Loblaw Eyes Urban Expansion

TORONTO Loblaw Cos. here said last week it will continue its aggressive store renovation program over the next 12 to 15 months and then devote more energies to opening new stores in major cities. The renovations are still our focus, Allan L. Leighton, president and deputy chairman, told investors in a conference call discussing third-quarter results. Our store base had not been restored for a long

TORONTO — Loblaw Cos. here said last week it will continue its aggressive store renovation program over the next 12 to 15 months and then devote more energies to opening new stores in major cities.

“The renovations are still our focus,” Allan L. Leighton, president and deputy chairman, told investors in a conference call discussing third-quarter results. “Our store base had not been restored for a long period of time, and that is still the No. 1 priority of the business, and until that is done — and we're probably another 12 to 15 months away from getting around the hoop — new stores are a secondary thought.”

Loblaw completed 70 store renovations during the quarter, which ended Oct. 9, for a year-to-date total of 161 stores, with 200 planned by year-end, Leighton said.

The company expects to do a similar number of renovations next year, he added.

As it renovates, Loblaw has also converted 23 Extra Foods in western Canada to the No Frills format, with six more conversions due by the end of the year, Leighton said. It has also opened five new No Frills stores in the Atlantic region and converted five Provigos in Quebec to franchise operations, he noted.

In addition, Loblaw opened a 20,000-square-foot urban store in Toronto called Bloor Street Market, “and we plan to introduce a number of small and large urban stores into our portfolio over the next few years,” Leighton said, including at least two larger urban stores in Toronto.

He said he believes the larger stores are more effective. “The smaller stores probably do $200,000 or $215,000 a week, perhaps $300,000, while the big stores [could] do in excess of $1 million — $1.2 million or $1.3 million, four or five times the power. So for us the way we think about urban is to bet on the major cities.”

In response to a question, Leighton said Loblaw's Real Canadian Superstores in western Canada are doing well, but those in Ontario “are still an issue” for the company.

“There's been a lot of good work done, which has helped to improve the profitability of that business, but we still need to have more clarity on the consumer proposition, and that's something you'll see us develop more next year,” he said.

For the 16-week third quarter, net income rose 12.7% to $208.6 million (U.S.), while sales increased 1.3% to $9.4 billion and same-store sales declined 0.4%. For the 40-week year to date, net income was up 7.9% to $519.1 million and sales increased 1.8% to $23.3 billion.

“The marketplace and the economy continue to present more headwinds than tailwinds,” Leighton said. “Consumer confidence is not in a good place, and people are concerned about the future and their own economics.”

Food sales were flat during the quarter and inflation was at zero, he noted. “Inflation is unpredictable at worst or gnat-sized at best, and the market is still tough and promotionally intense, and we still hover on the darker side of the moon.”

Loblaw said it has installed a new forecasting system to improve ordering and replenishment, and it expects half its distribution centers to be operating with a new warehouse management system by the end of the year.

The next phase of Loblaw's IT systems upgrade will involve merchandising, Leighton pointed out. “If that runs well, and we think we've got our data in good shape, then we'll press ahead aggressively.”

Q3 RESULTS

Qtr Ended 10/9/10 10/10/09
Sales $9.4B $9.3B
Change +1.3%
Comp-store -0.4%
Net Income $208.6M $185.1M
Change +12.7%
Inc./Share 74 cents 68 cents
40 Weeks 2010 2009
Sales $23.3B $22.9B
Change +1.8%
Comp-store Not Available
Net Income $519.1M $480.8M
Change +7.9%
Inc./Share $1.86 $1.75

(ALL IN U.S. DOLLARS.)