Robust food sales, fueled in part by surging online grocery traffic, lifted overall sales results at Metro Inc. for the fiscal 2021 first quarter, though a now-settled labor issue at its Jean Coutu subsidiary pulled per-share earnings below industry analysts’ forecast.
For the quarter ended Dec. 19, sales totaled $4.28 billion (Canadian), up 6.2% from $4.03 billion a year earlier, Montreal-based Metro said. Food comparable-store sales climbed 10% year over year, compared with a 1.4% in the fiscal 2020 first quarter. Food basket inflation was 2.5%, up from 2% a year ago.
“We are pleased with our first-quarter results, delivering continued double-digit food sales growth with good operating leverage while working through an eight-week labor conflict at our Jean Coutu distribution center,” Metro President and CEO Eric La Flèche (left) told analysts in a conference call.
“Food same-store sales were up 10% in the quarter, despite some sales shifting to the second quarter given our Dec. 19 quarter end date this year. Both conventional and discount performed well in Quebec and Ontario as we continue to gain market share. Our internal food basket inflation was 2.5%, slightly below than the previous quarter,” he explained. “Traffic trends improved but remain significantly below a year ago. The larger basket size more than offset the decrease in transaction. Strong sales have continued in the second quarter. And for the first four weeks, our comp sales are up a strong 12%. We were also pleased with our sales during the holiday period.”
Online food sales jumped 170% in the first quarter, continuing momentum from a 160% gain in the fiscal 2020 fourth quarter.
“On the e-commerce front, online grocery sales grew by 170% in the first quarter. Our hub stores continue to perform well and have adapted to the increased volume. The accelerated deployment of our click-and-collect service has begun with 19 additional Metro stores now offering the service. Our plan now calls for more than 170 Metro stores to offer click-and-collect by the end of the fiscal year, serving about 75% of the Quebec population and half of the population of Ontario,” said La Flèche.
In its “hub store” model, Metro adapts selected stores to serve as fulfillment points for online grocery orders in the surrounding area. The retailer also is building an online-only store in Montreal that will be dedicated to processing digital orders.
“Construction of the Montreal dedicated e-com store is under way, and we expect it to begin operations early next summer. Phase one of our new automated Toronto fresh DC is completed, and operations are set to start next month. Construction of the new automated frozen DC is progressing well and should open in one year,” La Flèche said. “In Quebec, construction of our new automated fresh and frozen DC in Terrebonne has started, and we expect to open in 2023.”
First-quarter comparable pharmacy sales edged up 1.3%, reflecting a 4% increase in prescription sales and a 3.8% decline in front-end sales. Metro attributed the front-of-store decrease to lower traffic, a milder cold and flu season and reduced promotional activity during the Jean Coutu labor dispute.
“Our pharmacy results were negatively impacted by the labor conflict at our Jean Coutu distribution center which ended on November 12, with operations resuming on November 15,” Chief Financial Officer François Thibault said in the call. “The conflict impacted our results through a combination of lower warehouse sales to pharmacies, with the related margin impact and higher operating costs, mostly transportation.”
Unionized workers at the Jean Coutu distribution center in Varennes, Quebec, which suppliers 400-plus pharmacies, engaged in a 24-hour strike on Sept. 23 but the next day were locked out by management, an action that lasted seven weeks until a new five-year contract agreement was reached.
“In the middle of the pandemic, our management team did a great job to operate the DC with about one-quarter of the normal staff and to implement our contingency plan to secure the supply of drugs to more than 400 pharmacies, which was the priority. We are now back to normal operating conditions after a few weeks to gradually ramp up inventories and promotional activity,” La Flèche told analysts. “However, new government restrictions on the sale of nonessential goods have been in place since Dec. 25 in Quebec, and this is having a negative impact on our pharmacy front-end sales, which are down 11.7% for the first four weeks of the second quarter, while our prescription sales were up 5.7% for the same period.”
Efforts to shift supply of Metro’s Brunet pharmacies to the Varennes DC also have restarted, he added. “With the new labor agreement in place, the integration of our pharmacy distribution operations has resumed, and the transfer of the Brunet pharmacy to the Jean Coutu DC will take place over the spring and summer, generating synergies of about $10 million next year. The rollout of the Jean Coutu lab and POS systems to the Brunet network is also back on track and will be completed this year.”
At the bottom line, Metro’s first-quarter net income came in at $191.2 million, or 76 cents per diluted share, compared with $170.2 million, or 67 cents per diluted share, in the prior-year period. Metro noted that the earnings results include a five cents-per-share impact from the labor conflict at the Jean Coutu DC, due to lower revenue and contingency plan costs.
Excluding $6.5 million in amortization of intangible assets (after tax) related to the Jean Coutu Group acquisition, adjusted net earnings were $197.7 million, or 79 cents per diluted share, compared with $180.9 million, or 71 cents per diluted share, a year earlier.
Analysts, on average, had projected adjusted earnings per share of 83 cents, with estimates ranging from a low of 79 cents to a high of 85 cents, according to Refinitiv.
“Looking ahead, we will be cycling very high comp sales in the last couple of weeks of our second quarter, when the pandemic was declared last year,” La Flèche said in the call. “We are focused on maintaining our strong momentum in food, with continued investments in our network and innovative merchandising. For example, we recently launched a new program called My Health, My Choices to help consumers shop and find products based on customers’ lifestyles, values and health needs. Nearly 9,000 SKUs found in-store will display up to three program attributes at shelf, and more than 50 different attributes can be found online or via the Metro app.”
During the first quarter of 2021, Metro completed one store relocation and major expansions and remodels at four stores in its food retail network. Overall, Metro’s retail base includes about 950 food stores under the Metro, Metro Plus, Super C, Food Basics and other banners in Quebec and Ontario, as well as 650 drugstores, mainly under the Jean Coutu, Brunet, Metro Pharmacy and Food Basics Pharmacy banners.