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Tough year, new leader ahead for Loblaw

As grocer Loblaw Cos. Ltd. (L-T) prepares for a new leader later in 2011, it is girding for a rough year in a highly competitive market with virtually no food inflation to help bolster the bottom line.

“We expect 2011 to be one of our toughest years yet,” Loblaw president Allan Leighton told a conference call on Thursday after the company reported that its fourth quarter profit fell 8.5 percent while same-store sales dropped 1.6 percent.

“Economic conditions are still not favourable. Inflation will be limited and we have big investments to make. We still have much to do.”

The country’s largest grocer announced that it will replace Leighton later this year with Vicente Trius, a seasoned international retail executive who currently holds a top position at French-based giant Carrefour and, previously, at discounter Wal-Mart Stores (WMT-N) Inc., the world’s No. 1 merchant.

Leighton, who arrived at Loblaw as deputy chairman in 2006, is a British retail veteran who spearheaded Loblaw’s turnaround efforts. He’s a longstanding advisor to the Galen Weston family that controls Loblaw.

Now Trius has a mandate to pick up the revitalization initiatives from Leighton in a “very seamless” way that will be “a piece of evolution,” the current president told analysts.

Trius, 53, is a Spanish national who joins Loblaw from Carrefour, where he was director for Europe and member of the group's executive board, in charge of Belgium, Spain, Italy, Poland Greece, Cyprus and Romania. Before that he held senior executive positions at Wal-Mart, where Leighton was also a former executive.

The advent of change comes as Loblaw said its fourth quarter profit dropped 8.5 percent to $151 million or 54 cents per share from $165 million or 60 cents per share. Quarterly sales fell 2.1 percent to $7.2 billion from $7.3 billion. Same-store sales at outlets open a year or more—considered an important measure of retail success—declined 1.6 percent.

Loblaw reported annual profit rose 3.8 percent to $681 million or $2.45 per share, from $656 million or $2.39 per share. Annual sales rose 0.9 percent to $31-billion from $30.7 billion.

The grocer warned that its operating profit next year will be squeezed by about $135 million because of continued investments in information technology and supply chain updates.

“In the year ahead, we expect to continue our focus on executing the plan in a market environment that remains unpredictable and competitively intense,” Loblaw executive chairman Galen G. Weston said in a statement on Thursday.

But he said 2010 was another year of “real progress” towards completing Loblaw’s renewal plan, which began four years ago.

In the fourth quarter, Loblaw’s core food sales declined “marginally” while its drugstore sales fell “moderately,” hurt by deflation as a result of Ontario regulatory drug reforms and replacing branded medications with their cheaper generic equivalents. Meanwhile, sales growth in Joe Fresh Style apparel was moderate while sales of other general merchandise dropped “significantly” because of softer discretionary consumer spending and the company’s deliberate scaling back of the non-food offerings.

Loblaw said its internal food prices saw no gains, compared to price deflation a year earlier. Mr. Leighton told analysts that he’s not counting on a lot of inflation in the first six months of 2011. He said the company would have liked to see an inflation rate of 2 to 3 percent to help boost its business.

On the brighter side, the grocer’s gross profit increased by 2.7 percent to $1.8 billion in the fourth quarter, or 23.6 percent of sales. The gain was driven mainly by improved private label profits, savings in purchasing products from suppliers, a stronger Canadian dollar and lower rates of “shrink” or losses because of stolen or damaged goods.

But gross profit was pinched by a $7 million charge tied to the effect of stock-based compensation net of equity forwards, as well as $27 million of incremental costs related to the company’s investment in information technology and supply chain assets. As well, Loblaw incurred a $28-million charge for fixed asset impairments tied to asset carrying values in excess of fair values for some stores.

And federal tax law changes resulted in a $12 million tax expense because of the elimination of the grocer’s ability to deduct costs associated with cash-settled stock options.

In 2010, Loblaw poured $1.3 billion into capital spending and expects those expenditures will drop to about $1 billion in 2011.

Meanwhile, the company’s board of directors decided to discontinue Loblaw’s dividend reinvestment plan after the dividend payment on April 1, when about $300 million in common share equity will be raised through the program, as planned.

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