Presiding at the 56th annual shareholders meeting of Loblaw Cos., executive chairman Galen Weston reported that in fiscal 2011 the company delivered four more quarters of year-over-year EBITDA (earnings before interest, taxes, depreciation and amortization) growth, recording a run of 16 consecutive quarters of improved results.

56th annual shareholders meeting, Loblaw Cos., executive chairman Galen Weston, fiscal 2011, Vicente Trius, flagship store, Maple Leaf Gardens, Toronto, Joe Fresh brand, Canada, President’s Choice, PC Black Label logo, Loblaws, Greenpeace’s Sustainable Seafood Ranking, major Canadian ­supermarkets

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Inside This Issue - News

Loblaws’ new exec team gaining traction

June 18th, 2012

TORONTO – Presiding at the 56th annual shareholders meeting of Loblaw Cos., executive chairman Galen Weston reported that in fiscal 2011 the company delivered four more quarters of year-over-year EBITDA (earnings before interest, taxes, depreciation and amortization) growth, recording a run of 16 consecutive quarters of improved results.

This, Weston noted, was achieved while the company was making substantial investments to upgrade its infrastructure and enduring the operational challenges that such big changes ­involve.

Revenue in 2011 reached $31.25 billion (Canadian), a 1.3% increase. Same-store sales, meanwhile, edged up 0.9%. Operating income grew 2.7% to $1.38 billion while EBITDA gained 5.5% to $2.08 billion.

The bottom line showed more robust growth, as net earnings improved from $675 million to $769 million, a 13.9% change. Over the year, sales growth outperformed the market.

Breaking down the sales figures presented a mixed bag in terms of performance.

Sales growth in food was modest, as increased square footage among competitors, particularly with Walmart continuing the rollout of its Supercenters, is having an impact.
Sales in drug stores declined marginally, driven by deflation that is due most likely to reduced dispensing remuneration imposed by the Canadian provincial governments.

Gas station sales were strong as a result of fuel price increases and moderate volume growth. General merchandise sales, excluding apparel, were lower as a result of continued reduction in space allocated to this category and a culling of the range and assortment of products. In contrast, apparel sales grew, partly as a result of larger space allocation.

Despite the good news on profitability, most of the questions raised by shareholders related not to last year’s performance but to the results for the first quarter of fiscal 2012, released two days before the annual meeting. First-quarter sales increased only 0.9%, (inching up just 0.2% on a same-store basis, adjusted for the closure day).

Moreover, operating income, net earnings, operating margin and EBITDA all declined by significant percentages. These, Weston acknowledged, “were not a good set of numbers.”

In Weston’s opening comments he made reference to the appointment last August of Vicente Trius as president of the company. Weston described Trius as "a seasoned executive with extensive experience operating successful global retail businesses" and added that "Vicente and his new team are now settled into their positions and gaining traction."

A major strategic decision was made and executed in 2011: organizing the company around two core operating divisions for the purpose of, as Weston described it, "more effectively serving the distinctive conventional and discount ­customers."

Referring to the major IT systems renewal project on which the company has embarked, Weston commented, "In 2007 we set out on a path to reposition ourselves so that we could compete in an increasingly dynamic environment."

Five years later that work is still unfinished, but Weston and Trius were able to record some significant accomplishments in 2011. All merchandise product category listings were migrated to a new SAP system without any major disruption. The in-store process was starting, with the first store in a pilot program going live in the fourth quarter of the current fiscal year.

In addition, 2011 saw the substantial completion of the supply chain renewal initiative. Over the five-year period, eight new distribution centers were opened and 11 older units were closed. By the end of the year shelf availability had improved to a 98.5% average, a level generally accepted as excellent, Weston noted.

The company’s real estate renewal program continued throughout the year. There were 78 major store renovations and 26 new store openings. Seven corporate and franchise stores were closed. The new stores included three full-service conventional stores that each set a new standard for grocery shopping in Canada.

Weston and Trius expressed particular pride in the new flagship store at Maple Leaf Gardens, Toronto. The store, they claimed, delivered on Loblaws’ commitment to building the world’s best supermarket by reimagining the large urban grocery store while recognizing both the historical significance of the site and the diversity of the neighborhoods surrounding it.

The store is to be the blueprint for the next generation of conventional urban grocery stores — both a neighborhood store for a hot meal pickup and a one-stop destination for a regular pantry load.

The Joe Fresh brand, introduced seven years ago, is now the largest-volume apparel brand in Canada. Its sales volume approaches $1 billion annually. One in three customers entering a Lob­laws store shops for a Joe Fresh item. During the year eight more Joe Fresh freestanding stores were opened in Canada, as were five new locations in the United States. And April 2011 saw the successful opening of a Joe Fresh store on Fifth Avenue in New York City.

As usual for Loblaws executives at public meetings and presentations, Weston and Trius referred to the progress of the company brands. Loblaws is home to both the No. 1 and No. 2 consumer brands in Canada, while President’s Choice is one of the top five brands in all categories recognized by Canadian consumers. In the hierarchy of global and national brands it is outranked in Canada only by Apple and Walmart.

The company launched more than 1,100 new control label products and redesigned or improved the packaging of about 500 products. Sales of control-label products in 2011 were $8.3 billion, compared with $8.2 billion in 2010.

Prominent among the new products offered in conventional supermarkets were those bearing the new PC Black Label logo. They are sourced around the world and "created to delight the adventurous foodie with products that either taste better than anything they have ever tasted before or are like nothing they have ever tasted before."

For almost 30 years Loblaws has been a leader among Canadian retailers in responding to society’s concerns about the environment. In his opening remarks and in response to questions, Weston touched on some of the achievements of the year:
• An average of 78% of waste from the corporate distribution centers was diverted from landfill.
• There were 3.5 million cases of produce shipped in reusable plastic containers.
• The total amount of refrigerant leakage across the chain was reduced by 9.7%.
• Since 2007 customers have been encouraged to forgo the use of 3.8 billion plastic shopping bags by utilizing reusable bags or boxes to transport their purchases.
• The company is on track to fulfill the commitment it made in 2009 to source 100% of the seafood sold in its stores from sustainable sources by the end of 2013.

Loblaws is Canada’s largest retailer of seafood products and in 2011 was ranked No. 1 on Greenpeace’s Sustainable Seafood Ranking of major Canadian ­supermarkets.

In his presentation to analysts on the results of first quarter 2012, Trius offered some commentary on what had transpired and how the company is positioning itself for the balance of the year.

The customer count, he noted, had been improving in the quarter, and surveys attested to an improved customer experience. However, the average basket size had declined and sales were flat compared with a year earlier.

In response, the company has determined to invest $40 million, spread over the year, to improve the “customer proposition.”

That money will be invested in a mix of margin reduction, including promotions, and added labor, particularly in the fresh departments.

The company’s profit was impacted by the number of charges it took in the quarter, including $123 million for its supply chain and IT upgrade projects and $15 million for store conversions.

When asked during the news conference if the company was losing market share, Trius acknowledged it has been, but he averred that the company is "trending in the right direction." Presumably that last remark was intended to mean that the company is taking actions that will, at some point, improve its ­performance.