11/16/2011 09:02 EST | Updated 01/16/2012 05:12 EST

Canada's largest grocery chain, Loblaw Cos., increases Q3 profit to $236 million

TORONTO - Loblaw Companies Ltd. performed "fairly well" during the most recent quarter as profits grew nearly 20 per cent, but competition, inflation and an infrastructure overhaul continue to eat into earnings.

"In the third-quarter, Loblaw performed fairly well, as the organization settled into a new rhythm, execution continued to improve," said executive chairman Galen Weston Jr.

The grocer said Wednesday that its profit rose to $236 million or 83 cents per share in the three-month period, compared with $197 million or 70 cents per share a year earlier.

Revenue at the country's largest grocery distributor grew two per cent to $9.7 billion in the 16 weeks ended Oct. 8., largely due to higher retail sales, thanks in part to rising gasoline and food prices.

The chain narrowly missed analysts' expectations for earnings of 85 cents per share, but beat revenue projections of $9.64 billion, according to estimates compiled by Thomson Reuters.

Loblaw Co. (TSX:L) has predicted this year will be one of its most challenging as it contends with rising food prices, stiff competition and an uncertain economy, all while it wraps up one of the company's biggest-ever infrastructure overhauls.

"Even as underlying operating trends improve, our infrastructure program remains a primary focus. We are making steady progress, however (it is) still expected to negatively impact operating income going forward," Weston said.

The upgrade to its information technology and supply chain cost $19 million during its most recent quarter as part of the plan that is expected to push full year capital expenditure to $1 billion.

Loblaw did not provide guidance on how much the program is expected to cost next year, but said spending will peak in 2012.

The chain's new president, former Walmart executive Vincente Trius, said 70 per cent of the company's products are now in the new integrated system and expects 90 per cent of merchandise to be in the new system by next year.

The company is aiming to have its first store ready to use the new system by late 2012, with a roll out to all of its 1,200 stores completed by 2014.

The overhaul is expected to reduce costs and redundancies once completed.

"The right systems combined with the right processes will allow us to drive costs out of the business and drive efficiencies while improving the experience in our stores for our customers," Trius said.

During the third quarter, same store sales — a key metric in measuring retail performance — improved 1.3 per cent.

Loblaw says it benefited from improved retail sales and financial services revenue. In addition to the grocery business, Loblaw owns President's Choice Financial as well as the Joe Fresh clothing chain.

The company's profit was bolstered by improved operating income, lower interest expenses and a lower tax rate.

However, its gross profit percentage sank slightly from 22 per cent to 21.7 per cent in the quarter due to competitive and inflationary pressures.

Loblaw said it experienced "moderate" internal food price inflation during the quarter that was lower than the national consumer price index rate of 4.9 per cent.

Trius, a veteran global retail executive, was appointed to the position early in the year and officially joined the company in August. He replaced Allan Leighton, who has been a long-standing adviser to the Weston family and deputy chairman of the Loblaws parent company, George Weston Ltd. (TSX:WN).

Earlier Wednesday, Metro Inc. (TSX:MRU.A), Canada's No. 3 grocery chain announced a reduced third-quarter profit as closures and other restructuring costs offset improved revenue.

Metro said the profit for the company's fiscal fourth-quarter dropped 7.8 per cent to of $86.1 million, down from $93.4 million a year earlier. Its sales grew to $2.66 billion from $2.56 billion.

Montreal-based 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.

Rising world prices for everything from meat and flour to sugar and gasoline have put upward pressure on food processors, grocers and most companies operating in the food business.

Both are feeling a double pinch from consumers reluctant to spend in an uncertain economy and rising raw materials costs, which is squeezing their bottom line.

But consumers are resisting price increases on store shelves so the two big chains as well as Sobeys parent Empire Co. Ltd. (TSX:EMP.A), are finding it hard to recoup their higher costs.

National grocery chains have increased promotions over the past year to attract cash-strapped consumers and as they face fierce competition, particularly in Ontario, from each other and retailers like Zellers and Shoppers Drug Mart (TSX:SC) who are increasing their food offerings.

U.S. retail king Walmart also plans a major expansion of 40 new grocery stores in Canada this year, its rival Target plans to enter the Canadian market in 2012.

Loblaw operates more than 1,200 stores across Canada under numerous banners which also include Great Canadian Super Store, Provigo, No Frills and Atlantic Superstore. The company employs 138,000 full- and part-time workers.

Shares in the company fell 1.5 per cent or 57 cents to $37.79 Wednesday afternoon on the Toronto Stock Exchange.