Canadian grocers Loblaw, Metro profits fall as competition intensifies

Two big Canadian grocers reported steep declines in quarterly profit on Wednesday in the face of esc…

Two big Canadian grocers reported steep declines in quarterly profit on Wednesday in the face of escalating competition from the likes of Wal-Mart Stores Inc and Target Corp, a new entrant to the Canadian market.

Loblaw Cos Ltd, Canada's largest grocer, reported a 29 percent decline in profit for the September quarter and lowered its earnings outlook, while smaller rival Metro Inc reported a larger-than-expected 40 percent drop in profit.

"The outlook is still very competitive. People are chasing sales at considerable expense. And we have to be careful between chasing those sales, spending too much money and not getting any returns," Metro's chief executive, Eric La Fleche, said.

Stock of both grocers fell as much as 6 percent. Shares of rival Empire Co Ltd, which operates Sobeys stores, also fell, shedding more than 2.5 percent.

Sobeys cemented its position as Loblaw's closest rival earlier this year with a $5.7 billion deal for Safeway Inc's Canadian assets. Shortly after, Loblaw announced a C$12.4 billion ($11.82 billion) deal to buy Canada's largest pharmacy chain, Shoppers Drug Mart.

Shoppers reported slightly lower quarterly net income on Tuesday, due in part to charges from the pending acquisition.

Loblaw said profit was hurt by a later Thanksgiving holiday and a decline in sales at its drugstores. Canadian Thanksgiving is in October, more than a month ahead of the bigger U.S. holiday, while pharmacies are feeling the squeeze from regulatory changes that cap generic drug prices.

It said start-up and other costs related to the spin-off of its real estate assets into a real estate investment trust, which was then taken public, Choice Properties, and restructuring charges also dented profit.

Toronto-based Loblaw cut its full-year earnings outlook due to higher-than-expected investments in store expansions and competitive pressure in certain food categories.

"I'm disappointed ... we will not be able to deliver on the expectations we set last quarter," said Loblaw Chief Financial Officer Sarah Davis. "The actual intensity we experienced in Q3 was greater than projected and caused actual performance to be below our expectations."

The grocer, which also owns the Joe Fresh clothing brand, expects flat 2013 operating income. In July, it forecast income would grow in the mid-single digits percentage-wise.

It also said it was expecting marginal growth at established stores in the fourth quarter. In 2014, the company was forecasting the first half of the year to be more challenging than the second half.

Montreal-based Metro, Canada's No. 3 supermarket operator, said expanding U.S. retailers provided "intense competition," especially in the populous province of Ontario.

In response to the competition, Metro plans to invest nearly C$250 million ($240 million) in Ontario in 2014.

"Overall, we view Metro's results as disappointing ... and price investments will inevitably be required for Metro to defend its market position," said BMO Capital Markets analyst Peter Sklar in a client note.