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“The 2020 fiscal year is off to a good start," Metro President and CEO Eric La Flèche told analysts in a conference call.

Sales inch up in first quarter at Metro

CEO says retailer ‘thought there was more potential’ in now-divested MissFresh meal kit business

Pharmacy helped lift comparable-store sales in the fiscal 2020 first quarter at Metro Inc., although the Canadian food and drug retailer fell short of analysts’ per-share earnings forecast.

For the 12-week quarter ended Dec. 21, sales totaled $4.03 billion (Canadian), up 1.3% from $3.98 billion a year earlier. Montreal-based Metro noted that sales reflect a $12.4 million negative impact from the adoption of IFRS 16 leases, which reclassified rental sublease income. Excluding the sales decrease related to sublease income, quarterly sales would have risen 1.6%, the company said.

Food same-store sales edged up 1.4% in the first quarter, compared with a 3.2% uptick in the prior-year period. Metro said the comp-store gain would have been 2% if the holiday season calendar shift hadn’t pushed much of those sales into the next quarter.

Eric La Fleche-Metro Inc.jpgEric La Flèche, Metro president and CEO (Photo courtesy of Metro Inc.)

"The 2020 fiscal year is off to a good start with solid revenue and earnings growth in a very competitive environment in the first quarter. Our average basket was up, while traffic and tonnage were slightly down due to the Christmas shift. Adjusting for the transfer of the holiday sales, overall tonnage and traffic were up slightly. So our Q1 results are in line with our expectations,” Metro President and CEO Eric La Flèche told analysts yesterday in a conference call.

“Our internal food basket inflation was 2%, down from 2.8% in the previous quarter. We experienced produce deflation in the quarter as we cycled high produce inflation last year. Also, fresh meat costs have been quite volatile over the past few months, and our teams did a very good job to deliver effective merchandising programs. The competitive environment was intense, but not worse than recent quarters. We are pleased with our holiday sales, and most of that performance will be in our Q2 results.”

Comparable pharmacy sales rose 3.6%, more than doubling a 1.5% increase in the 2019 quarter. The result reflected sales gains of 4.1% in the pharmacy — including 2.5% growth in prescriptions filled — and 2.7% in the front end.

The strong front-end performance, La Flèche noted, came from brisk sales in over-the-counter medicines and health and beauty aids.

“We are pleased with our pharmacy sales during the holiday season,” he said. “The integration of Jean Coutu is proceeding as planned, including the work in the Coutu warehouse to increase automated capacity, as well as the deployment of the Coutu retail management systems across the Brunet [pharmacy] network.”

Online grocery business remains “very modest as a percentage of total sales,” but Metro has continued to extend its e-commerce reach, according to La Flèche. The retailer launched its online grocery service, including in-store pickup and home delivery, in October 2016 at two Metro Plus stores in Montreal and one in Laval. The service was expanded to the greater Quebec City area in September 2017, to the greater Montreal area in October 2017 and then to Quebec’s Outaouais region in November 2017. And last spring, e-grocery service made its debut in the greater Toronto area.

“E-commerce sales continued to grow, and our KPIs are improving every month,” La Flèche said in the first-quarter conference call. “E-com sales are largely incremental to the Metro banner as we gain share of wallet from existing customers and attract new customers. We will soon be adding a second [e-commerce] hub store in Québec City, bringing the total to eight stores for the province.”

In the quarter, operating income (before depreciation and amortization and associate earnings) came in at $363.1 million, or 9% of sales, versus $320.6 million, or 8.1% of sales, a year ago. Metro said the result reflects a $42.6 million net benefit from the shift to IFRS 16 leases, which decreased sales but also operating expenses related to lease payments.

Metro Inc.Metro-MissFresh acquisition.jpg

Metro sold the MissFresh meal kit unit, acquired in 2017, just before the end of the fiscal 2020 first quarter in December.

The quarter also includes a $7.5 million loss on the December sale of the MissFresh meal kit business to Cook It, a Montreal-based ready-to-cook meal provider. Metro had acquired a majority stake in MissFresh in August 2017. Excluding that item, and a year-ago gain of $7.4 million from the sale of five pharmacies, adjusted operating income was $370.6 million, or 9.2% of sales (8.1% excluding the impact of the adoption of IFRS 16), compared with $313.2 million, or 7.9% of sales, in the 2019 quarter.

“MissFresh was a small startup. We thought there was more potential in the meal kit business for us than we saw, especially at store level and then the subscription e-commerce model. That's not a model that we're willing to continue, and we thought we were not the best owner going forward for that business,” La Flèche explained in the call. “So it didn't meet our objectives. We thought that with the Metro customer ecosystem, we could leverage that to gain some sales on meal kits. It was challenging. There was no real advantage with that.”

The first quarter’s bottom line showed net income of $170.2 million, or 67 cents per diluted share, versus $203.1 million, or 79 cents per diluted share, a year earlier. Adjusted for items totaling gains of $10.7 million in the 2020 quarter and $30.9 million in the 2019 quarter, earnings were $180.9 million, or 71 cents per diluted share, compared with $172.2 million, or 67 cents per diluted share, in the prior-year period, Metro reported.

Analysts’s consensus estimate for Metro’s 2020 first quarter was for adjusted earnings of 74 cents per share, according to Zacks Investment Research.

During the first quarter, Metro opened four new stores (including two relocations), converted two Metro supermarkets to Food Basics discount grocery stores, and expanded or remodeled eight stores.

Overall, Metro’s retail network encompasses about 950 food stores in Quebec and Ontario — namely under the Metro, Metro Plus, Super C and Food Basics supermarket banners — as well as approximately 650 drug stores and pharmacies under the Jean Coutu, Brunet, Metro Pharmacy and Food Basics Pharmacy banners.

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