Loblaw Companies Ltd., Canada’s largest food and drug retailer, expects it will increase profits in the first half of 2022, as the pandemic and rising food inflation continue to drive higher sales, according to an earnings update on Thursday morning.
Loblaw — a network of more than 2,400 stores, including Shoppers Drug Mart, No Frills and Real Canadian Superstore — reported a 30.1-per-cent jump in profits during its last quarter, with adjusted net earnings of $515 million beating the previous year by $119 million.
Restrictions aimed at containing the Omicron wave of COVID-19 infections led to strong demand for groceries in the last months of 2021, since many canceled holiday plans and ate at home instead, Loblaw said. Revenues of $12.76 billion in the quarter beat forecasts of $12.62 billion, according to a preview note from Scotiabank analyst Patricia Baker. In Loblaw’s retail business, the adjusted gross profit margin was 30.9 per cent — up 150 basis points compared to the previous year.
“Loblaw anticipates that in the first half of 2022 sales will benefit from the continued impact of the pandemic and elevated industry-wide inflation,” the company said in a news release, adding that it expects earnings per common share to grow “in the low double digits” in 2022, with higher growth in the first half of the year.
Food inflation is at its highest in more than a decade, with grocery prices shooting up 6.5 per cent in January compared to the previous year, according to the latest Consumer Price Index (CPI) report from Statistics Canada. Loblaw said its internal inflation measures trended slightly higher than CPI in the fourth quarter of 2021.
Loblaw president Galen Weston said five-per-cent inflation “is usually the place where you start to see meaningful behavior change” among customers. “They are becoming increasingly price sensitive, there’s no question about that,” he said on a call with financial analysts. “And we see it most notably in the accelerating performance of our discount business.”
Loblaw’s discount stores, which represent about 60 per cent of its network, lost ground during the pandemic ace customers preferred full-service, traditional banners where they could do a week’s worth of shopping at once. No Name, the company’s discount brand of private label products, has seen “significant uptake” as pennywise customers look for deals, Weston said, adding that the shift to a more cost-conscious consumer hasn’t reached “an extreme level.”
the report comes as Loblaw is locked in a public stand-off with a global snack manufacturer over the price of chips. PepsiCo Inc.’s Frito-Lay subsidiary, whose deep roster of chip brands includes Lays, Doritos and Tostitos, stopped shipping its products to Loblaw banners after the grocery chain refused to accept an increase in prices.
Industry leaders say the episode is an example of the tense talks happening across the food industry right now, as manufacturers pressure retailers to pay more for their products in an attempt to recover the rising cost of ingredients, packaging, transport and labour. In the Canadian grocery business, retailers negotiate the wholesale cost of goods with suppliers, and then set their own retail prices in store. Loblaw is pushing back in those negotiations with suppliers, arguing that he is trying to offer the best value to customers.
Loblaw declined to comment on the situation during Thursday’s analyst call, but chief financial officer Richard Dufresne said the company has a team of experts who break down each product into its component costs — labor, transport, packaging, ingredients — to determine whether the supplier’s price increase is justified.
“Using their analysis, we’re now well positioned to assess the requests that are coming our way,” he said. “We deal with a large number of vendors and this also provides us with a very strong perspective on what’s happening on cost increases.”
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Frito-Lay also reported earnings growth in a fourth-quarter update this month, with operating profit up 10 per cent year over year in North America, according to parent company PepsiCo. The company also reported that higher commodity costs, mostly in packaging and cooking oil, had an “eight-percentage-point” drag on operating profit.
Frito-Lay doesn’t provide specific results on their Canadian operations in earnings updates. But Michael Graydon, head of the manufacturing lobby group Food, Health and Consumer Products of Canada, said in a recent interview that Canadian operations of multinational food companies don’t operate at the same profit margins as their parent companies.
RBC analyst Irene Nattel said Loblaw’s forecast of double-digit earnings per share growth in 2022 is “presumably due to ongoing COVID restrictions” that drive more consumers to shop for food themselves, rather than go to restaurants. Loblaw will also be up against a more favorable year-over-year comparison as it starts to lap 2021 quarters, Nattel said.
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