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07/28/2022

Inflation drives down non-food sales at Loblaw

Shoppers are holding tighter to their purse strings and spending less on general merchandise, company president says
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Signage on the Loblaws grocery store on Lower Jarvis Street and Queen's Quay on Toronto's waterfront
Shutterstock/Sockagphoto

Loblaw Companies Ltd.'s sales growth is softening as inflation continues to grip the economy and shape consumer shopping habits, the company's president and chairman said Wednesday.

While the country's largest grocery and pharmacy chain sees "a little bit of softening" with its Joe Fresh apparel brand going forward, what it calls "general merchandise" or non-food sales outside of clothing are "notably down" in the most recent quarter, Galen Weston said.

"It definitely had a drag on our overall (comparable) sales results," he told analysts during a conference call to discuss the grocery and pharmacy chain's second quarter results.

Several large U.S.-based retailers have warned in recent months about unsold inventory as shoppers rein in spending due to rising costs. Companies like Walmart and Target have suggested profits could take a hit as they are forced to mark down excess inventory.

"The key in this circumstance is inventory. The question is how do you feel about inventory and do you have aggressive markdowns that you need to put through to clear that inventory," Weston said.

"The answer is we feel good about inventory and we don't see any meaningful margin risk associated with clearing what's left."

The company posted an increase in profit and sales in its second quarter, with drugstore sales driving overall margin expansion.

Pharmacy same-store sales increased 5.6%, while pharmacy and health-care services increased 6.1%.

"Right now cough and cold (sales) ... it's like we're in the middle of winter," Loblaw chief financial officer Richard Dufresne said during the call.

Weston added: "There's tremendous strength in fragrances. We're kind of wondering what people are doing with all of those perfumes."

Meanwhile, Shoppers Drug Mart opened Canada's first walk-in clinics staffed exclusively by pharmacists during the quarter, he said.

"We have four consultation rooms, we have four pharmacists and we are seeing patients on a very, very frequent basis," Weston said.

"As the provinces get more confident in expanding the scope of practice for pharmacists, we see an opportunity to have selected dedicated locations that can provide a health clinic-like service delivered by pharmacists."

The pharmacists treat minor ailments, prescribe cold sore medications and offer treatments for strep throat and urinary tract infections, he said.

Meanwhile, the retailer's discount grocery division continues to post strong growth.

Loblaw said its "hard discount" banners No Frills and Maxi as well as its in-house brands No Name and President's Choice are continuing to benefit from value-seeking shoppers.

Yet, there are signs inflation has peaked or will soon, with expectations inflation will moderate in the second half of the year, Dufresne said.

"Commodity price are coming off their highs, some freight costs are coming down and supply chain issues are normalizing — other than fuel costs, which remain high but down from their peaks of last March," he said.

The company said its net income available to common shareholders was $387 million or $1.16 per diluted share, a 3.2% increase from $375 million or $1.09 per share a year ago.

Adjusted profit was $566 million or $1.69 per diluted share, up from $464 million or $1.35 per diluted share in the second quarter of 2021.

Revenues were $12.85 billion, an increase of $356 million or 2.9% compared with $12.49 billion in the prior year quarter.