Loblaw links profit boost to health products, calls grocery margins ‘stable’

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Loblaw Companies Ltd., Canada’s largest grocery chain, reported second-quarter gains in both revenue and profit, as its new chain of physiotherapy clinics and its drug retail business helped drive up sales.

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Loblaw’s revenue hit $12.9 billion in the quarter ended June 18, up $356 million — or about three per cent — from the same quarter last year. The company said the bulk of the sales increases came from retail, but its newly acquired Lifemark Health Group contributed $49 million in revenue after the deal closed in May.

Net earnings were $428 million, down $6 million from last year. Loblaw said it recorded a charge of $111 million in the quarter, due to a federal tax ruling involving Loblaw’s banking wing that was released earlier this month.

On an adjusted basis, however, profit available to common shareholders was $566 million, up 22 per cent over last year. Adjusted net earnings per share were $1.69, up 25 per cent. Analysts were forecasting earnings per share of $1.59, according to a report from Bank of Nova Scotia analyst Patricia Baker.

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Loblaw noted that its earnings-per-share growth was helped by share buybacks, as it spent $603 million on repurchases in the second quarter alone.

Canada’s biggest grocer and its rivals in the sector have found themselves in the spotlight lately, since steep rises in Canadian grocery bills have helped drive the worst inflation crisis in decades. Grocers say they’ve been swarmed by suppliers, all asking for more money to offset increases in the cost of ingredients, transport, packaging, and labour. So Loblaw has had to decide whether to accept those cost increases and pass them onto the consumer, or absorb the extra costs in its profit margins.

Loblaw said it increased gross profit margins by 60 basis points in the quarter, to 31.2 per cent. But it said the boost came from its drug stores, not food retail.

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“Food retail margins were stable,” the company said in a financial update on July 27.

Loblaw has a wide collection of retail banners, including Shoppers Drug Mart, No Frills and Provigo, as well as its PC Financial banking wing. It also owns the Lifemark chain of 300 physiotherapy clinics, which it bought for $832 million this year as part of its plan to turn Shopper’s Drug Mart into a health-care provider.

Loblaw has said its drugstore operations have been benefiting from the disappearance of pandemic-related public health restrictions, with consumers buying more high-margin items like cosmetics as they start going back to the office, or to parties.

Same-store sales, a metric used in retail to capture a clearer picture of year-over-year performance by ignoring results from recently opened or closed stores, grew by 5.6 per cent in Loblaw’s drug retail segment. The food retail segment, however, only grew by 0.9 per cent.

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