11/12/2014 08:12 EST | Updated 01/12/2015 05:59 EST

Loblaw says grocery wars still going strong; looks at fresh food for growth

The head of Canada's largest supermarket chain doesn't see any kind of relief from the country's grocery wars in the next few years and, instead, expects competition will increase as rivals continue attempts to eat into each other's market share.

"There is a reasonable expectation of intense competition, with rational stability, for the next three years. Anyone who is predicting the market structure beyond that I think would be taking a big risk," Loblaw's president and executive chairman Galen G. Weston told analysts during a conference call Wednesday.

"(But) never say never. In our position, we will respond to whatever competitive forces come against us but we don't see a lot of evidence at this point that it's going to deteriorate particularly badly. And, we don't see an opportunity for us to outstrip our competitors over the next three years either."

Weston said Loblaw will continue to concentrate on offering value — whether that be through pricing, personalized offers or convenience — to consumers with continuing evolving tastes and expectations.

The company sees growing demand for fresh and ready-to-eat meals. Even if those meals cost more, consumers are willing to fork over the money if they perceive the food as good quality, Weston said.

"The quality is higher, the price is a little bit higher, but what we're seeing is consumers making that choice because they're beginning to see it less against what they might spend in the grocery aisle or the frozen aisle and more versus with what they might spend if they went to a restaurant instead," he said.

These are the same shoppers who are making the same "distinctive choice" when it comes to fresh juice. Loblaw recently began operating 50 juice bars that use produce from its grocery stores.

"Customers of a certain kind — and it's a broad based number, it's not just the people with high, high disposable income — are making a choice to spend $7 or $8 on a litre of orange juice because it's fresh than, say, $2.49 on what they might spend on a two-litre of Tropicana from the refrigerator," he said.

RBC analyst Irene Nattel rated the stock as "outperform" with a price target of $62, noting Weston's remarks that while Loblaw "is modestly outperforming its peers, relative market shares are likely to remain close to current levels."

On the Toronto Stock Exchange, Loblaw shares closed up $1.98 at $60.10.

Earlier in the day, Loblaw Companies Ltd. (TSX:L) reported that it had lower profits in the third quarter but higher adjusted earnings and revenue as it benefited from strong drug sales at the recently acquired Shoppers Drug Mart — a deal that combined Canada's largest grocery company with the country's largest pharmacy retailer.

The grocer bought the drugstore chain for $12.4 billion in a blockbuster transaction announced in July 2013 and completed this year. This was the second Loblaw financial report that included Shoppers in the consolidated results.

Loblaw had $371 million of adjusted basic net earnings, or 90 cents per share, for the three-month period ended Oct. 4. This was up 23 per cent from a year earlier and three cents better than analyst estimates.

Revenue jumped 36 per cent compared with a year earlier, rising to $13.6 billion. Excluding revenue from Shoppers, Loblaw's revenue was up a more typical two per cent to $10.2 billion, an increase of about $203 million.

Overall, Loblaw's net income fell 5.3 per cent to $142 million, from $150 million in last year's third quarter. The company attributed the decline to a decrease in operating income, which fell to $335 million from $375 million, before adjustments.

Excluding Shoppers Drug Mart, the adjusted operating income increased 74.2 per cent to $669 million from $384 million.

"We still have a few quarters of potential restructurings and things that are going to lead to one-time charges," Weston noted on the call, adding that the company incurred $46 million in restructuring costs in the quarter.

Meanwhile, same-store sales at Shoppers, a key barometer in the retail industry, increased 2.5 per cent in the period, boosted by a 3.7 per cent gain in pharmacy sales as more people filled prescriptions, which offset lower average drug prices.

Besides the pharmacy and grocery businesses — which operate under various banners such as Loblaws, No Frills, Real Canadian Superstore, Fortinos and Provigo — Loblaw also has the Joe Fresh clothing line, the President's Choice financial services and a majority stake in Choice Properties (TSX:CHP.UN), a publicly traded real estate trust.

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