UPDATE 2-Loblaw cautions on competition after profit trumps estimates

Thu Feb 20, 2014 1:43pm EST

* Fourth-quarter adjusted profit C$0.73 vs est C$0.55

* Revenue rises 2.3 percent to C$7.64 billion

* Gross margin in retail business rises 50 basis points to 22.1 pct

* Shares rise almost 6 percent

By Ashutosh Pandey

Feb 20 (Reuters) - Loblaw Cos Ltd's profit blew past market forecasts as gross margins improved more than expected, sending shares of Canada's largest grocer up almost 6 percent even as it warned of an "extremely competitive" first half of 2014.

U.S. retailers such as Wal-Mart Stores Inc and Target Corp have expanded in Canada over the past year, posing a threat to local retailers such as Loblaw, Canadian Tire Corp Ltd and Metro Inc.

"The competitive landscape has fundamentally changed with new competitors growing strongly and incumbents competing to maintain share," Loblaw President Vicente Trius said on a conference call on Thursday.

"But we will continue to execute against our investment program while balancing those investments with targeted efficiencies," he said.

Loblaw said it expected the pace of store openings by rivals to moderate in the second half of the year.

The company, which plans capital spending of about C$1 billion ($900 million) this year, said it expected revenue and adjusted operating income to grow but did not provide details.

Loblaw has said it expects its C$12.4 billion deal to buy Shoppers Drug Mart to close in the current quarter.

The company's net income fell to C$127 million ($115 million), or 45 Canadian cents per basic share in the fourth quarter ended Dec. 28, from C$139 million, or 49 Canadian cents per basic share, a year earlier.

After adjusting for one-time items, Loblaw earned 73 Canadian cents per share, beating the average analyst estimate of 55 Canadian cents, according to Thomson Reuters I/B/E/S.

Gross margins in the company's retail business rose 50 basis points to 22.1 percent, primarily driven by improved shrinkage and transportation costs. Shrinkage refers to a retailer's losses from theft, fraud and administration errors.

"After a disappointing Q3 due to over-investment in gross margins, management appears to have exercised greater discipline in Q4, finding a better balance between top line growth and margin," RBC Capital Markets analyst Irene Nattel said in a note to clients.

Total revenue rose 2.3 percent to C$7.64 billion. Retail sales rose just 1.8 percent while sales at established stores rose 0.6 percent. Loblaw is also involved in property leasing and financial services.

Loblaw shares had fallen about 19 percent as of Wednesday from their 52-week high of C$52.06 reached on July 15, the day it announced the Shoppers Drug Mart deal.

The TSX-Toronto Stock Exchange 300 Composite Index rose about 12 percent in the same period.

Loblaw shares were up 4.3 percent at C$44.10 in early afternoon trading.

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