29 new corporate and franchised stores, including stores that underwent conversions and major expansions, and the closure of 35 stores.

For the first three quarters of the year, sales increased 2.9 percent, or CAN $640 million (US $528 million), to CAN $23,057 million (US $19,028 million) year-to-date. Year-to-date operating income for 2008 rose CAN $127 million (US $105 million), or 21.1 percent, to CAN $729 million (US $602 million), resulting in an operating margin of 3.2 percent vs. 2.7 vs. in year-ago period.

A subsidiary of George Weston, Ltd., Brampton, Ont.-based Loblaw is a provider of drug store, general merchandise, and financial products and services. Loblaw is one of the largest private-sector employers in Canada, with over 140,000 full-time and part-time employees in more than 1,000 corporate and franchised stores across the country.