04/18/2012 08:40 EDT | Updated 06/18/2012 05:12 EDT

Grocery operator Metro enjoys Adonis boost as Q2 profit rises 12% to $96.1M

MONTREAL - Grocery store operator Metro Inc. gained its first real financial boost from last year's acquisition of Mediterranean-style Marche Adonis stores as its overall second-quarter profit grew 12 per cent.

The Montreal-based chain said Wednesday that its profit rose to $96.1 million or 94 cents per share for the period ended March 10, while sales improved four per cent, to about $2.65 billion.

The results beat analyst EPS estimates by two cents per share, as revenue increased more modestly in line with expectations.

Adonis sales were $59 million in the quarter, representing 2.3 per cent of Metro's total revenues. Metro's gross margins grew to 18.8 per cent of sales, from 18.4 per cent last year, mostly because of Adonis.

Chief executive Eric La Fleche said he's pleased with the second-quarter performance and the network's continued growth despite persistent competition, including from the expansion of Walmart's food offering.

"The core business delivered good results and the Adonis partnership also helped to grow sales, gross margins and ultimately net earnings," he said during a conference call.

Metro (TSX:MRU) acquired a 55 per cent stake in Adonis and its distributor Phoenicia Products last fall. It is working to help the small Quebec-based chain add about two stores a year in Quebec and Ontario.

A new store was added on the south shore of Montreal around Christmas and another is planned for this fall. Entry into Ontario is expected in 2013.

"We're working hard on that to accelerate their develop. The real estate takes time so we're doing the homework and trying to lock up sites and be active in the next few years," La Fleche told analysts.

Metro is also working on expanding its fresh food offering, which attracts higher margins.

The new format has been added across Ontario and at 35 per cent of its stores in Quebec. Full conversion is expected to be completed this year.

The chain is selling more tons of produce but at lower prices largely because strong crops in California prevent it from enjoying any gain in sales.

La Fleche said consumer reaction to the changes has been very positive, which was the "strategic driver" to grow customer traffic.

"It will drive tonnage so I think it's good for the business... as you increase tonnage in produce, your mix will favour a higher margin because produce does provide a higher margin."

The company paid 12.5 cents per share in dividends during the quarter, the first payout to investors since Metro announced an 11.7 per cent increase to its dividend rate.

Same-store sales grew by one per cent, while food prices grew by about one per cent, down a half percentage point from the first quarter.

Walmart's expansion of its Supercentre format into Quebec is having a modest and very manageable impact on neighbouring Metro stores, La Fleche said.

"It's only six stores so we're not taking anything for granted or anything lightly (but) I think our stores are in good shape, our programs are in good shape and we can face the competition."

Analysts expect the retail food industry will face big challenges in 2012 with intensifying competition from Walmart ahead of the arrival in 2013 of Target.

Irene Nattle of RBC Capital Markets said Metro remains "the quintessential consumer staples name."

"Stable, defensive, featuring attractive free cash flow deployed to annual dividend increase and in the case of Metro, share buy-back, driving forecasted EPS growth of 10 per cent through our forecast horizon," she wrote in a report.

Metro said the Ontario government's decision to not proceed with two planned tax reductions will cost it about $3 million or three cents per share, starting in the third quarter.

Besides its own operations, Metro also owns a stake in convenience store operator Alimentation Couche-Tard (TSX:ATD.B), which announced earlier Wednesday that it's making its first major European acquisition.

Couche-Tard contributed $8.9 million to Metro in the quarter, up from $7.9 million a year ago.

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.

The Montreal-based company operates a network of close to 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.

On the Toronto Stock Exchange, its shares closed down 20 cents at $53.40 in Wednesday trading.