Metro CEO Eric La Flèche: ‘Our first full year with Jean Coutu was successful’

It’s official: Metro Inc. has completed its first full fiscal year with acquisition Jean Coutu Group under its umbrella.

In reporting 2019 fourth-quarter and annual results this week, Metro President and CEO Eric La Flèche said the company is set to achieve expected synergies with drug chain Jean Coutu, acquired in a $4.5 billion (Canadian) deal that closed in May 2018.

“The integration with Jean Coutu is progressing well. We realized $18 million in cost synergies in the quarter and $65 million on an annualized basis,” La Flèche told analysts in a conference call.

“We expect to capture the remaining synergies starting in the latter part of this fiscal year. So I think we can say that our first full year with the Jean Coutu Group was successful and that we're on track to meet our $75 million synergy target after three years,” he added.

For the 12-week fourth quarter ended Sept. 28, Metro’s sales rose 3.3% to $3.86 billion (Canadian) from $3.74 billion a year earlier.

“The acquisition of Jean Coutu closed in May of 2018, and the fourth quarter last year included the full contribution of Jean Coutu. So the fourth-quarter results that we're reporting today are therefore comparable year over year,” Metro Chief Financial Officer François Thibault said in the call.

Related:Metro gains in Q3 but falls short of analysts’ forecast

Food same-store sales rose 4.1%, and inflation was at approximately 2.8%. Comparable pharmacy sales climbed 3.4%, with the same percentage growth in prescription drug and front-end sales. The number of prescriptions filled edged up 2.4%.

“Performance was strong across our banners as we saw increased customer count, basket size and tonnage. Our internal food basket was at 2.8%, a slight increase versus the 2.5% reported in the previous two quarters. However, we're experiencing lower food inflation since October as produce prices have stabilized,” noted La Flèche. “Pharmacy same-store sales, prescription sales and front-store sales all grew by 3.4%, marked by strong growth in OTC, HABA [health and beauty aids] and seasonal products.”

In the fourth quarter, Metro saw a bigger food basket size from shoppers.

Boosted by the addition of Jean Coutu, Metro’s fiscal 2019 sales totaled $16.77 billion, up 16.6% from $14.38 billion in fiscal 2018. The Montreal-based company said that excluding fiscal 2019 sales of $3.12 billion and fiscal 2018 sales of $1.16 billion generated by Jean Coutu, full-year sales for Metro grew 3.2%.

“We are very pleased with our fourth-quarter results to close an outstanding fiscal 2019,” La Flèche said. “We achieved strong comparable sales in food and pharmacy in Q4 while delivering solid margins and improved customer metrics.”

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Looking ahead, Metro plans to expand its brick-and-mortar footprint and upgrade more stores, though it didn’t see a net gain in retail space during the 2019 fiscal year.

“We continued to invest in our food retail network during fiscal 2019 with eight new food stores, including two relocations, as well as two conversions and 20 remodels. Nine stores were closed, thus, that our total net square footage remained flat,” La Flèche reported. “In the pipeline for fiscal 2020, we are budgeting 10 new stores, including three relocations, plus two conversions and 27 renovation projects.”

Store investments also include ongoing technology upgrades. “More than 100 stores now have self-checkouts, and we're planning on adding another 100 stores this fiscal year,” he said. “Also, we now have 37 stores equipped with electronic shelf labels, and we're targeting a total of close to 100 by year-end.”

Overall, Metro has 617 supermarkets and discount stores in Quebec and Ontario under the Metro, Metro Plus, Super C, Food Basics, Adonis, Marché Richelieu and Les 5 Saisons banners. Its retail network also includes 415 Jean Coutu drugstores; 146 Brunet retail pharmacies; 72 Metro and Food Basics in-store pharmacies; 296 Marché AMI small grocery stores; and 398 convenience stores under the Service, Servi Express and Dépanneurs Gem banners.

Beyond physical store locations, Metro continues to build up its online grocery offering. Store pickup and delivery debuted in October 2016 in Quebec, and same-day delivery launched in June 2018. Earlier this year, the company kicked off same-day grocery delivery in metropolitan Toronto and unveiled meal delivery partnerships with Uber Eats in Quebec and SkipTheDishes in the greater Toronto area.

“On the e-commerce side, sales in Quebec are growing at a good pace, and our model is delivering a good customer experience. In the GTA, demand is ramping up faster out of the gate than it did in Quebec,” according to La Flèche. “That said, we have the required capacity, and the team is working hard to learn the processes and become more efficient. Online sales still represent a very small proportion of our food sales, and our model allows us to remain agile and add capacity as needed with more stores.”

To handle the added volume, Metro has begun a $400 million modernization project for its Ontario distribution network. In September, the company broke ground on a 700,000-square-foot, semi-automated distribution center for fresh and frozen foods in Etobicoke, Ontario.

“Our warehouse modernization project in Toronto is under way. We received the permits to build the first phase of our semi-automated fresh distribution center in August, and I'm happy to report that this deal structure is up,” La Flèche said. “We expect to start operations at the end of next summer.”

At the bottom line, Metro fell short of analysts’ forecast. The retailer posted fourth-quarter net income of $167.4 million, or 66 cents per diluted share, compared with $145 millin, or 56 cents per diluted share, a year ago. Adjusted earnings for the 2019 quarter, reflecting amortization of intangible assets from the Jean Coutu Group acquisition (after tax), came in at $174 million, or 68 cents per diluted share, versus $161 million, or 63 cents per diluted share, in the prior-year period.

Net earnings for full-year 2019 were $714.4 million, or $2.78 per diluted share, compared with $1.72 billion, or $7.16 per diluted share, in fiscal 2018. Excluding the impact of various items in fiscal 2018 — including from the Jean Coutu acquisition and Metro’s disposal of its investment in Alimentation Couche-Tard — adjusted net income for fiscal 2019 was $731.6 million, or $2.84 per diluted share, versus $579.2 million, or $2.41 per diluted share, in 2018.

Analysts, on average, projected adjusted earnings per share of 69 cents for the fourth quarter and $2.86 for the full year, according to Zacks Investment Research.