UPDATE 2-Metro to reorganize Ontario store network, partner with Target

Wed Aug 14, 2013 12:43pm EDT

* To close or convert 15 Metro stores

* To take C$40 mln charge in current quarter

* Third-quarter earnings C$1.55/shr vs C$1.43/shr year earlier

* Sales down about 1 pct to C$3.57 billion

Aug 14 (Reuters) - Canadian grocer Metro Inc reported a fall in its quarterly sales and said it will close or convert 15 of its stores in Ontario to cut costs, sending its shares down 3 percent.

The company, which runs Adonis ethnic food stores and the Brunet pharmacy chain, also said it has agreed to operate Target Corp's in-store pharmacies in Quebec.

Metro had 368 supermarkets, 196 discount stores and 260 drugstores in the two Canadian provinces as of November.

It has been facing competitive pressure, especially in Ontario, as U.S. retailers expand their operations into Canada. U.S.-based Target plans to open its first 25 stores in Quebec this fall.

Metro said it will take a charge of about C$40 million ($38.75 million) in the fourth quarter related to the reorganization.

As part of the reorganization, it will convert about half a dozen Metro stores into Food Basics discount outlets, close between one and three stores, and offer early exit to some employees, a company executive said on a post-earnings conference call.

Higher competition weighed on sales in the quarter ended July 6. Revenue fell about 1 percent to C$3.57 billion and same-store sales, a key measure for retailers, fell 0.9 percent.

"Top-line growth is obviously a challenge in the current environment with no inflation in our basket ..., competitors adding square footage at a rapid pace and consumers shopping around more than ever," Chief Executive Eric La Flèche said on the call.

Separately, Metro and Target said they have agreed to open Brunet outlets in 18 Target stores by summer next year to provide prescription, pharmacy and health consultation services. The deal will increase the total number of Brunet stores in Canada to 168.

"(The agreement) enables us to significantly increase our presence, our purchasing power and our sales potential in Quebec," La Flèche said in a statement.

Metro's partnership with Target, along with Loblaw Cos Ltd's C$12.7 billion deal with Shopper's Drug Mart last month, underscores the increasing appetite of Canadian grocers for the pharmacy business. Prescription drugs offer higher margins than basic food staples.

Metro's net earnings rose to C$149.8 million, or C$1.55 per share, in the third quarter from C$144.4 million, or C$1.43 per share, a year earlier.

Metro shares were at C$69.68 on the Toronto Stock Exchange on Wednesday.

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