July 24, 2013 / 2:09 PM / 4 years ago

Loblaw raises outlook in tough Canadian retail market

(Reuters) - Loblaw Cos Ltd (L.TO) reported a higher quarterly profit as food and clothing sales rose throughout its stores, prompting Canada’s largest grocer to raise its full-year operating income forecast in defiance of tougher competition.

Loblaw, which is buying Shoppers Drug Mart Corp SC.TO to bulk up against an influx of U.S. competitors, said profit rose 14 percent in the second quarter. Sales growth was strongest in its clothing line and its gas-station network.

The company forecast 2013 operating income would grow, percentage-wise, in the mid-single digits. Previously, it had forecast modest or low-single-digit growth.

The higher guidance was probably expected as Loblaw’s first two quarters were pretty good, said Bobby Hagedorn, an equity analyst with brokerage Edward Jones.

He said the guidance looks achievable even though the market will be more competitive in the second half.

“I think the company is being conservative,” Hagedorn said.

The retail environment in Canada remains competitive and Loblaw said sales growth would be moderated by the expansion of its rivals and tighter price controls on generic drugs, which the company also sells.

Loblaw and parent George Weston Ltd (WN.TO) have been under increasing pressure from U.S. rival Wal-Mart Stores Inc (WMT.N), which has ramped up its grocery offerings in Canada.

Empire Co Ltd (EMPa.TO) is buying Safeway Inc’s Canadian assets to cement its position as Canada’s No. 2 grocer and Loblaw’s closest rival, while U.S. discounter Target Corp (TGT.N) plans to have 124 stores across the country by the end of the year.

Analysts said Target will be a better operator as it opens more stores.

Target was not as aggressive on pricing food and other consumable items when they opened their first stores, but as they open more, they will probably invest more in price, said analyst Ken Perkins of Morningstar.

“So the price competition could become more aggressive down the road but Loblaw is a large company and they have enough scale to invest in prices,” Perkins said.

Loblaw shares have outperformed the broader Canada consumer staples index .GSPTTCS. While the index was up 9.35 percent in the April-June period, Loblaw shares rose 12.3 percent.

PROFIT BEATS ESTIMATES

Loblaw’s net income in the second quarter rose to C$178 million ($173 million), or 63 Canadian cents per share.

Revenue rose 2 percent to C$7.52 billion.

Analysts on average had expected a profit of 58 Canadian cents per share on revenue of C$7.53 billion, according to Thomson Reuters I/B/E/S.

Sales at established stores, a key measure for retailers, rose 1 percent.

Operating margin was 4.3 percent in the quarter, compared with 3.9 percent a year earlier.

Loblaw this month announced a C$12.4 billion deal to buy Shoppers Drug Mart, Canada’s biggest pharmacy chain, to create a combined retail operation with more than C$42 billion in annual revenue.

This will give Loblaw increased exposure to pharmaceutical sales, which are expected to benefit from the aging of Canada’s population. It would also gain a foothold in the market for smaller stores serving dense urban neighborhoods.

There are, however, some longer-term concerns about generic drug prices as Canada’s provinces and territories agreed in January to tighten caps on prices of six widely prescribed generic drugs to cut costs for private and government health programs.

The new rules mandate drugstores charge no more than 18 percent of the price of the brand-name equivalent, lower than the previous 25 percent to 40 percent cap. The rules kicked off on April 1.

Shoppers reported a slight increase in second-quarter profit last week as its shops filled more prescriptions.

Loblaw shares rose as much as 2 percent to C$49.08 on the Toronto Stock Exchange on Wednesday.

Reporting by Bhaswati Mukhopadhyay in Bangalore; Editing by Robin Paxton

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