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    Sobeys' Q3 Earnings Fall 28 percent in Wake of Ongoing 'Transformations'

    Canadian retailer's same-store sales solid, but wholesale tobacco business continues decline.

    STELLARTON, N.S. -- Due to costs connected with recent streamlining efforts, Sobeys Inc., based here, reported quarterly basic net earnings per share of 51 cents, or CAN $33.3 million (U.S. $28.3 million), for its third quarter ended Feb. 3, 2007, vs. 71 cents, or CAN $45.7 million (U.S. $38.9 million), reported in year-ago period, representing a decline of 28.2 percent, according to CSNews’ sister publication Progressive Grocer.

    Included in the third-quarter earnings were CAN $7.0 million (U.S. $6.0 million) in costs related to the company's ongoing business process and system initiative, and CAN $13.2 million (U.S. $11.2 million) in pretax costs related to the rationalization of its Ontario distribution network and Atlantic administrative functions.

    At a conference call yesterday, Sobeys officials noted that a new distribution center being constructed in Vaughan, Ont., which is slated to open in fiscal 2009, was expected to boost the company's warehouse and distribution capacity while cutting overall distribution costs and improving service, and that the administrative rationalization was proceeding ahead of schedule, with 57 positions eliminated and 123 roles "redefined or redeployed" within the company.

    Basic net earnings per share for the 39 weeks ended Feb. 3 were $2.01, or CAN $130.4 million (U.S. $110.9 million), a decrease of 6.9 percent vs. the $2.16, or CAN $139.7 million (U.S. $118.8 million), reported in year-ago period.

    Sales for the third quarter were CAN $3.23 billion (U.S. $2.75 billion), compared with CAN $3.14 billion (U.S. $2.67 billion) last year, a rise of CAN $94.7 million (U.S. $80.5 million), or 3.0 percent. Same-store sales grew 1.8 percent in the quarter. Year-to-date, sales went up 2.0 percent from the prior year, with same-store sales growth of 2.4 percent.

    "Our third-quarter results reflect our continued solid same-store sales performance and commitment to sustain our price position as competition intensified, particularly in Ontario," said Sobeys president and CEO Bill McEwan during the call. "Transformation initiatives over the past three years enabled the first phase of administrative streamlining and distribution rationalization in the quarter that we expect to deliver significant annualized benefits."

    The company attributed sales growth for both the quarter and year to date to its continued implementation of sales and merchandising initiatives across Canada, together with the increased retail selling square footage as a result of new store development and an ongoing program to enlarge and renovate existing stores. Sobeys' sales growth was also positively affected by the August 2006 acquisition of Achille de la Chevrotière Ltée and its associated companies, which included 25 owned or franchised retail store operations, other wholesale supply agreements, and a distribution facility in Rouyn-Noranda, Quebec.

    However, however, Sobeys also saw further declines in its wholesale tobacco sales, which decreased CAN $41.0 million (U.S. $34.9 million) in the third quarter, and CAN $86.4 million (U.S. $73.4 million) on a year-to-date basis. Sales growth was also further adversely affected by the March 2006 disposition of the company's Cash and Carry business in Ontario and Quebec.

    Late in the second quarter of fiscal 2007 a major Canadian tobacco supplier started selling and distributing directly to certain Sobeys customers, further affecting the already declining sales in the category. This change is expected to reduce sales annually by about $300 million. Margins on tobacco sales are much lower than on other products, so the loss of these sales won't have a material impact on earnings, the company said, adding that it "continues to explore options to mitigate the financial impact of this decision."

    Sobeys' companywide capital investment came to CAN $136.0 million (U.S. $ 115.6 million) for the third quarter, a CAN $13.0 million (U.S. $11.0 million) drop from last year. During the quarter, the company opened or relocated 14 corporate and franchised stores, compared to 25 corporate and franchised stores opened or relocated in the year-ago period. Another nine stores were expanded during the quarter, vs. seven stores last year. Ten stores were closed during the third quarter of fiscal 2007, compared with 20 in the third quarter of fiscal 2006, and five stores were rebannered during the quarter, as opposed to one store last year.

    Net retail store square footage grew during the quarter by 252,482 square feet. As of Feb. 3, 2007, Sobeys' square footage amounted to 26.3 million square feet, a 4.0 percent increase over the year-ago period.

    Additionally, the company's board of directors declared a quarterly dividend of 15 cents per share on Sobeys common shares, which will be payable on April 30 to shareholders of record on April 13.

    Sobeys owns or franchises over 1,300 stores in all 10 Canadian provinces under such retail banners as Sobeys, IGA, Foodland, Price Chopper food stores, and Lawton's Drug Stores.

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