November 17, 2010 / 3:56 PM / 7 years ago

WRAPUP 2-Metro, Loblaw profits higher; falling prices weigh

* Loblaw Q3 EPS C$0.76 vs C$0.69 a year earlier

* Loblaw same-store sales down 0.4 pct

* Metro Q4 EPS C$0.88 vs C$0.77 a year earlier

* Deflation and consumer sentiment pressures weigh

* Loblaw shares edge higher; Metro shares slip (Adds details, conference call, analysts comments)

By Solarina Ho and Bhaswati Mukhopadhyay

TORONTO, Nov 17 (Reuters) - Two of Canada’s largest grocers, Loblaw Cos L.TO and Metro Inc MRUa.TO, posted higher quarterly profits on Wednesday but an inability to raise prices in a highly competitive market held back their results.

Both companies reported lower same-store sales. Loblaw said sales at stores open for at least a year fell 0.4 percent, while Metro reported 0.5 percent drop in same-store sales.

The results in part reflected a drop in wholesale food prices this year, which has forced grocers to hold the line on retail prices. In addition, consumers remain in a cautious mood, analysts and grocers say.

“The consumer seems to be looking for value and they continue to struggle a bit there,” Edward Jones analyst Brian Yarbrough said on Loblaw, Canada’s biggest grocery chain.

Metro, Canada’s No. 3 grocer, saw retail food price deflation of about 1 percent and did not experience the rise in food costs that was reported in recent economic data, Chief Executive Eric La Fleche told analysts during a conference call.

He attributed the lower retail prices to aggressive promotional activity that was expected to continue into the coming first quarter.

“Consumers are very cautious and they are chasing promotions and there is a lot of offers out there, no question,” La Fleche said.

Analysts said deflation was easing and food prices were beginning to return to the market. They expected grocers to pass any price increases to customers, but said the entire industry would have to follow suit.

Loblaw “cannot raise prices and then everyone else not raise prices, because then people will then go elsewhere,” said Yarbrough.

MIXED RESULTS

Looking ahead Loblaw, controlled by food processor and distributor George Weston Ltd WN.TO, said costs related to systems and infrastructure upgrades will pressure profit margins.

It raised its 2010 capital expenditures to C$1.3 billion from C$1 billion to pay for an increase in store renovations.

The company reported a 13 percent rise in third-quarter profit but results included a number of unusual items, including costs related to a labor settlement and a gain from a lower tax rate.

Net earnings rose to C$213 million, or 76 Canadian cents a share, from C$189 million, or 69 Canadian cents a share, a year earlier.

“Economic condition is our headwind ... and we still hover on the darker side of the moon,” said Loblaw Executive Chairman Galen Weston during a call with analysts.

Sales at Loblaw, which operates more than 1,000 stores under banners such as Loblaws and No Frills, rose 1 percent to C$9.59 billion. Its 2009 acquisition of specialty Asian food chain T&T Supermarket continued to bolster sales, the company said.

Metro reported a fourth-quarter profit that beat market consensus. Earnings climbed to C$93.4 million, or 88 Canadian cents a share, for the quarter ended Sept. 25, from C$84.4 million, or 77 Canadian cents, a year earlier.

Analysts had expected a profit of 84 Canadian cents a share, according to Thomson Reuters I/B/E/S.

Metro, which operates more than 600 supermarkets in Ontario and Quebec, said sales rose 1 percent to C$2.56 billion.

“Now that we are cycling through a period of inflation, that generally tends to be a positive for stock prices of food retailers,” said Robert Cavallo of Mackie Research Capital.

Loblaw shares, which dropped more than 2.6 percent earlier, finished up 11 Canadian cents at C$42.26, while Metro stock slipped 23 Canadian cents to C$46.00 on the Toronto Stock Exchange on Wednesday. (Additional reporting by Isheeta Sanghi in Bangalore; Editing by Frank McGurty)

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