Loblaw forecasts grocery prices will fall as its profit widens in first quarter

Rising food prices led to more shoppers looking for discounts on their grocery bills in the last quarter, but the head of Canada's largest grocery retailer forecasts prices will be coming back down sooner, rather than later.

"We see inflation slowing down as the Canadian dollar continues to increase,'' said Loblaw's executive chairman and president Galen G. Weston on an analyst call Wednesday. "We see consumer prices coming down in certain markets and certain categories.''

Weston would not specify where he thinks consumers will see the most savings on their grocery bills but said sustained rising food costs has resulted in more people shopping for discounts in the company's last quarter.

"We were a bit disappointed by food sales,'' he said, adding that the company saw "consumer resistance'' to higher food costs.

RBC Dominion Securities analyst Irene Nattel wrote that about 60 per cent of Loblaw food revenue comes from its discount banners, and should have been able to benefit from a consumer shift to lower-priced options in the first quarter—but pulled back on promotional spending just as competitors were ramping it up.

"Over the balance of 2016 Loblaw will adjust its promotional intensity in discount and simultaneously invest a bit in pricing/promo in conventional to ensure that the gap between the two segments narrows slightly,'' Mattel said in a commentary.

Despite the competition, Loblaw still saw same-store food retail sales grow by 2.6 per cent in the first quarter, after excluding gasoline sales. A year earlier, the comparable growth was 4.0 per cent. In contrast, same-store sales growth picked up in the drug segment to 6.3 per cent from 3.1 per cent.

Overall, including the Shoppers Drug Mart pharmacy business, PC Financial and Choice Properties as well as its food business, Loblaw reported double-digit increases to its profit and adjusted earnings for the three-month period ended March 26.

Loblaw earned $193 million of net income for the quarter, up $47 million or 32.2 per cent from a year earlier. Adjusted net earnings were $338 million, up $37 million or 12 per cent—helped by increased cost savings.

Revenue was $10.4 billion, up $333 million or 3.3 per cent from the first quarter, with the bulk of it coming from the grocery and pharmacy retail businesses.

Loblaw's profit amounted to 47 cents per share of net income and 82 cents of adjusted net earnings per common share, up from 35 cents of net income and 72 cents of adjusted earnings per common share.

Its common share dividend will rise to 26 cents per quarter, payable July 1, up four per cent from 25 cents per share.

The results were in line with analyst estimates compiled by Thomson Reuters.