UPDATE 3-Computer upgrades to weigh on Loblaw profit

Wed Feb 18, 2009 12:55pm EST

Related Topics

* EPS C$0.69 vs C$0.14

* Revenue rises 11.2 pct

* To expense C$200 mln in computer upgrades over two years

* Shares flat at C$33.40 (Adds details and analyst comments)

By Scott Anderson

TORONTO, Feb 18 (Reuters) - Loblaw Cos Ltd (L.TO) sees weaker results ahead as a costly computer upgrade and the economic downturn bite into its profit -- despite closing out 2008 with a big jump in fourth-quarter earnings.

Canada's largest supermarket chain, which has already invested a large sum of money to upgrade its "archaic" computer system, said on Wednesday it expects to expense about C$200 million ($159 million) over the next two years to continue the overhaul of its information technology system.

"We have got to move on on the IT front, because a lot of the costs that are trapped in the business are trapped in the business because we have very archaic systems," Allan Leighton, the company's president and deputy chairman, said on a conference call with analysts.

"We have now got to really step up our cost in IT," Leighton said.

As part of a wide-ranging facelift, Loblaw recently unveiled lengthy and costly plans to improve its supply chain and systems programs, while relaunching its President's Choice private-label brand.

Brian Yarbrough, an analyst at Edward Jones in St. Louis, Missouri, said the larger than expected computer project will weigh on Loblaw's results well into next year.

"This is the first time that they have quantified it and said that they will have to spend that much and that there is really not going to be any benefit for the next two years," he said.

"It is definitely going to weigh on next year's earnings. It is definitely higher than we had anticipated."

The company also said it has earmarked about C$750 million for capital expenditures in 2009, similar to what it spent in 2008.

Most of the money will be dedicated to upgrading its top 300 stores across the country, Leighton said. The company has more than 1,000 stores under banners including Loblaws, No Frills and Real Canadian Superstores.

STRONG FOURTH QUARTER

For its fourth quarter, Loblaw reported a sharply higher profit on Wednesday, helped by an extra week of shopping -- including the key Thanksgiving weekend -- and lower restructuring costs.

Loblaw said it earned C$188 million, or 69 Canadian cents a basic share, in the period ended Jan. 3, up from C$40 million, or 14 Canadian cents a share, a year earlier.

It also recorded a gain on the sale of its food service business and income related to its stock-based compensation.

"When you look at the headlines, you think 'Wow what a great quarter,' but there are some one-time items," said Yarbrough. "But despite that, I still think it was a good, quality quarter."

The comparative period the year before included a C$36 million restructuring charge and a C$52 million charge related to stock-based compensation.

Revenue rose 11.2 percent to C$7.75 billion in the latest quarter, and without the gains, Loblaw earned about 55 Canadian cents a share.

Analysts had expected, on average, earnings of 48 Canadian cents a share before items, and revenue of C$7.47 billion.

Sales in stores opened at least a year rose 10.6 percent. Operating margin was 4.1 percent, compared with 1.9 percent a year earlier.

Loblaw shares were flat at C$33.40 on the Toronto Stock Exchange after rising to C$34 earlier in the day. Shares of parent George Weston Ltd (WN.TO) were down 60 Canadian cents at C$63.01.

($1=$1.26 Canadian) (Reporting by Scott Anderson; editing by Rob Wilson)

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