Restructuring Sinks Loblaw Earnings; Sales Up

JON SPRINGER

TORONTO — Aggressive price investment is sparking sales increases for Loblaw Cos., but the growth is coming at a price, and difficult times lay ahead, officials of Loblaw, based here, said last week.

Overall sales grew by 3.5%, and same-store sales increased by 4.2%, during Loblaw's fiscal second quarter, which ended June 16. But operating margins were down sharply from the same period a year ago, and earnings fell by 39.4% as the company held the line on prices despite cost increases and absorbed millions in restructuring costs involving employee severance, inventory liquidation, consulting fees and store closures.

Officials in a conference call last week said Loblaw's restructuring was entering a “critical stage” in which departments will be centralized in a leaner organization. This “period of maximum risk” is expected to last through the end of the year, according to Mark Foote, president.

“The company is entering a critical period as many employees are dealing with recent transitions to new roles and responsibilities, and some level of disruption is expected,” Loblaw said in a statement.

Foote said Loblaw experienced internal food cost inflation of about 4% during the quarter but chose not to pass along those increases, as part of Loblaw's strategy to be more price-competitive overall. Foote said Loblaw was proactive rather than reactive in making pricing changes, and that activity was highest in Loblaw's hard-discount stores and in its Real Canadian Super Stores in Ontario and Quebec.

“We consider that we held the line on retails despite the cost [increases], as an additional investment in competitive food pricing,” Foote said. “We saw real volume growth across every major food category. We feel pretty good about our ability to keep retails low despite the costs.”

Asked about how long the price investments would continue, Foote said: “We haven't made as much investment as we're going to have to make, and we'll continue to make them until such time as we're done.”

For the quarter, Loblaw reported net earnings of $113 million on sales of $6.6 billion. Operating margin as a percent of sales fell to 3.1% from 4.6% in the same period a year ago.

Expenses in the quarter included an additional $66.6 million in costs related to employee layoffs.