Executives at Loblaw Cos. Ltd. , the country's largest grocer, are warning of tough times in the next couple of years.
"We are three years into our renewal program and making progress with two of the toughest years ahead," Galen G. Weston, executive chairman and scion of the controlling Weston family, said Wednesday. "As we enter 2010, we continue to expect sales and margins to be challenged by deflation and increased competitive intensity."
The warning comes as Loblaw reported that its fourth-quarter profit slid to $165-million or 60 cents a share from $190-million or 70 cents. Sales slipped to $7.3-billion from $7.7-billion.
On an equivalent 12-week basis, same-store sales dipped 0.7 per cent in the latest quarter, which had one less week than a year earlier.
To try to improve its situation, Mr. Weston said Loblaw plans to step up its investment in information technology and supply chain. However, that will squeeze operating profit by about $185-million this year over 2009. At the same time the company will keep its capital spending at about $1-billion.
But even though the company anticipates tougher times, it will start this year to add new stores for the first time since its turnaround efforts began a few years ago, Loblaw president Allan Leighton told analysts.
About half of the new stores will be discount banners such as No Frills and Real Canadian Superstores, and the other half will be conventional supermarkets such as Loblaws, he said. Toronto will be among the key locations for expansion.
And building on the success of Loblaw's Joe Fresh Style private-label apparel, retailer will tap into the line's creator, design guru Joe Mimran, to head all of the stores' non-food sections. They include home furnishings and electronics. "Joe is going to run the whole right hand side of the store," Mr. Leighton said.
The fourth-quarter results mirrored the supermarket chain's general trend of relatively weak sales and strong profit-margin control, Perry Caicco, retail analyst at CIBC World Markets, said in a note on Wednesday.
"On the positive side, the ex-inflation same-store sales trend improved for the first time, and gross margins are strong," Mr. Caicco said. "On the negative side, the company continued to give a grim outlook due to deflation and increased competition. However, we have learned to take these warnings with a small grain of salt."
Loblaw and other grocers have been hit by a drop in food inflation over the past several months after having enjoyed in early 2009 the benefits of higher food prices.
In its fourth quarter, Loblaw said on Wednesday that it experienced internal retail food price deflation compared with modest food price inflation, as measured by the Consumer Price Index for food purchased from stores.
Still, some analysts have predicted a gradual return to higher food prices by mid-2010, which should result in better days for supermarket chains.
Retail food inflation typically lags manufacturer cost inflation by five to nine months, analyst Jim Durran at National Bank Financial wrote in a report last month. "We expect to see a significant ramp up in food inflation by Oct/Nov 2010."
Still, Loblaw thinks that the combination of internal restructuring costs and competitive discount pricing will continue to pinch its bottom line.
It said on Wednesday that without taking into account the one less week in 2009, its fourth quarter same-store sales tumbled 7.8 per cent. Those sales exclude the impact of store openings and closings, and are considered an important measure of a retailer's health.
Sales were also squeezed in the latest period by the shift of Thanksgiving into the third quarter, from the fourth quarter in 2008 - a time when consumers tend to shop for a lot of food.
On an equivalent 12-week basis, sales in the fourth quarter didn't grow in food, were "moderate" in the drugstore aisles and dropped " significantly" in general merchandise. However, a silver lining was strong sales in the company's Joe Fresh fashion department.
Also on a brighter note, Loblaw's gross profit as a percentage of sales improved in the fourth quarter. It was 23.6 per cent compared with 22.5 per a year earlier. The company attributed the improvement to savings in purchasing, more disciplined supplier management, lower fuel costs and more efficient transportation operations.
However, continued investments in pricing, which essentially means price discounting, offset the improvements, it said.
Its fourth-quarter operating profit fell by 13.4 per cent to $43-million, mainly because of the additional selling week in 2008. Operating margins in the latest quarter were 3.8 per cent compared with 4.1 per cent in 2008. Included in operating profit is a charge of $27-million ($29-million in 2008) for fixed asset impairments tied to asset carrying values in excess of fair values for some stores, and an incremental charge of $12-million related to the investment in information technology and supply chains.