MONTREAL — After Metro Inc. here posted quarterly earnings and margins that exceeded expectations, one analyst questioned whether the retailer could sustain it.
Metro said strong sales — as well a continued recovery from price competition and internal technology and distribution issues that hurt performance a year ago — helped boost adjusted net earnings by 9.9% to $66 million (U.S.) during the fiscal first quarter, which ended Dec. 20. Excluding one-time charges for store conversions this year and tax issues a year ago, net income rose 34.8%, to $69 million.
EBITDA margins as a percentage of sales climbed by 65 basis points, and gross margin as a percentage of sales was up by nearly 1% — both described as “whopping increases” by Perry Caicco, an analyst at CIBC World Markets, Toronto. Sales of $2.1 billion (U.S.) were up by 3.7%, and same-store sales climbed 3.5%.
In a research note published last week, Caicco noted the performance “blew away our expectations,” but suggested that higher prices — and not higher store traffic — were behind the profit improvement. As the economic malaise in the U.S. spreads to Canada, this performance may be unsustainable, the analyst said in a research note.
“Despite an amazing bottom-line performance, we are not without our concerns,” Caicco said. “The way it got there — higher prices at gridlocked assets — may not be sustainable for more than a couple of quarters.”
Metro officials credited the performance to improvements in Ontario — where the company is about 40% through an effort to convert all of its stores to the common Metro banner — and stronger sales through market share improvements in Quebec. Merchandising and selection changes at the Food Basics discount banner in Ontario were “gaining traction,” said Eric La Fleche, president and chief executive officer, during a conference call.
The Metro conversions involve refitting stores formerly under the Dominion, Ultra, The Barn or A&P banners to the Metro banner and a format emphasizing service, prepared foods and perishables. The company as of late last month had completed 67 of 159 planned conversions.
“Metro conversions are helping our sales, especially post-opening, because there are some disruptions while we renovate,” La Fleche said. “Post-renovation, these stores will typically see a sales lift … generated mostly from a larger basket. We also tend to get a better mix, so it's good for margins in general.”
Caicco, however, suggested that Metro stores may be losing traffic. Same-store sales of 3.5% barely stayed ahead of 3% inflation, he noted. And a rapid slowdown in the heavy price competition that marked the Ontario market a year ago has allowed prices to drift up.
Caicco said he has been underwhelmed with the renovated stores, but noted their locations around metro Toronto are probably the best in the industry. This — combined with a softer competitive market — has driven Metro's results in much the same way Safeway has profited from its locations in Western Canada.
“Great locations and high prices — which is essentially the Metro strategy in Ontario — have worked in spades for Safeway Canada,” Caicco said. “We are not suggesting that Metro is becoming ‘Safeway East' … just that landlocked urban locations are a license to print money, no matter what store is sitting on top.”
|Net Income||$69.0M (U.S.)||$51.2M|
|Inc./Share||76 cents (Cdn.)||54 cents|