Profit Jumps Nearly 40% Even as Inflation Drives Up Costs for Retailers
Loblaw Companies Ltd. increased its dividend by the most in more than a decade after profits soared in its first quarter. The company said it will pay out an extra four cents per share, an 11% increase that put the quarterly dividend at 40.5 cents, widening the gap with its rivals in the Canadian grocery industry. The announcement was part of an earnings update on May 4, in which Loblaw reported a 41% increase in profit on revenues of $12.3 billion.
Loblaw said its higher profits were the result of operational improvements and looser pandemic restrictions that have allowed more people to go out, boosting demand for high-margin products such as cosmetics; not the steepest rise in food price inflation in 13 years. “We have begun the year with momentum in our core retail businesses, a clear strategic agenda, and continued traction in our growth initiatives,” chief executive Galen Weston said in a press release.
Loblaw, a network of more than 2,400 stores that includes No Frills, Shoppers Drug Mart and Real Canadian Superstore, said it has raised its dividend 11 consecutive times since 2012. In that time, it’s never raised the dividend by as much as 11%. In 202, the increase was 9%. Between 2012 and 2022, annual dividend increases at Loblaw averaged 6.2%.
As inflation pressures mount, retailers and food companies have been squabbling over who should absorb the brunt of cost increases, and major players have pulled their products from shelves temporarily in protest over Loblaw’s refusal to accept price increases. However, Weston has signalled that he believes Loblaw can sustain its margins going forward. In the quarter ended March 26, the company’s gross margin for food and drug retail improved to 31.1% from 30.3% in the same period in 2021.
“We see signs that inflation is moderating,” Weston said on a call with analysts. “However, external forces are significant and complex, making accurate predictions difficult.”
Maple Leaf Foods Inc., the Canadian poultry and pork processor, also suggested that the challenges facing the food system could be starting to stabilize, but only after a volatile period that will leave prices elevated, as cost increases from earlier in the year are “now in the marketplace,” CEO Michael McCain said. “I actually don’t recall ever facing the extraordinary instability that we all see: a global pandemic, burgeoning inflation like we’ve not seen in decades, extreme disruption in supply chains around the world, and now, emerging direct conflict (in Ukraine),” McCain said May 4.
Loblaw’s internal gauge of price inflation is running slightly higher than Statistics Canada’s consumer price index, which measured food inflation at 7.5% in the quarter. Weston, who took over as CEO in 2021, said one reason for the change is Loblaw’s recent push to stop running promotions that aren’t attracting customers into stores or giving the retailer some other return on its investment. One example was selling cases of bottled water below cost, a spokesperson confirmed.
“We’re getting out of what we call low-calorie sales, things that just were simply not giving us value for money,” Weston said. “As you optimize your promotional effectiveness, you’re essentially spending less to get the equivalent value in the minds of the consumer.”
Loblaw booked net earnings of $473 million in the quarter, up from $335 million in the same period last year. Better-than-expected adjusted earnings per share of $1.36 were “driven by stronger than expected gross margin in retail,” according to RBC analyst Irene Nattel.
Loblaw said the profit growth was helped by favourable impacts from restructuring as well as value adjustments on fuel and foreign currency. On an adjusted basis, net earnings available to common shareholders were $459 million, a year-over-year increase of about 17%.
Retail revenues reached about $12 billion in the quarter, an increase of $375 million or 3.2% compared to last year. Same-store sales increased by 2.1% in Loblaw’s food division. “Food sales continued to benefit from higher than normal eat-at-home levels,” Loblaw said in a news release on May 4.
Rising food prices are shaping shopping habits. Consumers are shopping for groceries more often, buying less with each visit and shifting to value-oriented stores as pandemic restrictions loosen and the cost of food increases, Loblaw said. Loblaw also said that its discount division posted strong growth in the quarter while demand for its in-house products surged. Both Metro and Sobeys also reported increased demand for house brands.
Canadian Tire Reports Q1 Profit and Sales Up From Year Ago
One of Canada’s biggest retailers is using customer data mined through its loyalty program and credit cards to drive sales and counter the potential impact of rising prices on demand. Canadian Tire Corp. Ltd. said that it is focused on attracting and engaging rewards members to gain insight into shopping habits and shape sales through promotions.
The company’s emphasis on its rewards program underscores the growing value of personal data in the highly competitive retail environment. It also highlights the increasing sophistication of in-store and online promotions that specifically target sales to increase spending.
“In addition to the rich first-party data we can mine through our Triangle Rewards loyalty program, our Triangle credit card provides critical insights into our customers and their preferences and shopping behaviours,” Greg Hicks, Canadian Tire president and CEO, said. “Our ability to engineer demand with our high-low programming across all banners has us being much more relevant,” he said. “We feel prepared to address any concerning shifts and spend behaviour at a customer level.”
In testing, the offer widget drove a 17% increase in sales at Canadian Tire and a 34% increase at Mark’s, Hicks said.
“If you went back two years ago, you would have seen a lot more of a store being 20 (per cent) off as an example,” said Gregory Craig, Canadian Tire chief financial officer. “The use of targeted promotional offers is much more significant than it’s been in the past.” Using customer data to target sales more effectively also benefits margins.
“With all of the data we have at our disposal, we’ve never been more able to really understand the value consumers crave,” said TJ Flood, president of Canadian Tire retail. “We’re always trying to strike that balance between managing margins and inspiring demand and also not giving an inch on being priced competitively.”
First Quarter Results
Canadian Tire raised its dividend by 25% as it reported its first-quarter profit and revenue rose compared with a year ago. Comparable sales at its Canadian Tire retail business grew 4.5%, with automotive, hockey and winter categories leading the way.
The company’s Mark’s banner saw comparable sales gain 17.1% amid stronger sales of industrial footwear and jeans while SportChek stores gained 10.2% on higher winter sports and apparel sales.
Overall, Canadian Tire reported net income attributable to shareholders of $182.1-million or $3.03 per diluted share, up from $151.8-million or $2.47 per diluted share a year earlier. Revenue for the quarter ended April 2 totalled $3.84-billion, up from $3.32-billion in the same quarter last year.
On a normalized basis, Canadian Tire said it earned $3.06 per diluted share, up from a normalized profit of $2.57 per diluted share a year ago. The retailer said it will now pay a quarterly dividend of $1.625 per share, up from $1.30 per share.
Home Depot Raises Full-Year Outlook as Shoppers Trade Up to Premium Products and Fuel Record Q1 Sales
The Home Depot, the world’s largest home improvement retailer, has reported sales of $38.9 billion for the first quarter of fiscal 2022, an increase of $1.4 billion, or 3.8% from the first quarter of fiscal 2021. Comparable sales for the first quarter of fiscal 2022 increased 2.2%, and comparable sales in the U.S. increased 1.7%.
Net earnings for the first quarter of fiscal 2022 were $4.2 billion, or $4.09 per diluted share, compared with net earnings of $4.1 billion, or $3.86 per diluted share, in the same period of fiscal 2021, representing a 6.0% increase in diluted earnings per share.
“Fiscal 2022 is off to a strong start as we delivered the highest first quarter sales in Company history,” said Ted Decker, CEO and president. “The solid performance in the quarter is even more impressive as we were comparing against last year’s historic growth and faced a slower start to spring this year. These results are a direct reflection of our associates’ continued ability to effectively navigate a challenging and dynamic environment. I would like to thank them and our many partners for their hard work and dedication to our customers.”
Fiscal 2022 Guidance
The Company raised fiscal 2022 guidance and now expects:
- Total sales growth and comparable sales growth of approximately 3.0%
- Operating margin of approximately 15.4%
- Net interest expense of approximately $1.6 billion
- Tax rate of approximately 24.6%
- Diluted earnings-per-share-percent-growth to be mid-single digits
Decker said that the company hasn’t seen the sensitivity to inflation that was initially expected. Customer transactions fell 8.2% but were offset by higher sales amid inflationary pricing. The company’s average ticket climbed 11.4%, and customers were still willing to trade up for premium products. Transactions of at least $1,000 increased 12.4% in the quarter.
Sales to professionals outpaced those for do-it-yourself projects. Kitchen and bathroom installation and building materials were among the categories that saw double-digit growth, likely thanks to that trend. “While we don’t know how inflation might impact consumer behaviour going forward, we are closely monitoring elasticities and customer trends across our respective categories and geographies and remain encouraged by the underlying strength we see in the business,” he said.
Walmart Shares Fall as Higher Costs, Supply Chain Problems and Inventories Eat Into Profits
Walmart has reported quarterly earnings that missed Wall Street’s expectations by a wide margin, as the nation’s largest retailer felt pressure from rising fuel costs and higher levels of inventory.
Walmart is a much-watched company as investors and economists look for clues about how the American consumer is weathering inflation. The discounter’s bottom line results for the quarter “were unexpected and reflect the unusual environment,” CEO Doug McMillon said in a release. Inflation in the U.S. is at a nearly four-decade high. The consumer price index, a broad measure of prices for goods and services, increased 8.3% in April compared with a year ago, according to the Bureau of Labor Statistics.
The significant jump in fuel prices, elevated labor costs and aggressive inventory levels weighed on the company, CFO Brett Biggs told CNBC in an interview. He said some merchandise arrived late and other items, such as grills, plants and pool chemicals, didn’t sell due to “unseasonably cool weather in the U.S.”
Plus, he said, Walmart employees returned from Covid leave quicker than expected and caused the company to become overstaffed during part of the quarter. He said those scheduling challenges have been resolved.
The company raised its outlook for sales this year, saying it expects net sales to increase about 4% in constant currency for the full year. It previously anticipated a 3% increase. But Walmart also lowered profit expectations. Earnings per share for the year will decrease by about 1% compared with the mid single-digit increase it previously expected, the company projected.
Here’s what Walmart reported for the fiscal first quarter ended April 30, compared with Refinitiv consensus estimates:
Earnings per share: $1.30 adjusted vs. $1.48 expected
Revenue: $141.57 billion reported vs. $138.94 billion expected
Walmart’s net income for the quarter fell to $2.05 billion, or 74 cents per share, compared to $2.73 billion, or 97 cents per share a year ago. The company’s adjusted earnings were $1.30 per share, 18 cents per share less than what financial analysts expected, according to financial market data provider Refinitiv.
Walmart’s adjusted earnings exclude gains and losses on company equity investments, as well as the incremental loss from its sale of U.K. and Japan operations during the first quarter of the previous fiscal year.
Total revenue rose to $141.57 billion from $138.31 billion a year earlier, above Wall Street’s expectations of $138.94 billion. Same-store sales for Walmart U.S. grew 3% compared with the year-ago period or 9% on a two-year basis. E-commerce sales rose 1% or 38% on a two-year basis. Walmart-owned warehouse club, Sam’s Club, saw same-store sales increase 10.2% year over year or 17.4% on a two-year basis.
Higher food sales, lower profits
Grocery, Walmart’s top sales category, is one of the company’s hard-hit categories. Food costs rose 9.4% in April on a 12-month basis, according to unadjusted data from the BLS. As shoppers look for value, Walmart is gaining market share in grocery, Biggs said in an interview with CNBC. However, that has come at a price. Sales of food are pressuring profits, since the retailer is selling more low-margin items like eggs and bread and less higher-margin merchandise like apparel and electronics.
Elevated inventory levels and higher supply chain costs took a bite out of Walmart’s earnings, too, McMillon said on an earnings call. McMillon and Biggs said that they expect Walmart to sell through the higher inventory levels in the coming quarters. Biggs told CNBC that the second quarter is “off to a good start from a sales perspective.”
Along with the drop in general merchandise sales, Walmart is seeing other signs some households feel budget strapped. The average ticket for customers in the U.S. rose 3% due to inflation, but the number of items in baskets has fallen, McMillon said on the earnings call.
The discounter is trying to strike a balance between keep prices low, while not letting profits slip further, McMillon told analysts on the earnings call. He said Walmart especially pays attention to “opening price-point food items” that low-income households must buy to feed their families, such as loaves of bread, gallons of milk, cans of tuna and mac and cheese.
Lowe’s Sales Decline as Cool Spring Weather Weighs on Demand for Outdoor Products
Lowe’s Companies, Inc. has reported net earnings of $2.3 billion, in line with prior-year results, and diluted earnings per share (EPS) of $3.51 for the quarter ended April 29, 2022, compared to diluted EPS of $3.21 in the first quarter of 2021.
Total sales for the first quarter were $23.7 billion compared to $24.4 billion in the first quarter of 2021, and comparable sales decreased 4.0%. Comparable sales for the U.S. home improvement business decreased 3.8% for the first quarter. Pro customer sales increased 20%.
“Our sales this quarter were in line with our expectations, excluding our outdoor seasonal categories that were impacted by unseasonably cold temperatures in April. Because 75% of our customer base is DIY, our Q1 sales were disproportionately impacted by the cooler spring temperatures. Now that spring has finally arrived, we are pleased with the improved sales trends we are seeing in May,” commented Marvin R. Ellison, Lowe’s chairman, president and CEO. “This quarter we delivered over 65 basis points of operating margin improvement, driven by our Total Home strategy and the execution of our Perpetual Productivity Improvement or PPI initiatives. Despite some increased uncertainty in the macro environment, we remain confident in the outlook for the home improvement market and our ability to deliver operating margin expansion in 2022. I would like to thank our front-line associates for their ongoing commitment to our customers and our communities.”
Full Year 2022 Outlook — a 53-week Year (comparisons to full year 2021 — a 52-week year)
- Total sales of $97 billion to $99 billion, including the 53rd week
- 53rd week expected to increase total sales by approximately $1.0 billion to $1.5 billion
- Comparable sales expected to range from a decline of 1% to an increase of 1%
- Gross margin rate up slightly compared to prior year
- Depreciation and amortization of approximately $1.75 billion
- Operating income as a percentage of sales (operating margin) of 12.8% to 13.0%
- Interest expense of $1.0 to $1.1 billion
- Effective income tax rate of approximately 25%
- Diluted earnings per share of $13.10 to $13.60
- Total share repurchases of approximately $12 billion
- ROIC1 of over 36%
- Capital expenditures of approximately $2 billion
As of April 29, 2022, Lowe’s operated 1,971 home improvement and hardware stores in the United States and Canada representing 208 million square feet of retail selling space, and it serviced approximately 230 dealer-owned stores.