April 30, 2008 / 11:32 AM / in 10 years

Loblaw posts higher profit, details overhaul plan

OTTAWA (Reuters) - First-quarter profit at Loblaw Cos Ltd (L.TO) rose by nearly 15 percent due to smaller restructuring costs, but Canada’s biggest grocer said on Wednesday it is disappointed by its sales growth and behind schedule on its recovery plan.

Still, investors shrugged off the company’s financial results and its forecast for continued profit margin pressure this year, and sent the battered stock nearly 9 percent higher.

“There was nervousness coming into the quarter because of the management change,” said BMO analyst David Hartley, referring to a big executive shuffle last week.

“Now the quarter came in at what expectations were, so there’s a big relief rally going on today.”

The market may also have been responding to a five-point plan announced by recently appointed president Allan Leighton, which is aimed at accelerating growth.

“We are back on the front foot, aggressive, attacking in a very controlled way,” Leighton told shareholders at the company’s annual meeting in Toronto.

Loblaw said it will stick to its strategy of chopping prices to increase sales in a “hyper competitive” market, while squeezing expenses to offset lower margins.

“We are right now in a business where our costs are growing faster than our sales,” Executive Chairman Galen Weston told shareholders. “In order to turn this business around, we have to have the opposite.”

For the period ended March 22, Loblaw said net earnings rose to C$62 million ($61.5 million), or 23 Canadian cents a share, from C$54 million, or 20 Canadian cents a share, in the same period last year.

Adjusted to exclude charges of 11 Canadian cents a share in the current quarter, and 26 Canadian cents a share a year earlier, the profit declined to 34 Canadian cents a share from 46 Canadian cents.

Analysts had expected earnings before exceptions of 34 Canadian cents a share and revenue of C$6.49 billion, according to Reuters Estimates.

Revenue at Loblaw, which is majority owned by North America’s biggest baker, George Weston Ltd (WN.TO), rose to C$6.53 billion from C$6.35 billion.

Weston told analysts that the quarter was “challenging” with margins remaining under pressure. Without the boost that Loblaw got from Easter holiday sales, which normally fall in the second quarter, sales volume was disappointing, he added.

Sales volume rose by 5 percent compared with 0.5 percent in the same period last year, but the revenue impact was partly offset by internal price deflation of about 1 percent.

Same-store sales rose by 2.8 percent, with about 0.7 percent of that reflecting a gain from Easter.

Loblaw said it will stick with the three- to five-year turnaround plan it launched a year ago, but is now six to nine months behind schedule on work to improve sales operations.

The company will ramp up its recovery in the next 12 to 18 months. In Ontario, it will refurbish 20 stores, cut prices and create 1,000 new service jobs, while in Western Canada it will renovate 25 stores and expand its discount banner.

It will also upgrade supply chain and systems programs, boost its private label President’s Choice program, and add merchandise from local markets to its centralized system.

Loblaw, which also offers mobile phone and financial services, is trying to keep customers loyal as Wal-Mart Stores (WMT.N) expands food sales in Canada. It has closed some stores and cut about 900 jobs while trying to repair its defective supply chain.

It expects some financial benefits from its restructuring in the second half of the year.

The company’s shares rose 8.8 percent to C$32.16 on the Toronto Stock Exchange. Last week, the stock tumbled 6 percent after management changes were announced.

($1=$1.01 Canadian)

With additional reporting by John McCrank; editing by Peter Galloway

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