July 26, 2017 / 11:41 AM / in 25 days

UPDATE 2-Loblaw sees challenges from lower drug prices, higher wages

(Adds forecast, details on cost reductions)

By Ahmed Farhatha

July 26 (Reuters) - Canadian grocer and drugstore chain operator Loblaw Companies Ltd said on Wednesday a rise in minimum wages and an expected decline in drug prices will impact its business in the coming quarters.

Shares of Brampton, Ontario-based Loblaw fell as much as 5 percent to C$68 on the Toronto Stock Exchange.

Wage growth in Canada is expected to pick up after being subdued since oil prices began declining from mid-2014, Bank of Canada researchers said earlier this month.

"In Ontario and Alberta, the recently announced changes to minimum wage rates, which we expect to come into effect in 2018 are the most significant increase in recent memory," Loblaw CEO Galen Weston said on a call, discussing the company's second-quarter earnings report.

Ontario, Canada's most populous province, in May announced plans to raise its minimum wage to C$14 per hour next year and to C$15 by 2019, from the current C$11.40.

Weston also said cuts in generic drug prices by Quebec's government will pressure Loblaw's pharmacy business in 2018, both in the province as well as the rest of the country.

Loblaw, which employs about 200,000 people, estimated the impact of minimum wage increases on labor costs at C$190 million next year.

Weston's remarks came as Brampton, Ontario-based Loblaw reported second-quarter profit that edged past analysts' estimates, helped by strong customer spending during the Easter holiday.

Loblaw, which operates the Shoppers Drug Mart chain, said sales at drug retail stores open for a year rose 3.7 percent in the quarter ended June 17.

At Loblaw's food retail business, sales at stores open for a year rose 1.2 percent, the company said. Excluding the impact of Easter sales, sales were about flat.

Customers typically shop in bulk during the Christmas and Easter holidays, accounting for about a third of most retailers' annual sales.

Net profit attributable to Loblaw shareholders more than doubled to C$361 million ($288.6 million) or C$1.11 per share. Analysts on average had expected C$1.10 per share, according to Thomson Reuters I/B/E/S.

Revenue rose to C$11.1 billion from C$10.7 billion. ($1 = 1.2510 Canadian dollars) (Reporting by Ahmed Farhatha in Bengaluru; Editing by Sai Sachin Ravikumar)

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