Loblaw sees ‘steady return to new normal’ in Q3

Loblaw Cos. eked out grocery sales gains for its fiscal 2021 third quarter in cycling robust retail sales growth a year earlier.

Meanwhile, at the bottom line, Canada’s largest food and drug retailer topped the high end of analysts’ consensus earnings-per-share estimate.

For the 16-week quarter ended Oct. 9, overall retail sales rose 2.4% to $15.83 billion (Canadian) from $15.46 billion a year ago, Brampton, Ontario-based Loblaw said yesterday. That compared a 7.2% uptick in the 2020 quarter, when elevated consumer demand from the COVID-19 pandemic spurred sales.

Food retail sales totaled $11.38 billion, up 1.5% from $11.22 billion in the prior-year period, when the supermarket segment posted a 7.6% increase. Same-store sales edged up 0.2% versus a year-ago gain 6.9%. Loblaw said the slim food retail sales growth reflects lower food-at-home demand year over year, offset by higher inflation. Basket size grew while traffic increased during the quarter. Over two years, food retail sales posted a compound annual growth rate (CAGR) of 4.5%, the company noted.

“In food retail, same-store sales improved as the quarter progressed, up 0.2%, lapping a strong quarter. Same-store sales benefited from continuing eat-at-home trends. Our pricing position remain strong, and we are pleased with our market share performance,” Loblaw Chief Financial Officer Richard Dufresne told analysts in a conference call on Wednesday. “Eat-at-home trends remain elevated, despite the easing of restrictions, compared to last year’s results that were driven by extended lockdowns and few social events or celebrations. This year’s [quarter] saw strong sales in the back-to-school season and for Thanksgiving. Halloween was also strong.

Related:Loblaw parent sells Weston Foods fresh/frozen bakery business

“More generally, entertaining at home is helping drive sales in food retail,” he added. “On a two-year average, food same-store sales reflected average growth of 3.6%. Traffic continued to improve in Q3 and is showing signs of beginning to normalize to pre-pandemic levels.”

Loblaw has kept price inflation in produce at bay by sourcing locally and in the U.S.

Third-quarter drug retail sales, from the Shoppers Drug Mart/Pharmaprix chain, climbed 4.7% to $4.25 billion following a 6.3% gain to nearly $4 billion in the 2020 quarter. Same-store sales increased 4.4% (6.1% in 2020), reflecting gains of 4.1% in the front end (2.4% in 2020) and 4.8% in the pharmacy (10.3% in 2020). Prescriptions filled rose 2.4% overall and on a comparable basis, with the average prescription value up 0.7% year-to-year.

Loblaw attributed comparable-pharmacy sales growth to strong sales in fee related services, while front-of-store sales benefited from the economic reopening in the third quarter. The drug retail segment generated a 5.5% CAGR on a two-year stack.

Related:Loblaw notches food, drug retail sales gains in Q2

“Our drug retail business delivered most of our sales growth in the quarter. Absolute sales increased 4.7%, reflecting strong Rx and growth in all major front-store categories, led by cosmetics and OTC,” Dufresne said. “Pharmacy same-store sales grew 4.8%, benefiting from 270% growth in pharmacy services, which includes COVID vaccines, testing and medication reviews. On a two-year average, drug same-store sales have grown 5.3%, with front-store at 3.3% and Rx at 7.6%.”

The third-quarter sales results indicate that a “steady return to a new normal is showing up in many ways,” according to Loblaw Cos. Chairman and President Galen Weston.

“At Shoppers Drug Mart, both acute and chronic prescription volumes are returning to our pharmacies as Canadians increasingly access the primary care which they had deferred during the pandemic,” he said in the analyst call. “At the same time, we’re all gathering in larger settings and beginning to return to the workplace, driving helpful tailwinds in beauty and cough-and-cold.

“This was accompanied by pent-up enthusiasm for celebrating the holidays, such as Thanksgiving, with customers shifting back towards larger turkeys and other entertaining staples,” Weston explained. “As they did so, our market division focused on retaining the large number of new customers that it attracted over the last 18 months by continuing to offer exceptional products and service. At the same time, our discount business welcomed many of its loyal value-seeking customers back through its doors — a trend which we expect to continue, as inflation is increasingly showing up in many aspects of our lives.”

E-commerce growth has tailed off but remains well above pre-COVID rates, Loblaw CFO Richard Dufresne said.

Dufresne noted that Loblaw is “paying a lot of attention to cost inflation” and working with manufacturers to rein in price hikes.

“In midsummer, inflation materialized in both fresh and grocery. In produce, prices have remained more or less flat to down as we’ve been sourcing locally and in the U.S. Meat prices have gone up but have stabilized recently,” he said. “Grocery remains the area with the most activity. The number and size of cost increases requested by vendors has been elevated since the summer. Our team uses a thorough process to vet pricing requests. We work hard to negotiate those increases down so that we offer our customers the best value. Our internal measures of inflation are trending slightly higher than CPI.”

E-commerce sales for the third quarter dipped 0.4% from a 175% surge in the prior-year period.

“Our online business continue to operate at penetration levels well above pre-COVID rates, albeit lower than the peak of last spring,” Dufresne reported. “Online grocery sales in the quarter were down slightly to last year. Online pharmacy continues to grow nicely and covered the slight gap generated by food.

“Within grocery, we have a strong and loyal base of online customers, but as lockdowns eased, some customers shifted back to in-store shopping,” he pointed out. “Online is here to stay, and although penetration in grocery has eased since the peak driven by lockdowns, customers expect us to offer seamless experience whether in store or online. We are confident that online will play an important part in the future of our business. Speed and convenience are the way to win, and I’m confident that over time we’ll be able to improve the profitability gap, as technology and new ways of doing things will reduce the cost structure of this channel.”

Customers’ return to pre-pandemic habits, such as shopping in stores, portend a “more sustained change in behavior,” Weston told analysts.

“Today, customers are looking for a seamless experience when they shop, and PC Express [online grocery service] is meeting that expectation by tapping into the best of multiple fulfillment options,” he said. “We continue to improve the efficiency and accuracy of our in-sourcing processes and are also adding new manual micro-fulfillment centers where it makes sense. This flexible approach has allowed us to evolve with the customer, continuing to serve the strong demand for click-and-collect while addressing the growing interest in delivery.”

Loblaw Cos. expects its discount grocery banners such as No Frills to benefit amid rising inflation.

On the earnings side, third-quarter net income (common shareholders) totaled $431 million, or $1.27 per diluted share, compared with $342 million, or 96 cents per diluted share, a year earlier. Adjusted net earnings came in at $540 million, or $1.59 per diluted share, versus $459 million, or $1.28 per diluted share, in the 2020 quarter.

Analysts, on average, had forecast adjusted EPS of $1.48, with estimates ranging from a low of $1.43 to a high of $1.56, according to Refinitiv.

Slow-performing stores targeted

In reporting Q3 results, Loblaw also announced a store network optimization program, which will focus on shifting underperforming locations to other retail banners.

“We have reviewed our network of stores and finalized plans to address approximately 20 of our most unprofitable stores. In almost all cases, this involves reformatting the store to better serve the local market,” Dufresne said in the call. “Most of these stores will convert to our discount banners. Some will be downsized, but only three will be closed. We expect to record a charge of $25 million to $35 million, most of which will be in Q4. These projects should substantially be completed by the end of next year.”

In the 12 months through the end of the third quarter, Loblaw opened 15 food and drug stores and closed 14 food and drug stores, ending the period with 2,439 stores overall, including 550 corporate-owned and 546 franchised grocery stores and 1,343 Shoppers Drug Mart/Pharmaprix associate-owned drugstores.

Weston Foods remaining businesses sold

This week, Loblaw parent George Weston Ltd. also reported the sale of its Weston Foods ambient bakery business to Hearthside Food Solutions for $370 million (Canadian).

Last month, George Weston unveiled a deal to sell its Weston Foods fresh and frozen bakery business to baked goods manufacturer FGF Brands Inc. for $1.2 billion (Canadian), adding at the time that it was still seeking a buyer for the remaining ambient business, including cookies, cones, crackers and wafers. The transaction with FGF came after George Weston put Weston Foods on the sales block to better focus on its Loblaw retail and Choice Properties real estate businesses.