Loblaw profit drops on costs; Joe Fresh in U.S. push

Wed Jul 25, 2012 11:03am EDT
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By Allison Martell

(Reuters) - Loblaw Cos Ltd, Canada's biggest grocer, reported lower quarterly profit on Wednesday on sluggish sales growth and higher expenses, sending its shares lower even as it announced a deal to expand its Joe Fresh clothing line in the United States.

The retailer said it would team up with U.S. department store chain J.C. Penney Co Inc to open nearly 700 of its Joe Fresh clothing shops inside renovated Penney stores from April 2013.

"I think it's actually a very good deal," said Edward Jones analyst Brian Yarbrough. "It helps them showcase their brand, it's a good way to grow sales and increase profits without having to put a lot of capital into the business."

Yarbrough said the plan is much less risky, and easier to roll back, than opening more standalone stores in the United States.

Loblaw's results were hurt by the C$20 million incremental cost of Loblaw's project to improve its supply chain and information technology systems. Higher labor and transportation costs, and input costs that it did not pass on to customers, also weighed on the results. Loblaw has said repeatedly that earnings will drop in 2012 as it spends to boost productivity.

"We remain confident that our ongoing investments in infrastructure, including the completion of our IT implementation, will enable efficiencies and expense leverage to drive future earnings growth," Executive Chairman Galen Weston said in a statement.

Loblaw and other Canadian grocers face rising competition as Wal-Mart Stores Inc boosts its food offerings in the country and ahead of the 2013 arrival of discount retailer Target Corp.

Loblaw's earnings fell to C$159 million ($156 million), or 56 Canadian cents a share, in the quarter, from C$197 million, or 69 Canadian cents a share, a year earlier. Analysts, on average, were expecting 61 Canadian cents, according to Thomson Reuters I/B/E/S.   Continued...