Loblaw says food prices 'will remain elevated' as suppliers push for more hikes

Loblaw Companies (L.TO) says food prices "will remain elevated" in the first half of 2023 as the grocery giant faces more than 1,000 requests from suppliers for "significant" cost increases.

Canada's largest grocery store chain, which reported fourth quarter earnings on Thursday, expects food inflation will persist as the company continues to receive "a large number of higher-than-normal cost requests" from its suppliers.

"We are seeing some costs stabilize and even begin to reverse in a few areas, and we are actively lowering prices in key categories. However, we still have over 1,000 supplier requests on our desks for significant cost increases," Loblaw president and chairman Galen Weston said on a conference call with analysts on Thursday.

"We continue to believe that these inflationary pressures are temporary and that they will ease with time, but predicting how long that will take is proving extremely challenging."

Food prices have continued to soar in Canada, even as the overall inflation rate begins to ease. The cost of food purchased from grocery stores increased 11.4 per cent in January, outpacing the overall inflation rate of 5.9 per cent and up from December's increase of 11 per cent. The price increases were widespread. Dairy product prices were up 12.4 per cent, bakery products up 15.5 per cent, and fresh vegetables up 14.7 per cent, with lettuce prices soaring 35.3 per cent.

The persistent food inflation comes as Loblaw reported an adjusted profit of $575 million in the fourth quarter ending Dec. 31, 2022, an increase of nearly 12 per cent compared to last year. Total sales in the quarter hit $14 billion, up from $12.8 billion during the same time last year. Same store sales at its drug retail business increased 8.7 per cent, driven by strong demand for cough and cold products, as well as for high margin beauty and cosmetics items. Food retail same store sales increased by 8.4 per cent, with discount brands such as No Frills outperforming its conventional stores amid high inflation.

Loblaw has faced public pressure and scrutiny over the increase in sales and profitability amid soaring prices. The grocery giant has repeatedly pointed to its flat gross margin on food as evidence that prices have not grown by more than costs, and that the company is not taking advantage of inflation to drive profitability. Gross margins are the amount of profit made on goods expressed as a percentage.

"Our food retail gross margins peaked in mid-2021, prior to the onset of accelerating inflation. Since then, our food retail gross margin has not returned to those levels," chief financial officer Richard Dufresne said on Thursday's conference call. Dufresne said cost pressures and discounting, including the No Frills price freeze initiative, weighed on gross margins in the fourth quarter.

"Our (fourth quarter) results are further evidence that retail prices are not growing faster than costs and the company is not taking advantage of inflation to drive profit."

The company said it will continue to push back on unjustified cost increases from suppliers.

On an adjusted basis, Loblaw said it earned $1.76 per diluted share in its latest quarter, compared with an adjusted profit of $1.52 per diluted share a year earlier. Analysts on average had expected a profit of $1.71 per share and $13.7 billion in revenue, according to financial markets data firm Refinitiv.

For the next year, the company expects its retail business to increase earnings faster than sales, and that adjusted net earnings per common share will be in the low double digits.

Loblaw's stock was up nearly 2 per cent on the Toronto Stock Exchange as of 1 p.m. ET.

With files from the Canadian Press

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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