BUSINESS

Metro boosts Q2 profits despite intensifying competition in Ontario

04/24/2013 09:19 EDT | Updated 06/24/2013 05:12 EDT
MONTREAL - Grocery chain Metro says intensifying competition in Ontario is hampering its ability to grow sales as retailers use promotions to lure customers.

The national food retailer said about 40 new stores have been opened by various players in the past six months, primarily in the Toronto area.

About half of the additions are new Walmart supercentres while the rest are from existing retailers and ethnic banners.

"The promotional activity is pretty intense as new stores open and people try to protect share as much as they can," CEO Eric La Fleche said Wednesday after Metro reported its second-quarter results.

The Montreal-based company (TSX:MRU) earned $366.8 million or $3.77 per share for the period ended March 16. It included a $266.4-million after-tax gain from selling about 10 million shares of Alimentation Couche-Tard Inc. (TSX:ATD.B).

Excluding the gain and discontinued operations, it earned $100.5 million or $1.02 per share, up 8.5 per cent from $96.3 million or 94 cents per share a year earlier.

The results were penny short of analyst estimates.

Revenue was down 2.6 per cent year-over-year, dropping nearly $70 million to $2.513 billion.

The decrease was due a shift in the important week before Christmas to the first quarter, the closure of a few unprofitable stores in Ontario and lost sales at the company's pharmaceutical division due to difficulties with bringing in a new warehouse management system.

Same-store sales for stores open at least a year were down about one per cent, but were flat excluding the Christmas week impact.

In an environment of intense competition and stable prices, La Fleche said it's difficult to boost revenues. The company is trying to spur traffic through its loyalty program and improved fresh food offering.

"Consumers remain very value-conscious, fickle and they shop around that's for sure," he told analysts.

Like other domestic retailers, Metro now faces a major new U.S. rival. Target began its expansion into Canada in March starting with a gradual rollout of stores in Ontario, already a battleground for the grocery industry.

Target is best known for its clothing and general merchandise but, like Walmart, it also sells grocery products. That part of the Target business is being done in partnership with Sobeys Inc., a Nova Scotia-based rival of Metro.

La Fleche said the impact from Target is limited so far. Some neighbouring stores have benefited from increased traffic, while others have seen grocery sales decrease.

Increased competition is less pronounced in Quebec, where Walmart added two new large stores in January, raising the number of super centres to 16.

Metro and its partners recently opened Ontario's first Adonis store in Mississauga. Another opening is planned east of Toronto by year-end.

La Fleche said Ottawa could also be a market for the Mediterranean-style format.

Irene Nattel of RBC Capital Markets said Metro delivered a second consecutive quarter of "solid" results.

"Metro's solid second-quarter results despite intense competition reinforce management's ability to drive both its offering and cost base to deliver for investors," she wrote in a research note.

Despite intensifying competition, she said the company is sticking to its game plan and is well-positioned to deliver nine to 10 per cent EPS growth for the fiscal year.

Metro said it will use some proceeds from the sale of half its investment in Couche-Tard stock to buy back up to one million of its own shares.

The retailer said it plans to repurchase and cancel the shares in private agreements with "an arm's-length, third-party seller." at prices to be negotiated. At recent market prices, the buyback could cost the company more than $60 million.

On the Toronto Stock Exchange, Metro's shares gained 14 cents to trade at $66.23 Wednesday afternoon.

A share buyback has been anticipated since Metro sold about half of its investment in the convenience store operator for $479 million. Most of the proceeds have been used to repay debt while the company determines how to deploy the rest.

Metro said its next dividend payment in June will be 25 cents per share, the same as the March payout but up 16.3 per cent from a year earlier.

Metro is Quebec's leading grocery chain with nearly 34 per cent market share. It has more than 65,000 employees in Quebec and Ontario, with more than 600 food stores under several banners including Metro, Metro Plus, GP, Super C and Food Basics, as well as over 250 drugstores under the Brunet, Brunet Plus, Clini Plus, The Pharmacy and Drug Basics banners.