AN UPBEAT OUTLOOK FOR SUPERMARKETS

MARK TOSH

TORONTO -- This year should be a good one for Canadian-based supermarket companies.

After almost two years of price wars -- which took a toll on company earnings -- and deflation, Canadian supermarket businesses are well positioned to prosper in 1994, Marilyn Brophy, a securities analyst at Levesque Beaubien Geoffrion Inc., Toronto, told SN Global.

"In 1994," she said, "you're going to see a big improvement in the bottom line for a number of companies."

For example, Brophy said, Loblaw Cos. here has ended the strike at its New Orleans stores and most likely will not have price wars to contend with in Alberta and Ontario this year. Metro-Richelieu, Montreal, has cut costs and refocused its store base, she said.

In addition to Loblaw and Metro, Brophy also has "buy" recommendations on the stock of Oshawa Group, Etobicoke, Ontario; and Empire Co., Stellarton, Nova Scotia. She has Univa, Montreal, rated as a "hold."

"A lot of retailers are thinking smarter," she said. "They are focusing on the consumer, they are focusing on cutting costs and they are letting labor know it can't get the wage increases it used to get."

Canadian retailers and distributors also have strengthened their position against suppliers over the past two years. Grocery store operators now are able "to dictate" to manufacturers what items go on their shelves because of the growing popularity of private label, Brophy said.

Although industrywide sales are likely to grow between 4.2% and 4.5% in 1994 -- which is similar to the growth of the preceding two years -- earnings should improve at a greater rate. This is because without the price wars

that broke out in Ontario and Alberta the past two years, retailers should improve their gross margins, she said.

Cross-border shopping also has waned since Canadian border operators have become more price-competitive with their U.S. counterparts.

Following are Brophy's comments on five Canadian supermarket companies:

EMPIRE: This retailer and wholesaler owns Sobeys, a chain of stores in eastern Canada. Sobeys has a "virtual hold" on the grocery market throughout the Atlantic provinces east of Quebec.

As a result of investing in technology, Empire's operations are very efficient, producing operating margins of 3.8% in the food business last year.

Empire has entered northern Ontario and is doing quite well in a competitive market. It owns some shopping centers that will have Wal-Mart Stores as the anchor following the U.S. company's acquisition of Woolco discount stores.

Empire and related parties own about 25% of Hannaford Bros., Scarborough, Maine.

LOBLAW: A 34-week strike at National Tea stores in New Orleans knocked off 20 cents from annual earnings in 1993. Loblaw tends to increase its earnings by about 25 cents in a normal year through new-store growth and upgrading existing units. It also is very price-competitive, which may have helped capture new customers during the Alberta and Ontario price wars. Loblaw also has a high degree of customer loyalty, with 72% of its shoppers spending more than 60% of their annual food dollar with the chain.

Loblaw, which has always tried to match the lowest price in the market, was expected to lower prices this month in Ontario to offset heavy promoting by A&P-Canada, which reopened 63 stores after a three-month strike.

Loblaw also sells a lot of private label, which enables it to tinker with its product assortment and offset loss leaders. METRO-RICHELIEU: Metro has made a big turnaround and is one of the leanest Canadian operators. Its earnings from operations equaled 3.5% of sales in 1993. The 1992 acquisition of 48 Steinberg stores has increased its penetration of Quebec to about a 30% market share. Management, Brophy said, is projecting it can do better than her 1994 earnings estimate of 95 cents per share.

Metro has found it can convert some traditional supermarkets to the Super C discount store format. In the converted stores, volume has increased between 50% and 100%. Metro also has invested in its meatpacking operation to improve productivity.

The company's new format, launched last October with two prototype stores, features more fresh food, more higher-quality products and more imported items. The stores have produced a 10% sales increase and a gross margin increase of 1%.

OSHAWA GROUP: Oshawa is holding ground. Its stock is attractive now because the price has dropped dramatically to the $22 to $23 (Canadian) range. At this price, the shares represent good value, Brophy said.

With price wars in Alberta and Ontario easing, earnings should increase to $1.70 (Canadian) in 1994. Oshawa also should benefit from the closing of some of the Loeb stores.

The company picked up 12 new IGA contracts in January 1994 and expects to add about seven more in 1995, which should contribute to volume increases in 1994 and 1995.

UNIVA (PROVIGO): The Quebec market-share leader with a 37% share, Univa is in a turnaround mode. New management, led by Pierre Mignault, chief executive officer, is going to cut costs, streamline operations and centralize where possible.

Instead of operating separate retail and distribution divisions, Univa will attempt "to blur those lines so they can cut costs and remove any duplication," Brophy said. It also wants to increase efficiency of its warehousing and logistics.

The company has said it believes there are some easy costs to cut through removing duplication of effort. Additionally, management is considering closing a few Loeb stores in Ontario. Those stores have been losing money and have been a drag on earnings.

Univa has a network of about 130 Loeb stores in Ontario.

Getting Their Share

The chart shows actual or estimated earnings per share for 5 Canadian companies. The estimates are from Marilyn Brophy, a securities analyst with Levesque Beaubien Geoffrion Inc., Toronto.

EARNINGS PER SHARE (Canadian $)

COMPANY 1993 1994

Empire $0.98 $1.19

Loblaw $1.07 $1.58

Metro-Richelieu $0.78 $0.95

Oshawa $1.33 $1.70