Canada’s biggest grocer is arguing that food inflation has not driven up profits, pointing instead to strong demand for pharmacy and cosmetics products.
Loblaw Companies Ltd. reported solid fourth-quarter results on Thursday morning, with profits and revenues both topping analysts’ expectations.
The strong earnings come as prices for Canadians at the grocery store continue to soar. While overall inflation slowed to 5.9 per cent last month, price growth on food purchased from stores accelerated to 11.4 per cent.
Loblaw’s revenues were up 9.8 per cent annually in the fourth quarter of 2022. Comparing sales at stores that have been open more than a year, food retail revenue was up 8.6 per cent year-over-year, while “front of store” pharmacy sales — over-the-counter meds and cosmetics, for example — surged 11.5 per cent in the quarter.
Loblaw has defended itself in recent weeks against accusations from Canadians that it is taking advantage of food inflation to push profits higher, arguing in social media posts that it only makes $4 of profit on every $100 grocery bill.
Richard Dufresne, Loblaw’s president and chief financial officer, told analysts on an earnings call Thursday morning that its profit margins on food are actually declining due to inflation as suppliers pass higher costs on to the grocer.
Internal food inflation at Loblaw has been “generally in line” with rates seen in Statistics Canada’s Consumer Price Index, he said.
The company’s gross profit margin for the quarter was 30.6 per cent, down from 30.9 per cent a year earlier. The decline was driven by higher costs on food retail margins, Dufresne said, and by investments in promotional campaigns such as the No Name price freeze.
He added that Loblaw’s gross profit margins peaked in mid-2021, before inflation started dramatically accelerating, and has not returned to those levels since.
In other words, Dufresne argues that inflation has hurt, not helped, the company’s profit margins.
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“Retail prices are not growing faster than costs, the company is not taking advantage of inflation to drive profit,” he said.
The company does not provide specific breakdowns of its profit margins for food or other areas of its business.
Industry watchers have pointed to a lack of transparency in grocery store earnings as an issue for gauging the extent to which retailers are contributing to food inflation. A House of Commons committee has summoned the CEOs of Canada’s big three grocers to testify about their role in rising food prices.
Profit has been on the rise at Loblaw in the past year. Net earnings were roughly $1.9 billion for 2022, up 2.5 per cent from the year before.
On an adjusted basis, Loblaw earned $1.76 per share in the fourth quarter, beating analysts’ expectations of $1.71 per share.
Loblaw expects its full-year 2023 adjusted earnings per common share to grow in the low double-digits compared with the average analyst estimate of 9.64 per cent, according to Refinitiv IBES data.
Retail bellwether Walmart Inc., however, forecast its full-year earnings below estimates on Tuesday, and warned that tight spending by consumers could pressure profit margins.
Shoppers Drug Mart business booming, Loblaw says
Loblaw CEO Galen Weston Jr. said on Thursday’s call that an “exceptional performance” from the Shoppers Drug Mart side of the business helped push earnings higher last quarter.
Higher demand for over-the-counter medicines during flu season, as well as boosts in cosmetics and other pharmacy sales, were significant sources of growth, he said.
Weston also said more provinces are turning to pharmacists to deliver primary care, helping to boost demand at Shoppers Drug Mart.
High inflation elsewhere in the Canadian economy last quarter meant fewer households were willing to pay restaurant prices and instead bought and cooked their own groceries, Weston said.
The company’s campaign to freeze prices on No Name items through the holiday months — an initiative it said was aimed at helping Canadians deal with the rising cost of food — was also “a driver of that success,” he added.
But Loblaw does not expect inflationary pressures to significantly abate in the months to come.
While Weston said prices are starting to “stabilize and even (beginning) to reverse” in some areas of the business, he said suppliers continue to request “significant cost increases” from the grocer.
“We expect inflation to remain elevated in the first half (of 2023),” Dufresne said Thursday. “Your guess is as good as mine for the second half.”
The Bank of Canada has said it expects the country’s annual inflation rate to fall to three per cent by mid-2023 en route to hitting its two per cent target next year.
Loblaw is continuing to push its discount options for shoppers. The company converted 11 market-brand stores to discount banners last year and plans to transition 20 more stores in 2023.
— with files from Reuters
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