February 23, 2012 / 1:32 PM / 6 years ago

Loblaw shares fall on discounting, costs

A Loblaws store is pictured in Ottawa February 24, 2011.Chris Wattie

TORONTO (Reuters) - Loblaw Cos Ltd's (L.TO) earnings rose but came in short of analyst estimates on Thursday as discounting and higher costs took their toll, sending shares of Canada's largest grocery operator lower on Thursday.

The company, majority owned by George Weston Ltd (WN.TO), said the slight rise in quarterly profit reflected lower interest expenses and a decline in its effective tax rate.

Operating income fell, due in part to discounts, as well as cost increases that outpaced the grocery chain's own prices.

Margins at Canadian grocers are under pressure as Wal-Mart Stores Inc (WMT.N) expands its food offerings in the country. Competition is expected to heat up further early in 2013, when Target Corp (TGT.N) opens its first Canadian stores.

Loblaw, which is in the midst of a multi-year program to improve productivity, again warned that investments in its supply chain would hurt performance in future quarters.

Executive Chairman Galen Weston said in a release that incremental cost of the program would amount to about C$70 million in 2012.

"We do not expect our operations to cover these incremental costs, and as a result, we anticipate full-year 2012 net earnings per share to be down year-over-year, with more pressure in the first half of the year," he said.

Net earnings for the quarter ended December 31 rose to C$174 million ($174.1 million), or 60 Canadian cents a share, from C$165 million, or 58 Canadian cents, a year earlier. Analysts, on average, had expected earnings of 66 Canadian cents a share, according to Thomson Reuters I/B/E/S.

Revenue rose 3.6 percent to C$7.37 billion. Sales at established stores, a key measure for retailers, rose 2.5 percent, but between 0.8 and 1 percent of the gain was thanks to an extra day of store operations in the recent quarter.

Shares were down 5.1 percent at C$35.42 in early trading on Thursday on the Toronto Stock Exchange. Weston fell 3.0 percent to C$63.41.

($1 = 0.99 Canadian)

Reporting By Allison Martell

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