February 17, 2010 / 1:38 PM / 8 years ago

UPDATE 3-Weak food sales hit Loblaw, more pressure seen

* EPS C$0.59 vs consensus C$0.49

* Revenue down 5.6 pct at C$7.31 bln

* Same-store sales down 7.8 pct

* 2010 capex at C$1 billion

* Shares up 1.6 pct at C$37.50 (Adds background and analyst’s comments)

By Scott Anderson

TORONTO, Feb 17 (Reuters) - Quarterly profit at No. 1 Canadian grocery chain Loblaw Cos L.TO fell 13 percent, hurt by weak food sales, and it warned that stiff competition and lower food prices could affect results over the next few quarters.

Loblaw, which has undertaken a lengthy and costly upgrade of its computer system, also said on Wednesday that more investments in that project will weigh on results this year.

It expects to spend about C$185 million ($178 million) more this year on the IT upgrades than last year, and has earmarked about C$1 billion in total for capital projects this year. About half of that is to be spent on store renovations as it aims to boost square footage by about a million square feet.

Still, it said it sees tough times ahead as the benefit of rising food prices is diminished and competition stiffens.

Grocers benefited from rising food prices last year as they passed on rising costs for wheat, rice, vegetables, fruit and other goods to the consumer, reaping wider profit margins. But this effect lessened in recent months as commodity prices slipped, dragging retail prices and margins down with them.

Analysts expect a further slowdown in price increases and that will mean less spectacular earnings growth for Canada’s big supermarket chains.

“I‘m still very hawkish about the market. Deflation is a difficult thing for retailers to deal with...the market is still very competitive and volumes in the market are very wobbly,” Allan Leighton, the company’s president, said on a conference call.

The grocer, whose banners include Loblaws, T&T Supermarket and No Frills, earned C$165 million, or 59 Canadian cents a share, for the quarter ended Jan 2. That was down from C$190 million, or 70 Canadian cents a share, a year earlier when the quarter contained an extra week.

Revenue fell 5.6 percent to C$7.31 billion, with same-store sales down 7.8 percent.

Compared with the year-before quarter on the basis of an equivalent number of weeks, sales were flat and same-store sales declined 0.7 percent.

But the results exceeded expectations as analysts, on average, were expecting earnings of 49 Canadian cents a share excluding items, and revenue of C$7.27 billion.

“It continues to be very competitive. The industry is a little bit more competitive than they would have hoped for and they have deflation going against them,” said Brian Yarbrough, a retail analyst at Edward Jones, in St. Louis, Missouri.

$1=$1.04 Canadian Reporting by Scott Anderson; editing by Peter Galloway

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