Metro expects food price increases have peaked

Same-store sales rise 4.5 per cent on higher basket inflation

Metro says prices for meat and produce have likely peaked after more than a year of accelerating growth.

"We expect somewhat lower levels in the coming months as we cycle the meat price jump of last year and also the decline of the Canadian dollar,'' CEO Eric La Fleche said Wednesday during a conference call to discuss second-quarter results.

The Montreal-based retailer said the price of its "aggregate food basket'' increased 4.0 per cent in the quarter ended March 14.

Meat prices were up more than 12 per cent in February compared with a year ago, according to Statistics Canada. Metro said prices of canned goods and non-perishable groceries have been stable.

Same-store sales at locations open at least a year were up 4.5 per cent. That marked an acceleration from the four prior quarters as past merchandising strategies _ including an improved fresh food offering and a reorganization at the Food Basics discount banner – gained traction.

Lower fuel prices are also believed to have driven higher consumer spending at the chain's stores in Ontario and Quebec, the company said.

Total revenue grew six per cent to $2.707 billion, including a contribution from the Premiere Moisson bakery business acquired last year.

Despite rising food costs, Metro said intense competition and consumer reactions have prevented it from fully passing along the increases to consumers. As a result, it has focused on other products to drive increased traffic along with larger purchases in a move to deliver strong margins.

La Fleche said Metro's loyalty program has been a key strategy. Personalized discounts are designed to get consumers to shop more frequently and spend more at Metro stores. It recently launched a digital online personalized flyer that allows consumers to save on products they buy.

RBC Capital Markets analyst Irene Nattel said Metro's results suggest conditions are improving for Canadian food retailers.

Metro's ability to pass through higher food costs to consumers ``should extend to Loblaw as well, suggesting upward bias to expectations,'' she said in a brief research note.

During the quarter, Metro's net profit increased 15.2 per cent to $111.6 million. That amounted to 43 cents per share on a diluted basis, up from 36 cents in the second quarter of 2014.

Analysts had expected 42 cents of net income on $2.67 billion of revenue, according to estimates from Thomson Reuters.

Besides its own operations, Metro's investment in convenience store operator Alimentation Couche-Tard) delivered $16.3 million in earnings, up from $11 million a year earlier.

Metro said it is examining some former Target locations that could house Metro locations if they become available.

The retailer is also beginning to add more urban stores to take advantage of the condo boom in Toronto and Montreal. A Metro store recently opened west of downtown Toronto and one in Montreal's Griffintown redevelopment is slated to open next spring.

"We're keen to open a few stores where it makes sense, where the economic returns make sense,'' La Fleche said, adding that high rents make some sites unworkable.

In a note to investors this morning BMO Capital Markets analyst Peter Sklar wrote that Metro's higher basket inflation "indicates continued passing through of higher cost of grocery throughout the industry while at the same time holding gross margin."

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