Loblaw Takes Another Big Hit

ELLIOT ZWIEBACH

BRAMPTON, Ontario — Loblaw Cos. here said last week it will take a goodwill impairment charge related to its 1998 acquisition of Provigo Inc. — totaling about $500 million to $760 million (U.S.) — for the year ending Dec. 30, 2006.

During a conference call with analysts, the company said the decision to take the write-down followed its annual goodwill impairment test analysis, although it did not explain why it had taken so long to book the charge, which will be finalized and adjusted during the first half of 2007.

The impairment charge, in the words of one Canadian analyst, was “a huge shock.”

Loblaw did not report net income for the fourth quarter and year ended Dec. 30 — a year in which it had already suffered several earnings setbacks. It said it expects earnings per common share will be negatively impacted by the latest charge, with a loss within the range of $1.71 to $2.63 per share for the quarter and between 6 cents and 98 cents for the year.

The company said several factors other than the goodwill impairment charge had a negative impact on fourth-quarter earnings, including higher shrink; higher labor costs; higher general merchandise markdowns; incremental supply chain costs and investments in information technology; and a separate real estate impairment charge resulting from a decision to suspend plans for several sites that had been scheduled for future development.

For the 12-week quarter, sales rose 3.5% to $5.7 billion (U.S.) and same-store sales jumped 1.3%. For the year, sales increased 3.7% to $24.2 billion and same-store sales rose 0.8%.

In a separate action, Loblaw announced the appointment last week of a new chief financial officer, effective April 2 — William Wells, the CFO at Bunge Ltd., a U.S.-based food processing company.

In connection with Wells' hiring, Loblaw said Steve Smith, executive vice president, financial control, will leave the company after 21 years. It also said Rick Mavrinac will step down from his role as executive vice president after 25 years with the company. They had shared the CFO responsibilities.

During the conference call, Galen G. Weston, executive chairman, said the decision to take an impairment charge for real estate resulted from a new union contract with retail clerks in Ontario, “which enables our existing sites to be more competitive for the long term, resulting in less enthusiasm for putting in new formats that could cannibalize sales.”

Weston also said Loblaw plans to continue to make “focused pricing adjustments going forward. We're consciously investing in price as much as is appropriate, and we will continue to do that.”

Loblaw will also make a concurrent effort to lower its costs of doing business, Weston said. “We're not happy with the way the business is performing on the cost side, which has resulted in a compression of margins, so we're trying to move costs down and return margins to a more acceptable level as part of our three-year turnaround plan,” he explained.

Weston said the chain hopes to improve levels of service at the store level, “where employees are too busy trying to find inventory in the back rooms, and they don't have time to engage customers. We have a problem with on-shelf availability, and our consumer price image is not as good as we thought.

“But customers still love the stores and the products and our consumer promise, and we must get back to delivering on that promise.”