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Loblaw Companies Limited (NYSE:L)

Q3 2009 Earnings Call

November 17, 2009 11:00 am ET

Executives

Inge Vandenberg – Senior Vice President, Corporate Affairs

Galen G. Weston – Executive Chairman

Allan L. Leighton – President and Deputy Chairman

Dalton T. Philips – Chief Operating Officer

Robert G. Vaux – Chief Financial Officer

Sarah R. Davis – Executive Vice President, Finance

Analysts

Patricia Baker - Scotia Capital

Perry Caicco - CIBC World Markets

Irene Nattel - RBC Capital Markets

Jim Durran - National Bank Financial

Michael Van Aelst - T. D. Newcrest

Keith Howlett - Desjardins Securities

Winston Lee - Credit Suisse

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Loblaw Companies Limited third quarter earnings conference call. (Operator Instructions) I’d like to remind everyone this conference call is being recorded today, Tuesday, November 17, 2009 at 11:00 AM Eastern Time.

I will now turn the conference over to Inge Vandenberg, Senior Vice President, Corporate Affairs. Please go ahead.

Inge Vandenberg

Good morning and welcome to the Loblaw Companies Limited third quarter conference call. This call is also being webcast simultaneously on our website, www.loblaw.ca. I’m joined here this morning by Galen G. Weston, Executive Chairman; Allan Leighton, President and Deputy Chairman; Dalton Philips, Chief Operating Officer; Bob Vaux, Chief Financial Officer and Sarah Davis, Executive Vice President, Finance.

Before we begin today’s call, I want to remind you that the discussion will include forward-looking statements such as the company’s beliefs and expectations regarding certain aspects of its financial performance in 2009 and future years. These statements are based on certain assumptions and reflect management’s current expectations, and they are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These risks and uncertainties are discussed in the company’s materials filed with the Canadian Securities Regulators from time to time including the company’s annual report and third quarter report. Any forward-looking statements speak only as of the date they are made. The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, other than as required by law.

Certain non-GAAP financial measures may be discussed or referred to today. Please refer to our third quarter report and other materials filed with the Canadian Securities Regulators from time to time for a reconciliation of each of these measures to the most directly comparable GAAP financial measures. Our third quarter report as well as the archive of this conference call will be available on our website.

I will now turn the call over to Galen Weston.

Galen G. Weston

Good morning. Thank you for joining us. As we progressed through the third quarter, our sales were increasingly impacted by the significant decline in inflation and the ramp up of our pricing investments.

Earnings benefited from cost containment and supply chain efficiencies. We expect that sales and margins will be challenged due to decreasing inflation, competitive intensity and our ongoing renovation and infrastructure programs.

Lastly, this quarter we’re delighted to finalize the acquisition of T & T Supermarkets Incorporated, and we welcome T & T’s talented management team and colleagues into our Loblaw’s family of companies and look forward to continue running what we believe are the best Asian supermarkets in Canada.

I’ll now turn the call over to Bob Vaux to review our financial performance.

Robert G. Vaux

Good morning and thank you for joining us today. Sales in the third quarter decreased by 0.2% to $9.5 billion, while same-store sales decreased by 0.6%. Sales and same-store sales in the quarter were positively affected by about 0.5% as a result of the shift of the Thanksgiving holiday into the third quarter of ’09 from the fourth quarter of ’08.

Sales were negatively impacted by 0.5% as a result of the sale of the company’s food service business in the fourth quarter of ’08 and positively impacted by 0.2% by the acquisition of T & T. Excluding these items, sales and same-store sales declined by 0.4% and 1.1% respectively.

In the third quarter, sales growth in food and drugstore was modest, sales growth in apparel was moderate, while sales of other general merchandise declined significantly and gas bar sales declined significantly as a result of lower retail gas prices, despite moderate volume drop.

National food price inflation as measured by the Consumer Price Index for food purchased from stores was 4.2% in the third quarter of ’09. Our internal retail food price inflation was below CPI for food and significantly lower than our internal retail food price inflation in the second quarter of ’09. In addition, I’ll remind you that we experienced moderate internal food price inflation in the third quarter of ’08.

Gross profit in the third quarter was $2.2 billion or 22.9% of sales versus $2.1 billion or 22.1% of sales in the third quarter of last year. The improvement was largely due to improved buying synergies, more disciplined vendor management, sales mix, lower fuel costs and the efficiency of transportation operations. Increased investments in pricing partially offset the improvement.

Operating income was $378 million in the third quarter compared to $312 million in Q3 ’08. Operating margin was 4% compared to 3.3% last year and operating income and operating margin were positively influenced by improved gross profit, lower labor and supply chain costs and a lower net stock-based compensation charge, partially offset by the previously announced incremental investment in information technology in supply chain. The company incurred an incremental cost of $25 million in the third quarter related to its previously announced investment in information technology in supply chain, which negatively impacted earnings per share by roughly $0.06.

Loblaw realized third quarter basic net earnings for common share of $0.69 compared with $0.57 for the same period of ’08. Net debt at the end of Q3 was $2.7 billion compared to $3.5 billion at the end of Q3 ’08. The improvement of about $800 million was primarily due to an improvement in working capital and the cash savings associated with the dividend reinvestment plan, partially offset by the acquisition of T & T.

For the remainder of the year we are continuing our investment in renovations to our existing store base and in upgrading our information technology and supply chain infrastructure. The estimate of capital expenditures for 2009 remains at about $1 billion.

I will now turn it over to Allan Leighton, who will provide some context for the remainder of the year.

Allan L. Leighton

Thank you Bob. When we spoke last quarter, we spoke of a year of two halves and a balancing act, where the second half of the year would be focused on using our war chest to drive volumes into a flat to declining market, with inflation dropping off drastically and a ramp up in our own infrastructure and renovation programs that are all vital to our renewal. The third quarter has seen exactly this.

We entered the quarter with moderate inflation, volumes and volume share under a bit of pressure in the food market with bumpy volumes. We exited the quarter with close to no inflation and with sales volume and volume share on an upward path in a food market of still bumpy volumes.

Over this four period quarter, our internal inflation declined by 3.5%. We have invested margin in our price position and launched significant price programs across the country, in the Atlantic through the Just Lower Prices campaign, in Zehrs where 3,000 prices reduced, in Ontario Superstores with prices rounded down, in No Frills through Won’t Be Beat, and in Maxi through 1,000 Ways to Save. And our ad match program in the west continues to offer our customers there with the lowest prices. We are encouraged with the early results of this activity.

We’re on track to successfully complete our first release of our SAP program, which as you know is largely finance focused, in January and in the planning of releases two and three, which are merchandising and operations which are due in the second half of next year. The supply chain programs around the warehouse management system, WMS, our transport management system, which is TMS, and physical infrastructure too are on track.

And we opened our new half a million square foot DC in Vancouver two weeks ago on time, on budget. And it’s the first of our DCs to go with all of the new systems at the same time.

More than 200 store renovations and refreshes are on track for completion in the second half of this year. We managed to do close to 100 during this quarter.

We believe that inflation or lack of it will be a factor for at least the next six months, restricting revenue growth and therefore volumes is the new imperative. With that in mind, we have invested in price in the quarter at a cost to gross margin. And it’s worth remembering the large part of our investment didn’t take place until the second half of what was a four period quarter.

Our outlook for the rest of the year has not changed and we believe sales revenue and margins will be challenged. Inflation will disappear, competition will intensify, and volume growth and volume market share will be [kept].

Operator, I’d now like to open the call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Patricia Baker - Scotia Capital.

Patricia Baker - Scotia Capital

Just Allan, that last point that you made that you still expect that revenues to be challenged and now volume will be the new imperative. You’ve been talking about volume a lot all through this year and had a lot of people focused on volume. If volume is the new imperative, can you share with us perhaps some quantitative indication of where volumes actually were in the third quarter? Because I think in your opening remarks you made it sound as if the pricing strategy actually was successful and it helped you raise volume. And perhaps what kind of volume targets would you be looking for? And you know exactly what metric will you be looking at to determine that these price investments are actually successful?

Allan L. Leighton

Thanks Patricia. Let me start with the end of that. The metrics we’re looking at really are what’s happening to our item growth, what’s happening to our volume growth and what’s happening to our volume market share. So they are the metrics that we’re really looking at because clearly with little to no inflation in the marketplace, then clearly that’s where you tend to focus on volume.

Our programs as I said really didn’t get going until the second half of this quarter. And that means two things. First of all, I think when people look at the gross profit that we achieved in the quarter, then clearly that’s the blended average of that quarter and would not be a good proxy for where we exited that particular quarter. The programs I say are in early days. We are seeing an improvement in performance off the back of that and that’s really what we’ll be focused on as we go into the Christmas period, which we believe will be two things. First of all very competitive and secondly the real cycling of inflation will become much tougher in Q4 even than it’s been in Q3.

Patricia Baker - Scotia Capital

Just to clarify that, okay, and I am going to ask you to really spell this out so that people don’t try to interpret what you’re saying. Your indication that we should not assume that the gross profit that you had in the quarter was blended, you didn’t exit the quarter with that gross profit improvement, and clearly what you’re implying there but I want you to say it is that the gross profit in the last half of the quarter was lower than that blended rate?

Allan L. Leighton

Yes, but we don’t talk about it. We only talk about it in a blended way.

Patricia Baker - Scotia Capital

I understand that but I think it’s important because of the fact there’s been a lot of different interpretations of lots of things that you’ve been saying through the year that we get a little bit of clarification. And the answer you just gave me is pretty good clarification.

Allan L. Leighton

And I think Patricia obviously we’re pretty consistent with what we’ve been saying which is that revenues would be challenged, inflation would come off, gross margins would come down, the industry would be competitive and markets would be bumpy. And I think that’s still very much our line.

Patricia Baker - Scotia Capital

Absolutely. Now in your opening remarks did you indicate that you are starting to see a volume pick up and your volume share is growing?

Allan L. Leighton

No, what I said is that I was very specific on it is that we entered the quarter with both our volume and our volume shares under pressure and that we exited the quarter with an improvement, both in our volume and in our volume market shares.

Patricia Baker - Scotia Capital

Last question, and I apologize for asking another one, but your discussion of volume being the new imperative and the implication that we’re not going to see revenue growth, when are we going to see the revenue line move at Loblaw or in the industry? And do we absolutely need inflation before we get there because I would have thought that a big machine like Loblaw you would be very, very focused on trying to get that top line, despite inflation.

Allan L. Leighton

Yes, you know inflation is partially in our control, partially out of our control. But what is clearly in our control is what we do with our volumes. If you’ve got negative inflation or if you’ve got you know pretty flat inflation for a period of time, you know that does have an impact on top line revenue growth. And as I said, when you look at our performance in this quarter, the inflation rate changed inside the business by 3.5% over that period of time. Now that’s a pretty significant number.

Operator

Your next question comes from Perry Caicco - CIBC World Markets.

Perry Caicco - CIBC World Markets

I just want to start with a couple of questions around the same-store sales number. Did sales of non-apparel general merchandise you know decline significantly? Is there any way you can quantify the impact of that on same-store sales in the quarter?

Allan L. Leighton

Yes, Perry. I’ll give you a bit of a headline on the sales generally might help actually. You know I describe it as a [cure tag], slightly lumpy in parts. So the bits to strip down to really understand what’s going on is gas probably had about a $0.01.4 impact on our comp sales number. So we got some volume growth there but clearly again we’re recycling the big inflation on gas of a year ago. The core GM business, which is business if you take [haber] out and if you take apparel out, was actually worse in Q3 than it was in Q2. And that’s for a number of reasons really. One is that to please the market, that’s market’s not particularly strong. But secondly in a large number of our renovations and refresh work that we’re doing as you know we’re reducing the amount of space that we’re giving to that core GM, probably by around 10% to 15%. So that’s also an impact on that.

So gas a pretty big impact, 1.4. GM much worse than it was in Q2. We also renovated about 100 stores during this quarter, which is a big number of stores, and clearly you know when you do that there’s a bit of friction that it causes in terms of the sales performance. If you trickle that stuff out and you look at the core underlying volume and item performance of the business, it’s roughly much as it’s been all year, the big difference easy to say inflation, our own internal inflation you know dropped by 3.5% over this quarter. And that’s basically the make up of the sales.

Perry Caicco - CIBC World Markets

And Allan I understand that you executed a fairly large SKU reduction across a range of stores in the quarter. Obviously that’s had some positives on your business in terms of operating costs, etc. But would that have had any impact on sales?

Allan L. Leighton

Yes, while we’re going through the friction of doing it, Perry, as you know is it’s not so much when you take them out. It’s the process of taking them out and changing the planograms and the layouts as you’re going through the renovations. So as we ramp up, as we have been doing this sort of whole renovation and refresh program in the business on the scale that we’re doing it, you know in the short term it has some friction costs which you know we’re prepared to take because you know our idea is to build in the business for the long term not just the short term.

Perry Caicco - CIBC World Markets

And that’s what you refer to when you refer to the challenges caused by the ongoing renovation and infrastructure program [inaudible]?

Allan L. Leighton

Yes. And a good way to think about it, Perry, you know we’re trying to get close to another 100 in this quarter so even for you know a machine as big as ours, they are big programs.

Perry Caicco - CIBC World Markets

And just again, related to that the ongoing renovation and infrastructure programs, the infrastructure side of that program, has that had any impact on your business? You know on your sales so far? Or should it have any impact on your sales and marketing?

Allan L. Leighton

No, it’s the reverse. It’s only positive. Our supply chain particularly is performing incredibly well.

Operator

Your next question comes from Irene Nattel - RBC Capital Markets.

Irene Nattel - RBC Capital Markets

Would you be able to give us an indication of where you feel you stand at this point in terms of investments in price? In other words, did you take pretty much what you thought you needed to take later on in the quarter, or should we be looking for a fair degree of intensity there?

Allan L. Leighton

I think we’re in a much better place than we were. I think we’re in pretty good price position around the country. My view is that there will be some more because we will probably invest some price into some of the other banners. And Irene, as you know, what’s happening in the market is very competitive. You know, if you look at most flyers most weeks, once upon a time you may get a couple of new [loaves] in any one month. Most of the time you get two or three loaves every week. So I think that this Christmas period will be pretty fierce in terms of competition, so there’s our sort of what I would describe it as our strategic pricing, which is to just make sure that we’re in the right place on a banner perspective. But I think that the tactical piece of pricing will also increase because the market’s just going to be more competitive.

Irene Nattel - RBC Capital Markets

And can you talk a little bit about your plans for PC around as we get into the holiday period, which obviously is a very important driver of traffic for you?

Allan L. Leighton

Yes, Irene, I’ll get Dalton to talk bit about PC for Christmas. Dalton?

Dalton T. Philips

Irene, it’s basically the culmination of our 20, you know 25 years of President’s Choice. We’ve come out with a very strong program. We love the holidays, too. We’re on track with all our repackaging in that brand so we’ll have nearly 2,000 items repackaged for the end of this year. So we’re very encouraged by it.

Irene Nattel - RBC Capital Markets

And are we going to see some special pricing around that 25th anniversary?

Allan L. Leighton

You’ll have to wait and see.

Operator

Your next question comes from Jim Durran - National Bank Financial.

Jim Durran - National Bank Financial

I just wanted to focus on Quebec. Can you give us an update on where you’re at on that process?

Allan L. Leighton

Jim, you’re referring to some of the store change activity. Is that what you’re thinking about?

Jim Durran - National Bank Financial

Yes. Unless you want to tell us something else.

Allan L. Leighton

Oh, no, no, no, no, no. We knew something that you didn’t know anyway. So on Quebec there are a couple of things really. As you know we’ve taken three stores and we’ve put the Great Food Program into that. That was initiated in Ontario but has been done with a very significant Quebec twist, in [Angus Kirkland]. And they started off very good and the customer reaction has been very good. So we think that we have a pretty good model there for the local stores which are in the good sites for Loblaws.

We have converted one. We’ve finished actually converting a second Loblaw to Maxi & Cie. And again they tend to be in the sites that are not so strong from a local banner perspective. And again those are being encouraging.

And then thirdly, we’ve taken one of our urban Provigo stores and we’ve made that really into an urban food store. And that, too, although early days, we’re pretty encouraged with. So we’ve been doing a lot of work in terms of what those formats may look like.

And we’ve also done a lot of work on meat in Quebec. And I think that we now have a better meat offer in Quebec which is absolutely right for the Quebec consumer. And that’s taken a bit of time to get to, but we’ve worked with Cargill on that and [ponte chombe] so there’s been a lot of activity in Quebec. And we hold out a lot of hope for that market because our ability then to roll these programs is something that we’ll talk to you about for something we may do next year.

Jim Durran - National Bank Financial

So can you give us some idea as how many Loblaw stores you expect to have in Quebec at the end of the process?

Allan L. Leighton

It’s too early to tell yet. You’re still going to have a Loblaw chain of some size there, but it’s going to be really stores that have great food stores and have locations that are locations where you can have a great food store as opposed to some of the secondary locations and the more ethnic locations that some of those stores are in today.

Jim Durran - National Bank Financial

And just looking at your SG&A in the quarter, would you classify that as your new run rate? It was flat, including the $25 million of IT supply chain spend. And as a second point to that question, are you still intending to spend the full amount of $70 million in the back half of the year which you only spent $25 of on those initiatives?

Allan L. Leighton

Yes. I’ll start with the end. Yes we are going to spend the $70 million, not just spend it for the sake of spending it. There’s always a bit of flex in the IT projects because we tend to [lose] them around by a week or two depending on, you know, where we are at any one time. I’m very pleased with how we’re managing that because as you know it will be a huge program, but I think we’re in pretty good shape. But there’s a bit of flexibility sometimes around you know when we start stuff and sometimes we move things around.

But our intention is to still spend that money, and frankly what we don’t spend we’ll just roll into next year. But that’s a good number to be working on the back half.

As far as SG&A, the only thing I would say rather than comment on whether, you know, that’s the run rate and it’s going to be that forever because being that’s the forecast is that there are, you know, clearly we’re pleased with what we’ve been able to do on the cost space. There were two big drivers of our cost performance. One is just our central costs and our general SG&A is being, you know, well controlled for a period of time. But also our supply chain and the money we’ve invested in supply chain in terms of physical infrastructure and the benefits of some of these new systems, TMS and WMS, really started to kick in. You know, so I’m certain the supply chain piece of that is something that I would see as you know not just sustained but build on. The rest of it is for you to forecast I guess, Jim.

Operator

Your next question comes from Michael Van Aelst - T. D. Newcrest.

Michael Van Aelst - T. D. Newcrest

Just to follow up quickly on the Provigo, are you planning on exiting any of the smaller, under performing markets in Quebec?

Allan L. Leighton

No, not at the moment. No.

Michael Van Aelst - T. D. Newcrest

Shifting to your working capital, I noticed a big shift there. You seem to be collecting a little faster but paying a lot slower. Is this something that is sustainable going forward or is this a temporary deviation?

Allan L. Leighton

We think it’s, well you know, working capital as you know will go through some of these up and down by $150 million at any one time. But you know we think that the majority of this is sustainable and as you know we had a very complex set of payment terms. I think we had 60 of them. And we’ve simplified that down to a mere half a dozen. And something we’ve been working on for a long period of time. You know we’re very cash conscious. We launched a program nearly nine, 12 months ago and that was called the Cash Marathon which was making sure that we utilized our cash. And that cash was utilized by us. So you can see that our inventory levels are way down below last year. Our whole payables are much more simplified from where they’ve been. And so there’s always a bit of volatility in those numbers, but it’s a pretty good proxy for what we expect we can afford.

Michael Van Aelst - T. D. Newcrest

And just finally, can you give us an update on what the performance of the No Frills are like out in western Canada?

Allan L. Leighton

Very strong.

Operator

Your next question comes from Keith Howlett - Desjardins Securities.

Keith Howlett - Desjardins Securities

On the store rationalization or SKU rationalization, is that exclusively in general merchandise or is there some reduction on the foods side?

Allan L. Leighton

Well, there are two things Keith. The number one thing is, you know, that SKU rationalization to me is something you do every day. You know there’s an oxymoron that says retail ranges only go one way, which is they increase. And the best way to manage retail ranges is you edit them. So for me this whole thing about SKU rationalization and how we manage SKUs is something that you know the business has to learn to do on a day-to-day basis.

To the second point is in some of the, I think what we’ve really tried to do is tailor the right range and the right SKUs for the right banners. And you’ll see more of the tailoring and less of the sort of general, you know, all these SKUs go in all of these banners, and that is something that we’ll sort of continue to build on.

Keith Howlett - Desjardins Securities

And on the general merchandise side of the business, are you pretty much where you want to be or how far along in the process are you?

Allan L. Leighton

I don’t think we’re halfway yet. And that’s not just the SKU rationalization. You know in all of the stores that we touch, we basically reduce what I describe the core GM space. We’re giving slightly more space to grocery. We’re giving more space to Joe, which is doing very well. And we’re also giving more space to [habit] and pharmacy within all of that. So you know I think that you’re really talking about 500 stores where it really will make a difference, and we’re probably less than a third of the way through those.

Keith Howlett - Desjardins Securities

Recently I’ve noticed in some of the real Canadian superstores you’ve reduced the sort of staff levels in floral and I think removed cosmeticians out of the beauty area. Are these tests or is this a broad sort of modification of the service level at those stores?

Allan L. Leighton

No. I mean it’s not. In some stores where we you know test them in and test them out, I think the thing about the superstore business is and the whole discount business is you know clearly that cost space is part of their competitive edge. And it’s very easy to ladle cost into those stores for some times which are peripheral product groups in terms of sales, in terms of real sales. And actually in recent weeks or recent months we’ve been adding into the stores because we think it’s a really important part of the build up to Christmas to make sure that you know the store conditions are, you know, better than they were last year. And that we’ve got plenty of people to get people through what we think will be a pretty busy time.

Operator

Your next question comes from Winston Lee - Credit Suisse.

Winston Lee - Credit Suisse

I just want to talk about the gross margin expansion a little bit more. So I know that it’s coming down in the quarter and you guys have indicated basically inflation has, you know, really accelerated downwards. And so what I’m wondering is how much of the gross margin benefit do you think is sustainable, excluding inflation? If there’s a way that you can sort of help us to think.

Allan L. Leighton

Yes, think about it this way, so I mean [personal] inflation, this is really important, it sort of disappears I think is the way I would describe it, and if anything you know it’s going to stay that way for a period of time is our view of it. And that’s an important thing just to get in your head. In terms of the gross profit, which you must remember in that calculation it isn’t just the gross margin, but actually shrink has the transport piece of our supply chain cost and that’s just the way the calculation is. If you look at our gross margin I think it’s up 0.8 year on year. But if you look at it on the quarter, it’s actually down about 0.3. And as I say, just to give you all some direction and I’ll repeat it for that point, is that that’s a blended number over four periods, and wouldn’t be a proxy for where we ended up.

So a big part of the gross profit improvement is clearly benefits of our centralized buying and our vendor management, but also the success in the supply chain of transport which has two elements to it. One is as I told you is the fuel piece of that, which will either, you know, depending on whether the fuel will either stay or go away. But the more concrete part of that is just that we’ve become much more efficient in managing our 30,000 trucks that we have on the road every day. And you know there’s a big cost and therefore big benefits. So you know some of that gross profit will go because it’ll get invested into price. Clearly we try and make up some of that. Clearly the transportation piece, which is to do with the supply chain and as I say I’m very confident we’ll not just sustain but grow, but any element of that to do with fuel you know is volatile as all commodities are.

Winston Lee - Credit Suisse

When you look at the programs that really kind of took off in the second half of the quarter, can you talk about if there was a notable volume difference for you?

Allan L. Leighton

Again, without being specific, because we never are, you know I think I indicated in my sort of opening remarks that the performance as we exited the quarter in terms of both our volume and our volume market share was better than it was than when we entered it.

Winston Lee - Credit Suisse

And the SG&A, again X the increments like [tea] costs, you know look like and I think it was pointed out earlier that it was flat as a ratio of sales. And so I wondered if there was kind of some upside from or sorry if there was further upside to that, or should we expect that you’re going to have increasing labor costs into the next year that will kind of keep that relatively flat? Or how should we think about that?

Allan L. Leighton

My sense of it is that, you know, clearly as you enter next year you’ll get some wage inflation, which you always get, and no inflation to compensate for the wage inflation, which is way inflation is always the retailers friend. And I think in the costs that are to do with the supply chain, and our admin costs, as I say I think we’re in a good place. And there is certainly opportunity for some improvement, as and when the system comes in. You know, I wouldn’t want to give you any other steerage apart from that.

Operator

Your next question comes from Perry Caicco - CIBC World Markets.

Perry Caicco - CIBC World Markets

I just want to delve a little bit more into store labor, if I could. I mean as your revenues, you know, suffered a bit over last quarter, I’m assuming you’ve had to make some ongoing decisions about some variable costs in the business. I guess most notably would be store labor. So I guess just sort of understanding that, you know, the impact, the changes in labor levels you know have on things like customer service and [inaudible], how do you over the fourth quarter intend to balance between, you know, sort of a pessimistic sales outlook and the need to really service the business coming into Christmas?

Allan L. Leighton

Okay, Dalton’s answering the first part of that, Perry. Okay?

Dalton T. Philips

Well, Perry, you know we’ve been at this now for a while in terms of putting in processes into the business so it can improve the productivity. So in the quarter, to give you an idea, our store productivity was up 2.5%. So that’s what’s really helping. And you can see that in the front end where our items are scanning right now up 3.5% on last year, so that’s a strong improvement. And in grocery, our productivity’s up nearly 5.5%, up on last year. And what that really means is that with a more efficient supply chain, as Allan talked about, you’ve got trucks coming in on time, you’ve got teams there when they need to be there to unload the trucks. We’ve got pallets that are better configured. We can get that freight up onto the shelves more effectively than we did last year. So you’ve got 2.5% productivity improvement, which you know is helping on this one.

Allan L. Leighton

So Perry, I think the answer is that’s why productivity and that’s why this building inclusion improvement in the supply chain and I’m really encouraged with how we manage the process through the stores is a big part of that, because as you know we’re still relatively inefficient in that because it’s not an end to end process.

The second thing you’ll want to point though is that we will not allow, we won’t bring down our wages as a cost to service. And you’re right to raise that point, because that does put a bit of pressure on the business. And so productivity will go a long way, but it may not be sufficient to cover everything that we need because as you know if you’ve got a bit of inflation on the top line it did not help that particular metric.

Perry Caicco - CIBC World Markets

And an unrelated question, you’ve launched No Frills in Atlantic, Canada, now and I’m just wondering what your plans are for No Frills in that market? And you know similar to the west, will No Frills be you know a replacement program for existing stores or do you plan to build out some new units?

Allan L. Leighton

Well, we haven’t said yet because as you know it’s been very good and turned out pretty quickly. We want to have a look see what that does. But if we do, I think you’ll just have to wait and see what happens. But it’s not just a one off, just let’s stick one in the ground for the hell of it. It’s to see how these things work. And if they work, then we may get behind it aggressively. If they don’t, we won’t.

Perry Caicco - CIBC World Markets

In the west, No Frills is obviously a sort of a replacement program for Extra Foods. I’m just wondering if you’re looking at the east in the same vein.

Allan L. Leighton

Not necessarily. And remember, Perry, as you know in the west it is a conversion program, but our intention is to build ten new ones. And I think we’ve done two already. And the plan is to finish the rest off probably by quarter three of next year. The most interesting thing for us in the west about No Frills is one, how it’s been received and secondly, how many real estate people are contacting us about sites for No Frills in urban areas, which is something that’s really come out of the success of that. And we’ve opened one in downtown Vancouver, which is you know people have seen and quite liked the idea of.

So we see the opportunity for No Frills in the west to be a bigger one than we initially thought.

Operator

Your next question comes from Patricia Baker - Scotia Capital.

Patricia Baker - Scotia Capital

Two things we haven’t talked about, Allan, are traffic and the consumer. Can you talk to us about what traffic trends were like through the quarter and maybe even exiting the quarter? And also, with respect to the consumer, are we still seeing some trade-down behavior? Are they changing the way they shop, what they shop for? What’s your read on the consumer going forward?

Allan L. Leighton

On the latter part first, Patricia, it can achieve as much as they’ve been, now. It’s pretty settled into you know where it’s been probably for the last quarter and a bit. As far as item count, persons number and basket, actually our customer numbers would be up, year on year on the quarter. Our basket size is actually up year on year on the quarter. And our customer count, item count, where it was before, really down a tad.

Patricia Baker - Scotia Capital

So you’re not going to be like Dalton and give us little percent numbers, right?

Allan L. Leighton

No.

Patricia Baker - Scotia Capital

Just going back on the related to that, but going back what you said earlier about exiting the quarter with volume increasing and your volume market share up, so that would be indicative of Loblaw actually gaining share in the market because there’s a lot of chatter about Loblaw actually losing market share. And then secondly, with respect to that volume improvement and market share improvement, looking sort of at attribution, how would you assign you know cause and effect with respect to the renos and the pricing in delivering that result for you?

Allan L. Leighton

Well the cause and effect is always a combination of the two. And because we’ve done some renos where there’s been no pricing, so it’s a combination of the two things.

Patricia Baker - Scotia Capital

I understand that’s a combination but you probably have some sense of which is the greater contributor. Is it the pricing?

Allan L. Leighton

Not necessarily. I mean you know a past example, we renovated Bayview North and not adjusted the price in any way, shape or form and it’s been a tremendous performance. So it is very much depending on you know both banner and site. And you know the idea is that both of them have an impact and it’s a combination of the two that are more potent than one in isolation.

As far as the market share is concerned, you know the direction we’ve given I think is all the direction that we can give. We don’t really talk about market share. I tried to give everybody a bit more indication than normal because of the contrast between the beginning and the end, not just on market share but also in terms of inflation and all sorts of other things in the quarter. So I’m afraid, Patricia, you’ll have to work with what we’ve said so far.

Patricia Baker - Scotia Capital

No, I certainly understand that, but maybe I’m completely missing something because it seems pretty simplistic to me that if you say your volume market share is up, then you’re likely gaining share.

Allan L. Leighton

No. What I said was actually that when we entered the quarter, our volumes were under pressure. I said when we exited the quarter that our volumes were on the upward trend and our volume market share was on the upwards trend.

Operator

Your next question comes from Jim Durran - National Bank Financial.

Jim Durran - National Bank Financial

My question’s been asked. Thank you.

Operator

There are currently no further questions in the phone queue. Please continue.

Inge Vandenberg

Okay. Well, this is Inge Vandenberg just wrapping up the call. Thanks very much for your interest in Loblaw Companies and we’ll speak with you on our fourth quarter call in February.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thanks for participating. Please disconnect your lines.

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Source: Loblaw Companies Limited Q3 2009 Earnings Call Transcript
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