TORONTO (Reuters) - Loblaw Cos Ltd (L.TO), Canada’s largest grocer, reported higher earnings on Thursday but the result came in short of analyst estimates as discounting and increased costs pressured profit margins, and its shares tumbled more than 5 percent.
The company also offered a tepid first-half outlook, saying a multi-year program to boost productivity would result in lower net profit.
It estimated the incremental cost of upgrading its information technology and improving its supply chain at about C$70 million ($70.19 million) in 2012, along with C$40 million for other investments.
“While certainly traffic and (market) share appear to improve, the cost of the improvement in traffic” is a concern, said Raymond James analyst Kenric Tyghe, “and perhaps some concerns with respect to both the timelines and incremental costs of the IT rollout.”
The company, majority owned by George Weston Ltd (WN.TO), said a slight rise in profit for the latest quarter, ended December 31, reflected lower interest expenses and a decline in its effective tax rate.
But operating income fell, due in part to discounts, as well as cost increases that outpaced the grocery chain’s own prices. That put margins under pressure, a concern that may have contributed to the swoon in Loblaw’s share price, Tyghe said.
Margins at Canadian grocers are feeling the squeeze as Wal-Mart Stores Inc (WMT.N) expands its food offerings in the country. Competition will heat up further early in 2013, when Target Corp (TGT.N) opens its first Canadian stores.
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