July 22, 2010 / 12:28 PM / in 7 years

UPDATE 3-Loblaw profit slips on infrastructure investments

* EPS 64 Canadian cents vs 70 Canadian cents

* Revenue up 1.2 pct at C$7.3 billion

* Same-store sales down 0.3 pct

* Shares rise 1 percent

(Updates with details, analyst comment, stock price)

By Solarina Ho

TORONTO, July 22 (Reuters) - Loblaw Cos L.TO, Canada’s biggest grocery store chain, said on Thursday quarterly earnings dropped 8.6 percent as infrastructure and technology investments held back profit.

Even so Loblaw shares climbed close to 1 percent as the results still came in ahead of expectations.

“Overall, another pretty good quarter from these guys,” said analyst Robert Cavallo of Mackie Research Capital Corp.

“It was better than our numbers, better than where The Street was at. Sales were slightly lower than expectations, but this was more than offset on the margin side and on really good cost control.”

Loblaw had previously warned that results for the remainder of the year would likely take a hit due to major upgrades to its information technology and supply chain systems. The overhaul is part of its strategy to compete more effectively with discounters like Wal-Mart Stores WMT.N.

The company on Thursday said it was in the middle of several dozen renovation projects, which are expected to ramp up further in the third quarter before leveling off in the crucial fourth quarter.

“We expect investments associated with our supply chain and IT programs to continue to negatively impact our operating income during this period,” said Chief Executive Galen Weston during a conference call with analysts.

“Although Loblaw is entering period of maximum risk around IT/supply chain renewal, it is doing so with the wind in its sails. Today’s results should put a floor under recent share price gains,” Irene Nattel, an analyst with RBC Capital Markets, said in a note.

BY THE NUMBERS

Net earnings slipped to C$180 million, or 64 Canadian cents a share, in its second quarter ended June 19, from C$193 million, or 70 Canadian cents, for the same period a year earlier.

Excluding one-time items, the number was closer to 72 Canadian cents a share, Cavallo said.

Analysts had forecast earnings of 62.4 Canadian cents a share, according to Thomson Reuters I/B/E/S.

The company, which operates more than 1,000 stores under banners such as Loblaws and No Frills, said revenue rose 1.2 percent to C$7.3 billion, helped by the acquisition last year of T&T Supermarket Inc, an Asian specialty food chain.

Same-store sales, or sales at stores open for at least a year, declined 0.3 percent.

The Brampton, Ontario-based company reported strong growth in apparel and gas bar sales, but a significant decline in sales of other general merchandise. Drugstore sales were modest, while growth in food was flat.

Loblaw said it experienced internal retail food price deflation compared to flat national food prices.

“I still think though this trend will reverse moving into the back half of the year. It will move back to no inflation or modest inflation at that point,” Cavallo said.

As part of its growth strategy, Loblaw announced the opening of the first of its new “small-format” pharmacies on Wednesday. During the conference call on Thursday, executives said it planned to launch about 200 more across the country.

The shares climbed 33 Canadian cents to C$41.75 on the Toronto Stock Exchange.

($1=$1.04 Canadian)

Editing by Frank McGurty

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