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Industry NewsMetro cuts prices, boosts profits

Metro cuts prices, boosts profits

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Thursday, April 27, 2017

By Peter Diekmeyer

Metro Inc. CEO, Eric La Flèche, surprised analysts this week by suggesting that a deflationary environment makes it easier for grocers to build in profit margins. “When prices are increasing, everybody is watching,” said La Flèche during a conference call with analysts following release of the company’s second quarter results. “Last year, when food inflation ran high, we had to trim margins on many items.”

 Metro’s recent results suggest that he may be right. The Montreal-based grocer’s sales were essentially flat during the quarter due to strong food deflation, which forced price cuts averaging two per cent throughout Metro’s product line. That’s substantially less than the 3.6 per cent decline reported by Statscan for food sold in Canadian stores during March.

However, Metro’s gross profit margins rose to 20.1 per cent of sales during the second quarter, from 19.9 per cent during the comparable period last year. La Flèche linked the increasing average basket size among Metro customers and declining store visits, with a 20 per cent rise in fuel prices over the past year. The implication is that, in order to save on gas, consumers are making fewer trips but buying more during each trip.

In all, Metro had a strong quarter, said Peter Sklar, an analyst with BMO Capital markets, who, in a note to clients, attributed positive earning per share increases to healthy tonnage growth and cost discipline.

E-commerce now a core initiative

La Flèche also provided clarity regarding the company’s e-commerce efforts, which he characterized as a core strategy. “It’s not a test,” said La Flèche in response to a question about how the pilot was going. “It’s phase one.”

The e-commerce offerings, which are a mix of home delivery and click-and-collect initiatives in major markets, are generating larger basket sizes and bigger margins than in-store purchases. These results are tempered by “expensive” delivery costs.

Metro’s e-commerce strategy will be gradually expanded during coming months to more of its stores in urban areas of Quebec such as Montreal, Quebec City and Outaouais. Ontario expansion will follow “later,” La Flèche said.

Metro market share growth stalls

Despite Metro’s strong results, the grocer likely did not gain market share during the quarter, but held ground said La Flèche. This may in part be due to continued expansion by big box discounters. Walmart has now rolled out 56 of its planned 74 Supercentre conversions, and Costco has added two new locales in Ontario with two more coming. “We are feeling it,” said La Flèche.

Metro’s CEO also confirmed that the company will buy out the remaining minority interest in its Adonis outlets, which now form a core part of its strategy to target new Canadians. When Metro took its initial stake, the Adonis chain had four stores. That total has grown to 11, with a 12th scheduled to open next year, after which Metro is scheduled to open “a couple more” in ensuing years.

Metro has been using Adonis outlets to test products ranging from spices to marinated meats, which, if they work well, are subsequently introduced into the broader chain.

Increased regionalization efforts, such as Metro’s new Woodbridge, Ont., store, which targets much of its offerings to a local Italian Canadian community, are also planned. Canada’s “population growth is mostly ethnic and we need to focus on that,” said La Flèche.

Metro Q2/2017 highlights

  • Fully diluted net earnings per share of $0.56, up 9.8%
  • Sales of $2,902.4 million, up 0.7%
  • Same-store sales up 0.3%
  • Net earnings of $132.4 million, up 6.0%
  • Declared dividend of $0.1625 per share, up 16.1%

Click here to read the transcript from the analysts’ conference call.

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