Metro profit more than triples, but sales are down slightly

New store openings are creating intense competition but Target has helped drive traffic to Metro stores, says CEO
4/24/2013

Metro Inc. on Wednesday reported that it had tripled its quarterly earnings, even though sales fell nearly three per cent to $2.51 billion.

Second-quarter profits at Canada's third-largest grocer were helped by an after-tax, one-time gain of $266.4 million from the sale of 10 million shares of convenience store operator Alimentation Couche-Tard Inc.

Metro's net income was $366.8 million or $3.77 per share, including the gain on the sale of Couche-Tard stock.

Adjusted net earnings from continuing operations were $100.5 million, a 4.4 per cent gain over the first quarter.

During the company's analyst conference call, president and CEO Eric La Flèche appeared focused on Canada's highly competitive retail environment, describing it as "intense."

Increased competition was partly to blame for decreased traffic and flat sales at established stores, he said.

The national food retailer said about 40 new stores have been opened by various players in the past six months, primarily in the Toronto area.

About half of the additions are new Walmart Supercentres while the rest are from existing retailers and ethnic banners.

``The promotional activity is pretty intense as new stores open and people try to protect share as much as they can,'' La Flèche said.

But La Flèche said that Metro hasn't been hurt by Target, which started opening stores in Ontario in March.

Metro, he said, has actually benefited from increased traffic brought on by Target's store launches, adding "it varies by store and town."

Revenue for the quarter was down 2.6 per cent year-to-year, dropping nearly $70 million to $2.513 billion.

That was below expectations, according to a research note by BMO Nesbitt Burns analyst Peter Sklar.

Sklar cited several factors for the drop, including the shift of the Christmas selling week into the first quarter (later confirmed by La Flèche), the closure of the under-performing Ontario stores and "a temporary distribution glitch in the pharmacy business."

La Flèche also discussed the company's new produce distribution centre in Laval, Que.

Only a week old, the DC replaces an aging warehouse Metro inherited form Steinberg's in 1992.

"There are always some productivity issues the first week," La Flèche said of the larger centre, which boasts a new and improved system. "But that transfer is going extremely well."

Asked whether Metro would consider an automated DC similar to ones operated by Sobeys, he replied: "Work is ongoing. Its under analysis. We’re looking at that stuff."

As for Metro's latest project–the Ontario launch of ethnic banner Adonis–La Flèche said the Mississauga store is "resonating well" with consumers.

He added the company plans to open another store in the east end of Toronto this year, and another one to two stores per year following that.

READ: Adonis opens first Ontario store near Toronto

Though the Adonis' expansion appears focused on the Toronto area, La Flèche acknowledged the format could work in other urban centres.

Metro acquired a 55 per cent stake in Marche Adonis, an independent Montreal grocer, in late 2011. Adonis operates five stores in Quebec.

Irene Nattel of RBC Capital Markets said Metro delivered a second consecutive quarter of ``solid'' results.

``Metro's solid second-quarter results despite intense competition reinforce management's ability to drive both its offering and cost base to deliver for investors,'' she wrote in a research note.

She said the company is sticking to its game plan and is well-positioned to deliver nine to 10 per cent EPS growth for the fiscal year.

Metro Inc. also announced Wednesday that it intends to buy back and cancel up to one million of its common shares in private agreements, at prices to be negotiated with the unidentified seller.

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