Facing an increasingly competitive retail landscape, Canadian retailer Loblaw Cos. posted a slight lift in retail sales but, due to incremental margin investment in the back half of the year, lowered its earnings growth expectations for 2013.
However, company executives are optimistic as the company remains focused on investing in what it refers to as the “customer proposition” and looks forward to its acquisition of Shoppers Drug Mart.
“As expected, in the third quarter the competitive environment intensified significantly. Increases in square footage from incumbents and new entrants reached critical mass. This, combined with the shift in consumer expectations, put significant pressure on our business,” Galen Weston, executive chairman of Loblaw, told analysts during the company’s third-quarter conference call on Wednesday.
For the quarter ended Oct. 5, total revenues totaled Canadian $10 billion, up 1.9% compared with the year-ago period.
In the retail segment, sales growth was 1.5%, reaching C$9.77 billion. Same-store sales growth was 0.4%. Retail same-store sales growth was negatively impacted by the timing of the Thanksgiving holiday, estimated to be 0.5% to 0.7%.
Drug store sales declined “marginally” as a result of reform-induced deflationary pressures, the company noted during its conference call with analysts.
Net earnings totaled C$154 million compared with C$217 million in the year-ago period. Adjusted basic net earnings per common share were down 3.7% to 78 Canadian cents compared with 81 Canadian cents in the year-ago period.
For its outlook for 2013, the company indicated that it remains committed to its strategy to drive its customer proposition (i.e., price, service and assortment), including investments in food margins in the fourth quarter of 2013. As a result, adjusted operating income and operating income for the full year is expected to be flat compared with 2012.
Looking forward, the company believes that the strength of its core business, combined with the planned acquisition of Shoppers Drug Mart, will position the company to deliver long-term earnings growth.
As previously reported, Loblaw and Shoppers Drug Mart announced on July 15 a definitive agreement under which Loblaw will acquire Shoppers Drug Mart for C$12.4 billion in cash and stock. In September, shareholders voted in favor of the proposed acquisition, which is expected to close before the end of the first quarter 2014.
Weston told analysts that the acquisition will “drive synergies in both the top and bottom line, as well as position us as the leader in the two most compelling trends in retail — health and urbanization.”
“Looking forward, our company will be more powerfully positioned than ever before to the meet the evolving needs of the Canadian consumers. With the right infrastructure, cost structure, asset mix and formats to deliver long-term earnings growth,” Weston said.
Meanwhile, the company is pleased with the success of its loyalty program, PC Plus, which launched in May in 44 Ontario Loblaws banner stores. Designed for a smartphone, the PC Plus program is a fully digital program that, through personalized offers, aims to help customers save time and money.
“A strong driver of business going forward is our loyalty program, PC Plus, which is looking to be a real game changer. PC Plus is performing beyond our expectations. … Based on the experience we have had with over 300,000 registered digital members to this point, we see PC Plus having the potential to be a meaningful, positive addition for our sales line at a national level,” president Vicente Trius told analysts during the call.
He added that, at its 44 Loblaw Ontario store locations, customers have demonstrated a “high level of engagement” with more than one-third of sales tied to PC Plus. The company estimates that PC Plus has driven a low-single digit sales lift in the Loblaw Ontario stores since May. Given the success, the company will launch PC Plus nationally over the coming days.
The PC Plus program pays attention to what customers do, the products they buy and the offers they redeem to create a customized experience. The more customers shop and interact with the PC Plus program, the more personalized offers become. And, at its core is the PC points program, which enables customers to earn points to put towards dollars off their grocery bill.