July 25, 2008 / 12:46 PM / in 9 years

Loblaw profit hurt by weak sales, price cuts

OTTAWA (Reuters) - Second-quarter profit at Loblaw Companies Ltd (L.TO) tumbled after excluding one-time charges as weaker-than-expected sales growth coupled with price- chopping ate into earnings at Canada’s biggest supermarket chain.

<p>Loblaw's Chairman Galen Weston (L) gathers his notes as President John A. Lederer (R) walks to the podium to address the annual general meeting of the grocer's shareholders in Toronto, May 4, 2006. REUTERS/J.P. Moczulski</p>

Still six to nine months behind schedule on its recovery plan, Loblaw on Friday said profit margins are expected to remain under pressure for the rest of this year.

Revenue at Loblaw, which is majority owned by North America’s biggest baker, George Weston Ltd WN.TO, grew 1.5 percent but lagged analyst estimates, while sales growth at stores opened at least a year slowed from a year earlier.

Shares of the Toronto-based company fell 3.3 percent after the report.

“What’s driving this is we’re not an effective selling organization. The issues that were there, that we made the changes for, doesn’t get turned overnight,” President Allan Leighton said on a conference call with analysts.

“We’re looking at driving sales momentum that is sustainable over a period of time, not that comes and goes on a week-by-week ... basis.”

Loblaw is using a strategy of cutting prices to spark revenue growth and to keep its customers as Wal-Mart Stores (WMT.N) expands food sales in Canada. It is also trying to pinch expenses to offset lower margins.

Net profit increased to C$140 million ($138.6 million), or 51 Canadian cents a share, in the period ended June 14, from earnings of C$119 million, or 43 Canadian cents, in the same period last year.

The most recent quarter included C$1 million in restructuring charges versus C$73 million in the year-ago period, which had an impact of 18 Canadian cents per share.

Earnings were also lifted by C$14 million gain on the sale of investments.

“They missed,” BMO analyst David Hartley said in an interview. “We get 45 Canadian cents adjusted versus 59 cents adjusted last year, so it’s a significant decline year over year, and it’s a 12 percent miss from consensus estimates.”

Analysts expected earnings before exceptions of 50 Canadian cents a share, according to Reuters Estimates.

Shares of Loblaw lost C$1.02 to C$29.35 on the Toronto Stock Exchange. Over the last 12 months the stock has lost 42 percent of its value.

Revenue grew 1.5 percent to C$7.03 billion, lagging the average analyst estimate of C$7.12 billion.

“This was a weak quarter in sales, but a more consistent quarter in terms of margin and cost,” Leighton said. “We still, in Q2, had deflation in the business that means the prices are coming down faster than we were putting costs through.”

Sales at stores open for at least one year rose by 0.7 percent, compared with a 2.7 percent gain in the 2007 quarter, partly due to the shift of Easter sales to the first quarter. Scotia Capital analyst Ryan Balgopal had forecast 2 percent same-store sales growth in a note preceding the results.

“You’ve got this big gulf between wholesale inflation and price deflation on the retail side,” Hartley said. “They also said they were going to see downward pressure on their margins in the second half of the year, so cost containment is going to be huge thing for them.”

The company, which also offers mobile phone and financial services, said it is starting to see “positive results” from its five-point plan that Leighton announced soon after his appointment in April.

To accelerate growth the company is opening more stores and hiring service staff in Ontario, while renovating stores and expanding its discount banner in Western Canada. It is also improving its supply chain and systems programs while relaunching its President’s Choice private-label brand.

($1=$1.01 Canadian)

Reporting by Susan Taylor; Editing by Frank McGurty

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