Loblaw Companies Ltd. is raising its dividend by almost five per cent despite reporting lower third-quarter net earnings in what the grocery giant called a period of "intense" competition.
The grocery, pharmacy and general merchandise retailer said Wednesday that the higher quarterly dividend, which rises by a penny to 22 cents per share, reflects the board's confidence in Loblaw's long-term strategy.
"Our investments are delivering and we're confident in our plans for building the business the right way for the long term," company president Vicente Trius said.
But Trius noted it was a challenging quarter, in which Loblaw's net income fell by 5.9 per cent to $222 million, or 79 cents per share, due to several one-time items.
Those items include such as $29 million related to its ongoing overhaul of its information technology and supply chain, a $9 million charge related to share-based compensation and $8 million charge related to upgrading some conventional stores in Ontario.
"In Q3, competition remained intense as promotional penetration continued to rise," Trius said on a conference call.
"While there was an increase in consumer confidence, the quarter saw rising unemployment and low retail price food inflation, which put pressure on the top line," he said, referring to revenues.
Trius said Loblaw is focusing on customer loyalty and bringing repeat business into its stores to help "manage our reliance on promotional activity," as grocers discount certain items to bring traffic into their stores.
He also said Loblaw (TSX:L) will manage costs to improve its competitive position.
The owner of the Loblaws, Real Canadian Super Store, Joe Fresh, President's Choice and other brands has been undergoing several years of operational changes as it upgrades its information technology system and adjusts its retail network.
Loblaw is in stiff competition with its major rivals, Sobeys (TRX:SBY) and Metro Inc. (TSX:MRU) as well as other types of retailers that offer food items, including U.S.-based department store chain Walmart and Toronto-based Shoppers Drug Mart (TSX:SC) as they compete for scarce consumer dollars in a still weak economy.
But in contrast to Loblaw's weaker earnings, Quebec-based competitor Metro reported strong revenue and profit growth in its fourth quarter as it benefited from improvements at its own operations as well as its investment in convenience store chain Alimentation Couche-Tard (TSX:ATD.B).
Metro's net income was up 75.9 per cent compared with the same time last year, rising to $145.1 million or $1.46 per share from $84.4 million or 83 cents per share. Metro's overall sales were up 11.1 per cent to $2.9 billion — less than one-third of Loblaw's level.
In Loblaw's third-quarter financial results, the Brampton, Ont.-based company had slightly higher revenue and adjusted earnings than last year.
Overall revenue at Loblaw grew by $100 million or one per cent to $9.8 billion from $9.7 billion in the comparable 2011 period, while earnings before items totalled $646 million, up 1.1 per cent.
"We are pleased with the fundamental progress to date — the dividend increase announced this morning reflects the board's confidence that management's long-term strategy will build shareholder value over time," executive chairman Galen G. Weston said on the conference call.
RBC Capital Markets analyst Irene Nattel reacted to the dividend increase by saying,"Surprise! Loblaw amends dividend policy, raises divvy first time since 2004."
Nattel noted it was Loblaws intention to increase the dividend while investing in its business.
"Based on prior policy, we had not expected dividend increase prior to 2014," she wrote in a research note.
Loblaw chief financial officer Sarah Davis said same-store sales — those that have been open for at least a year — decreased by 0.2 per cent.
Davis said there was "modest" growth in Loblaw's food, drug and gas bar businesses, offset by a decline in general merchandise. She added that apparel sales were flat.
CIBC analyst Perry Caicco said Loblaw reported slightly better than expected quarterly results. Caicco noted that Loblaw's adjusted earnings per share of 81 cents was higher than his estimate of 78 cents.
Sales of $9,827 million, lower his forecast of $9,872 million and same store sales were below his forecast of a 0.5 per cent increase at 0.2 per cent, Caicco said in a research note.
On Tuesday, a group representing Canadian drug plan sponsors announced it had chosen Loblaw as its preferred provider of pharmacy services.
Coalition leader Towers Watson says the initiative would help employers contain the expense of providing drug and health benefits while also giving employees convenient access to pharmacy and health-care services through Loblaw's retail locations.
Loblaw has about 500 pharmacies within its grocery stores, which operate under various banners including Loblaws, Real Canadian Superstore and Zehrs.
It also has more than 100 medical clinics, 100 optical shops and 60 Goodlife fitness facilities within or near Loblaw-owned locations.
Shares in Loblaw were up 29 cents to close at $33.64 on the Toronto Stock Exchange.