08/14/2013 07:27 EDT | Updated 10/14/2013 05:12 EDT

Target Canada, Metro Team Up In Quebec; Supermarket Chain Plans Ontario Reorg

FILE- In this Thursday, July 5, 2012, file photo, rows of carts await customers at a Target store in Chicago. Discount retailer Target Corp. said Thursday, Aug. 2, 2012 that a key revenue measure rose more than expected in July, as more shoppers visited its stores and spent more on their purchases. (AP Photo/M. Spencer Green, File)
MONTREAL - Metro is reorganizing its Ontario grocery store network and will become the exclusive operator of Target's pharmacies in Quebec as it continues to adjust to intense competition and dramatic changes in the Canadian supermarket and pharmacy businesses.

The Montreal-based company (TSX:MRU), one of Canada's largest grocery retailers, said 15 stores would be affected including six Metro stores in Ontario that will be converted to the Food Basics discount banner and up to three underperforming locations that will be closed over the coming months.

Metro said it will also offer buyouts to an unspecified number unionized employees at the other Ontario stores affected as it aims to reduce its labour costs. It declined to say how much will be saved or how many people will be let go.

"I am confident that this reorganization and investment will allow us to better meet customer needs, reduce operating costs and improve our performance," CEO Eric La Fleche said Wednesday during a conference call.

The company, which has 263 Metro and Food Basics stores in Ontario, said it will take a $40-million restructuring charge in its next quarter related to the reorganization.

Meanwhile, Target Corp. (NYSE:TGT) will partner with a Metro subsidiary under an agreement announced Wednesday that will see Brunet own and operate 18 pharmacies that Target will open next summer in Quebec. The deal will raise its Brunet store count to 168 and nearly double its presence on the island of Montreal.

"This strategic partnership will enable us to significantly increase the presence of Brunet in Greater Montreal and represents a solid growth platform for our pharmacy business," La Fleche told analysts.

Metro has said it is interested in growing its pharmacy division, especially in Quebec. La Fleche said it will consider other expansion opportunities should they become available.

Minneapolis-based Target, which has acquired much of the space formerly occupied by Zellers, said it plans to open its first 25 stores in Quebec this fall. Only 18 will have pharmacies, but Metro will have the exclusive right to add other Brunet locations as Target expands its presence in the province.

Under Quebec law, pharmacies must be owned by individual pharmacists. The Brunet locations inside Target stores will be run by independent pharmacists supplied by Metro's McMahon subsidiary, which also distributes pharmaceutical products. McMahon will supply the prescription drugs and over-the-counter medicines while Target will provide its private-label brands. Financial details were not disclosed.

"We're pleased with the positive response we've received from guests at the 62 in-store pharmacies that are currently in operation throughout Canada, and look forward to delivering superior, patient-focused health care to our guests in Quebec," said Tony Fisher, president of Target Canada.

Metro is facing increased pressure to expand following recent deals by Loblaw (TSX:L) to purchase Shoppers Drug Mart (TSX:SC) and Sobeys (TSX:EMP.A) to buy Safeway Canada based in Western Canada. Quebec-based Jean Coutu Group (TSX:PJC.A) has been named as one of the likely takeover targets.

Metro's changes were announced Wednesday as it reported a third-quarter profit of $149.8 million or $1.55 per share, up from $144.4 million or $1.43 per diluted share a year ago.

However, sales slipped to $3.57 billion for the quarter ended July 6 compared with $3.6 billion a year ago.

Same-store sales decreased 0.9 per cent, but were flat excluding the loss of a day of business because Canada Day was in the third quarter this year.

"Top line growth is obviously a challenge in the current environment with no inflation in our basket, competitors adding square footage at a rapid pace and consumers shopping around more than ever," said La Fleche.

Analyst Irene Nattel of RBC Capital Markets said Metro delivered "solid results," growing profits despite a same-store sales decrease.

She said investors will likely view Metro's announcement about Target "as a signal that it is keep to grow the business."

Metro's banners include Metro, Metro Plus, GP, Super C and Food Basics, as well as Brunet, Brunet Plus, Clini Plus, The Pharmacy and Drug Basics.

On the Toronto Stock Exchange, Metro's shares lost $2.29 or 3.18 per cent at $69.66 in trading Wednesday afternoon.

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