November 17, 2009 / 1:35 PM / in 9 years

UPDATE 2-Loblaw results rise despite weaker sales

* EPS C$0.69 vs analyst forecast C$0.62

* Revenue down 0.2 percent at C$9.47 billion

* Same store sales slip 0.6 percent

* Stock climbs 3.2 percent to C$31.36 (Adds background, analyst comments)

By Scott Anderson

TORONTO, Nov 17 (Reuters) - Loblaw Cos (L.TO) reported a higher quarterly profit on Tuesday despite weaker same-store sales, but Canada’s biggest grocery store chain warned its performance would be challenged in the months ahead as retail food prices ease, squeezing its profit margins.

Food prices have climbed in recent quarters as grocers passed on rising costs for wheat, rice, vegetables, fruit and other goods to the consumer, benefiting from wider profit margins. But this benefit lessened in recent months as the commodity prices slipped, dragging retail prices and margins down with them.

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

However, Loblaw was able to churn out a profit that rose 20 percent in its most recent quarter as it turned its attention to cost containment while taking advantage of its huge buying power.

Loblaw shares gained 3.2 percent to C$31.36 on the Toronto Stock Exchange.

“Their cost of goods is down, so their gross margin is way up and everything just flowed,” said Robert Gibson, head of research at Octagon Capital. “They are able to get better pricing in this market environment.”

Loblaw did not report an exact figure, it said its internal retail food price inflation was below the national level of 4.2 percent for food prices measured in the consumer price index.

The company, whose banners also include Zehrs, Fortinos and Real Canadian Superstores, expects its results to be hampered in the months ahead as margins are squeezed further.

“We expect that sales and margins will be challenged due to decreasing inflation, competitive intensity and our ongoing renovation and infrastructure programs,” Galen Weston, executive chairman, said in a release.

Loblaw said it earned C$189 million, or 69 Canadian cents a share for the quarter ended Oct. 10. That was up from C$157 million, or 57 Canadian cents a share, a year earlier.

Revenue fell 0.2 percent to C$9.47 billion, with same-store sales down 0.6 percent.

Analysts, on average, had expected earnings of 62 Canadian cents a share before items and revenue of C$9.62 billion, according to Thomson Reuters I/B/E/S.

Gross profit as a percentage of sales in the third quarter was 22.9 percent, compared with 22.1 the previous year.

$1=$1.06 Canadian Reporting by Scott Anderson; editing by Rob Wilson

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