SOBEYS' GUIDANCE UNDER PRESSURE

STELLARTON, Nova Scotia -- Sobeys here said last week its sales and earnings guidance for the fiscal year that ends in May is "at risk," though developments through the balance of the year could put final results in the low range of the guidance.

Bill McEwan, president and chief executive officer, stressed repeatedly during a conference call with analysts that the company would be obligated to change its guidance if its anticipated financial performance would fall outside the previously stated guidelines of 6% to 8% sales growth and 12% to 16% earnings-per-share growth.

"But we're not backing off from our previous guidance because the tools are in place to reach those numbers," McEwan said following release of results for the 13-week first quarter ended Aug. 2, which showed sales up 4.7%, same-store sales up 1.6% (up 0.9% excluding remodeled stores) and net income down 8.7%.

Glenn Hynes, executive vice president and chief financial officer, said sales growth during the quarter was "less than expected" because of numerous factors that combined to create a difficult summer selling season, including an acceleration of competition in Ontario, a slowdown in tourism in rural markets and the lingering effects of a fourth-quarter strike that ended last May at a facility in Ontario.

According to McEwan, "We were certainly not pleased or satisfied with our results, but we are very far from discouraged."

Most encouraging to Sobeys' forward momentum, he said, are results at stores that have been remerchandised and, in some cases, rebannered across its operating regions in Canada, "which have exceeded expectations almost without exception." Pressed by analysts, McEwan said sales improvements have ranged from 6% to 30%.

As a result, he said, the company plans to slow down the rate of new-store growth for the year and redirect $14.6 million to $18.3 million, or approximately 5% more of this year's capital budget, to accelerating its store renovation and remerchandising programs -- an increase of 50% over its target at the end of the fiscal year last May, he noted -- "because we think we'll get a greater return faster by concentrating on improving our existing asset base."

That acceleration will be most evident in Western Canada, where the company plans to convert 57 Garden Market stores to the Sobeys banner during the fiscal year ending in May while simultaneously strengthening in-store operations, McEwan said. The first conversion opened earlier this month in Winnipeg, Manitoba, he noted, with seven more conversions scheduled for the province by mid-October.

McEwan emphasized that the increased activity in Western Canada is not "a sudden strategy or the result of a particular competitive situation" but one the company has been working on for several years. Remerchandising efforts include the addition of 800 stockkeeping units in grocery and 700 in health and beauty care; improved positioning of pharmacy; introduction of full-service floral departments; introduction of more than 60 new Signature products in perishables; new front-end service standards; in-store demonstrations by corporate personnel; and an improving pricing position.

Looking at Sobeys' other regions, he said the chain has been able to maintain its market-share position in Ontario despite a very intense competitive atmosphere during the first quarter, which he noted has leveled off, while its stores in Quebec are performing well and those in Atlantic Canada are showing improvements.