April 20, 2011 / 11:33 AM / 6 years ago

UPDATE 3-Canada's Metro eyes benefits from inflation after dull Q2

* Q2 EPS C$0.80 vs est C$0.82

* Q2 rev falls 0.4 pct to C$2.57 bln

* Says has raised some prices as inflation creeps in

* Sees further price increases

* Shares rise marginally (Rewrites throughout, adds conference call details, background, share movement)

By Abhiram Nandakumar and Nivedita Bhattacharjee

BANGALORE, April 20 (Reuters) - Metro Inc MRUa.TO, Canada’s No. 3 grocer, is eyeing benefits from small rise in basic food prices after witnessing food-price deflation and competitive discounting that ate into its margins in the second quarter.

All through last year, a drop in wholesale food prices, also known as food deflation, forced Canada’s grocers and retailers to tighten profit margins as they fought off increased competition and harsher regulations.

Metro said it has raised prices of some products and could effect further increases as Canada starts seeing retail price inflation.

Inflation in Canada soared to 3.3 percent in March triggered by sharp rises in gasoline and food prices, surprising markets. The consumer price index climbed 1.1 percent on a month-on-month basis, the sharpest rise since January 1991.

“We intend to remain price competitive, but at some point prices may increase,” a Metro executive said on a conference call with analysts.

Metro, the third grocer after Loblaw Cos Ltd and Sobey’s parent Empire Co Ltd (EMPa.TO), also competes with the Canadian unit of Wal-Mart Stores Inc .

Last month, aggressive holiday-season discounting and falling food prices drove Empire to report a lower quarterly profit. [ID:nN08154770]

New drug laws in Quebec and Ontario lowered drug prices, which, coupled with the expiration of prime drug patents, have further squeezed retailers’ margins.

Metro said for the second quarter, net income rose to C$83.3 million ($87.1 million), or 80 Canadian cents a share, from C$80.3 million, or 74 Canadian cents a share, a year earlier.

Sales dipped about half a percent to C$2.57 billion. Same-store sales rose 0.2 percent. Metro said the drop in food prices hurt its sales by about 1 percent in the quarter.

Analysts on average expected the company to earn 82 Canadian cents per share, on revenue of C$2.57 billion, according to Thomson Reuters I/B/E/S.

Shares of Montreal-based Metro, which operates about 600 food stores and more than 250 drugstores in the provinces of Ontario and Quebec, were up 14 Canadian cents at C$46.85 in midday trade on the Toronto Stock Exchange on Wednesday. They touched a high of C$47.06 in the morning session. ($1 = 0.956 Canadian dollar) (Reporting by Nivedita Bhattacharjee and Abhiram Nandakumar; Editing by Prem Udayabhanu and Gopakumar Warrier)

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