RESTRUCTURING IMPACTS LOBLAW RESULTS

Jon Springer

TORONTO -- Loblaw Cos. here said it was weathering the short-term effects of its restructuring initiatives through a fiscal second quarter during which same-store sales were flat and earnings missed analyst estimates.

"As we've said before: We're going to take on a lot this year," John Lederer, president of Loblaw, told analysts in a conference call discussing quarterly results.

As previously detailed, Loblaw plans to close six warehouses and consolidate its supply chain activities while rolling out food and general merchandise superstores -- measures intended to steel the retailer to battle with low-cost operators such as Wal-Mart Stores.

The supply chain initiatives, which company officials said would reduce costs and improve service to its stores over the long term, "encountered some challenges in Western Canada" during the quarter, Lederer said.

"As one implements changes in areas that are not accustomed to it, you may encounter some difficulties," he said. "And in Western Canada we had some challenges in this warehouse execution, but that is behind us now, and we look forward to building some real supply chain opportunities."

The supply chain restructuring will cost Loblaw around $57 million during 2005, the company noted.

Lederer said he was encouraged by the performance of Real Canadian Superstore locations in Ontario, saying the eight such stores so far in the comparable-store base were generating "very strong double-digit" results and that all 17 stores had exceeded expected results.

Loblaw is scheduled begin mediation this week with three locals of the United Food and Commercial Workers Union in hopes of negotiating a new labor contract to replace a current deal set to expire early next year, Lederer added.

Net income of $211 million Canadian ($171 million U.S.), or 76 cents a share, increased from 71 cents a year ago but missed analyst estimates of 81 cents.

Overall sales of $5.2 billion during the 12-week quarter increased 6% from $4.9 billion. Factors contributing to the sales increase included inflation and an overall store and square-footage increase.