Better value brings better sales for Loblaw in second quarter

Loblaw Cos. said its focus on value propelled net and same-store grocery sales gains for its fiscal 2023 second quarter, with adjusted earnings per share edging above analysts’ forecast.

For the 12-week quarter quarter ended June 18, consolidated retail sales came in at  $13.47 billion (Canadian), up 6.7% from $12.62 billion a year ago, when top-line retail results grew 4.4%, the Brampton, Ontario-based food and drug retailer said Wednesday.

By segment, food retail sales rose 6.4% to $9.56 billion in the second quarter versus a 0.9% uptick to $8.98 billion a year earlier. Food same-store sales also surged, up 6.1% after just a 0.9% gain in the fiscal 2022 quarter.

As in the 2023 first quarter, traffic increased while basket size decreased in Q2. Loblaw reported grocery price inflation as down to 9.1% in the quarter from 9.6% in the prior-year period, essentially in line with the company’s internal food inflation.

Grocery sales catalysts

The ability to deliver daily value and savings to Canadian shoppers drove strong sales growth across both the food and drug retail businesses, Loblaw noted. Increased food retail sales reflected a continued customer shift to discount grocery stores, and shoppers took advantage of values in Loblaw’s private labels and personalized offers from its PC Optimum loyalty program, the company said.

“Our hard discount banners continued to outperform the overall discount channel, delivering strong traffic and item count growth as customers continue to focus on value offerings,” Loblaw Chief Financial Officer Richard Dufresne told analysts in a conference call on Wednesday. (Call transcript provided by AlphaSense.)

Loblaw aims to convert more Provigo supermarkets in Quebec to its Maxi discount grocery format. / Photo: Shutterstock

“In Quebec, our discount position continues to grow. We converted 10 Provigo stores to Maxi in the quarter, and we will convert another 10 stores in Q3. We continue to be very pleased with the sales growth being generated from these converted stores,” he explained. “Our market banners remain healthy, despite the ongoing shift to discount stores. Having the right customer offer in all our stores remains a key focus. Righthand side posted a solid quarter, with all major categories delivering positive same-store sales and apparel outpacing food same-store sales.”

Along with the upside trends at Loblaw’s discount and conventional supermarkets, Chairman and President Galen Weston pointed to the PC Optimum loyalty program and private label as traffic and purchase drivers.

“In our food business, market stores continue to perform well, lifted in part by the customer response to our President’s Choice Summer product lineup, including new customer favorites like frozen mochi and ube boba pie,” Weston said in the call. “The ongoing shift to discount continued to pick up steam, driving high growth in our stores. Our hard discount locations have never been busier, with our highest-ever customer counts at double-digit growth. And No Frills was recently named the most-trusted store for low prices. We’ll add 25 more to the network this year.

“As customers focus on value, sales in our private brands continue to outpace national brands, delivering an average savings as high as 25%,” he added. “And more Canadians are turning to PC Optimum points to fill their carts, with redemption rates climbing. We were delighted to see a recent survey that said Canadians are paying more attention to loyalty programs and that PC Optimum is by far their favorite, used an incredible nine out of 10 times.”

Pharmacy sales, services expand

Drug retail sales, from Loblaw’s Shoppers Drug Mart/Pharmaprix arm, climbed 7.4% to $3.91 billion from $3.64 billion in the year-ago span. Sales rose by 5.4% to $1.93 billion in the front end and by 9.4% to $1.98 billion in the pharmacy. On a comparable basis, drug retail sales grew 5.7% year over year, including gains of 5% in the front end and 6.3% in the pharmacy. Prescriptions count ticked up 0.9% year over year, with the average prescription value up 4.7%.

The robust pharmacy and front-of-store sales growth reflects strength in beauty products, Loblaw said. Still, retail gross margin dipped for the food and drug segments amid higher shrinkg and double-digit supplier cost hikes that “were not fully passed on to consumers,” according to the company.

“In our drug business, we returned to a more normal growth rate in our front-store. Elevated sales of cough-and-cold meds subsided, while beauty remained brisk,” Galen said. “Although COVID services have declined nationwide, we are increasing our range of patient care. In fact, it feels like every month another province moves to expand and fund services that pharmacists can provide to plug growing gaps in primary care systems.”

He cited Loblaw’s investment in Pharmacy Care Clinics, with 72 slated to open this year. A pilot of six of the primary care locations kicked off Wednesday in New Brunswick, a day after Loblaw opened its first two clinics in Ontario. Twenty-six Pharmacy Care Clinics already have been rolled out in New Brunswick.

Loblaw's flagship President's Choice own brand has been a difference-maker for value-seeking shoppers, executives noted. / Photo: Shutterstock

Online sales bounce back

On the digital side, e-commerce sales climbed by 13.9% in the 2023 second quarter, marking a rebound from a 17.5% decrease a year ago and a 1.1% decline in the 2023 first quarter.

Pharmacy accounts for a “disproportionate part” of online business, and delivery has seen “substantial growth” versus a dip in pickup, according to Weston.

“We are still waiting to see what the normalized post-COVID growth rate is for e-commerce. But it’s certainly not going backwards, and we expect it to continue to grow as we look forward,” he said.

“A couple of interesting updates that I can provide between last quarter and now,” Weston continued in the call. “We launched the PC Pass, which is our subscription product for PC Express for pickup, and we’ve seen fantastic adoption of that product. It’s now up to about 10% of the total sales in PC Express. And then, of course, we continue to work away on improving the overall value proposition. And, I’m delighted to say, we’re at all-time highs in terms of our service levels and fill rates for our customers. So the service just gets better and better.”

Bottom line ticks up

In the fiscal 2023 first half, Loblaw’s retail sales totaled $26.21 billion, up 6.2% from a year earlier. Food retail sales rose 5.1% to $18.57 billion during the 24 weeks, with same-store sales up 4.6%. Shoppers Drug Mart’s first-half sales came in at $7.64 billion, an increase of 9%. Comp-store sales advanced 6.5%, including gains of 5.5% in the pharmacy and 7.5% in the front end.

At the bottom line, fiscal 2023 second-quarter net income (available to common shareholders) came in at $508 million, or $1.58 per diluted share, compared with $387 million, or $1.16 per diluted share, in the 2022 quarter, Loblaw reported. Adjusted net earnings for common shareholders were $626 million, or $1.94 per diluted share, versus $566 million, or $1.69 per diluted share, a year ago.

The company noted that the earnings gain reflected the cycling of a prior-year charge of $111 million from a PC Bank commodity tax matter, and higher sales and cost control fueled adjusted net earnings growth. Analysts, on average, had projected adjusted earnings per share of $1.91, with estimates ranging from $1.87 to $1.93, according to Refinitiv.

Loblaw said it opened 15 food and drug stores and closed 13 over the previous 12 months. As of the end of the second quarter, the company’s retail network encompassed 2,442 stores, including 561 corporate-owned supermarkets under multiple banners, 543 franchised grocery stores and 1,338 Shoppers Drug Mart/Pharmaprix associate-owned drugstores.