Loblaw Co, Canada's biggest grocery store chain, warned of a tough second half of the year on Friday, even as it reported above-forecast profits and a plan to buy the country's largest Asian food retailer.
Loblaw said it offered C$225 million ($208 million) for T&T Supermarket, which operates 17 stores and four distributions centers in British Columbia, Alberta and Ontario, and supplies fresh and prepared Asian food to a rapidly growing market.
They understand that they have to be in this business because the Canadian demographic is changing, not just with age but with ethnicity, and they want to be there, said David Hartley, an analyst at BMO Capital Markets.
Loblaw, whose banners include Zehrs, Fortinos and Real Canadian Superstores, expects the T&T deal to close by the end of the year and add to earnings in the first year after that.
It will pay C$191 million in cash, and fund the rest of the deal through preferred shares issued by T&T, the value of which will be tied to the future performance of the business.
T&T booked sales of about C$514 million in the 12 months ended June 30. Loblaw's revenue was C$7.23 billion in the quarter to June 20, up 2.8 percent from the year-ago period.
Loblaw shares, which have risen 18 percent in the past year, were off 1.3 percent at C$34.30.
Loblaw said higher sales and lower costs helped fuel a 38 percent rise in second-quarter profit to C$193 million, or 70 Canadian cents a share, up from C$140 million, or 51 Canadian cents.
But it said lower sales, a drop in food price inflation and costly infrastructure and renovation programs would cut into its second-half performance.
We still believe the second half will be the toughest, Executive Chairman Galen Weston said on a conference call with analysts. We expect a significant challenge to sales and margin for the remainder of the year.
Gross profit as a percentage of sales was 23.4 percent in the second quarter of 2009 compared with 22.5 percent in 2008. Same-store sales, a figure that tracks the performance of stores open for at least a year, rose 2.5 percent, helped by higher prices and increased sales volumes.
Analysts had expected, on average, earnings per share of 56 Canadian cents before items and revenue of C$7.33 billion, according to Reuters Estimates.
Part of the drag on profits will come from a revamp of Loblaw's computer infrastructure. Earlier this year it said it expects to spend about C$200 million over the next two years to overhaul an archaic information technology system.
The company also said it planned to boost its 2009 capital expenditures by 33 percent to C$1 billion from its earlier estimate of C$750 million. The money is earmarked equally for store renovations and computer system upgrades.
It defended the decision to ramp up spending even as it braces for tough times.
It really is this whole balancing act. We have a business that we need to run for today in conditions that change frequently, Allan Leighton, president and deputy chairman, told analysts.
But we also have a bigger picture, which is the renewal plan of the business ... and therefore we should continue to invest in it and ramp it up, Leighton said.
($1=$1.08 Canadian) (Reporting by Scott Anderson; editing by Rob Wilson)