02/21/2013 08:22 EST | Updated 04/23/2013 05:12 EDT

Loblaw expects more competition in 2013 from a customer who wants value

Canada's largest grocer, Loblaw Companies Ltd. expects more competition and moderate sales growth in 2013, and says it's considering consolidating some of its banners.

Company president Vicente Trius said Thursday that Loblaw has looked at the number of grocery banners it operates, but noted how customers value them.

"Banners have a lot of strong equity with the customers, so you need to be careful when you try to rationalize banners," Trius told a conference call with financial analysts.

"But we believe there are some opportunities on maybe some rationalization of banners," he said, after being asked if Loblaw had given any thought to consolidation.

Loblaw (TSX:L) is Canada's largest supermarket operator with 22 different banners, including Independent, Zehrs, Superstore, Wholesale Club, Value-mart, No Frills, Maxi, Loblaws and Provigo.

The Brampton, Ont.-headquartered company saw its fourth-quarter profit drop by 17.8 per cent after taking a $61-million restructuring charge that chopped 16 cents per share off the bottom line.

Trius said 2013 will bring more "competitive intensity" and a customer "who is squarely focused on value."

"In this environment, I remain focused on improving our customer proposition, strengthening our competitive position through investment in price, assortment and labour to be offset by managing costs."

Loblaw is in stiff competition with 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 consumer dollars in a still weak economy.

Chief financial officer Sarah Davis said 2013 sales growth will be moderated by such factors as competition and generic drug deflation.

Davis added that she expects operating income growth for this year to be "modest," which she described as being in the low single digits.

CIBC analyst Perry Caicco noted the moderate outlook in sales and operating income growth for Loblaw.

"In other words, as expected, no material sales or earnings progress," Caicco said in a research note.

But Caicco said sales for Loblaw came in at $7.4 million, higher than his forecast of $7.3 million.

In its financial results, Loblaw said its net income was $143 million or 48 cents per diluted share in the three months ended Dec. 29. That's down $31 million or 17.8 per cent from $174 million or 60 cents per share in the same 12-week period of 2011.

Revenue rose 1.2 per cent to $7.46 billion from $7.37 billion.

On an adjusted basis, Loblaw reported earnings of $190.9 million or 64 cents per share, beating estimates of $177 million or 63 cents according to a survey of analysts polled by Thomson Reuters.

For the full year, Loblaw reported net income of $650 million or $2.28 per diluted share on revenues of $31.6 billion. That compares with net earnings of $769 million or $2.71 per share on revenues of $31.25 billion in 2011.

During the fourth quarter of 2012, Loblaw said it would reduce the number of head office and administrative positions by about 700.

Loblaw also announced it will form a real estate investment trust that will be one of the country's largest commercial landlords.

The REIT would operate as a subsidiary of Loblaw and sold in an initial public offering expected to be completed in mid-2013, subject to regulatory approvals.

"We're feeling pretty confident with that deadline," said Davis.

The change would see Loblaw contribute real estate assets with a current market value of more than $7 billion to the venture.

Loblaw isn't the first such chain to make the move. Empire Co. Ltd. (TSX:EMP.A), operator of the Sobey's supermarket chain, spun off a number of properties into Crombie Real Estate Investment Trust (TSX:CRR.UN) in 2006.

Shares in Loblaw were up 26 cents at $40.01 in mid-afternoon trading on the Toronto Stock Exchange.