The decision by Loblaw Companies Limited to chop 700 jobs from the payroll in administration and at head office in Brampton on Tuesday was met with mixed reviews from analysts and investors.
After the announcement, shares rose 84 cents and closed at $34.72.
Loblaw has been upgrading its supply chain technology and infrastructure and while the job cuts may reflect greater efficiencies, Perry Caicco, managing director, CIBC World Markets, warned investors against applying the savings directly to the company’s bottom line.
“Notwithstanding that these job cuts probably reflect a demand from the parent company to generate some return on the outsized capital spending on
systems, it is highly unlikely that these actions will directly boost earnings,” wrote Caicco in a note to investors on Tuesday.
“The recent history of the company suggests that some of these job cuts will
be replaced by equally expensive outsourcing, and that the company will
struggle to re-assign eliminated roles in a productive fashion. In other words,
we believe the risk of poor head office execution and service to stores will be high for at least 12 months.”
Caicco said some portion of the cuts will likely reduce expenses, a necessity in light of the surge in growth in the grocery sector in Canada.
Walmart is in the midst of adding 4.6-million square feet of retail space to operations in Canada by the end of January 2013. More than half of the projects will involve supercentres providing a full range of groceries. Target will be selling groceries in stores opening in Canada next spring.
The family-owned Longo’s is also expanding in carefully selected prime locations in the GTA.
Loblaw Companies Limited is Canada’s largest food retailer, with more than 1,000 corporate and franchised stores, including Loblaws, Zehrs, T&T, Fortinos, Provigo, No Frills and the Real Canadian Superstore. The company employs about 138,000 full- and part-time workers.
In the past 12 months, Loblaws has opened 14 new stores across Canada, creating 2,000 new jobs.
The investment in infrastructure at Loblaw – trimming 250 separate systems down to something manageable – began in 2009.
“It’s a huge job, particularly when you’ve got to keep the old systems running to keep doing business. It’s like changing the engine on a car while the engine is still running,” said retail analyst Ed Strapagiel.
“This year, 2012, is when most of their system conversion takes place. There will likely be teething pains, so add a few months to work the bugs out. I think most professional stock analysts understand this. I think they think Loblaw is doing the right thing, but they would prefer to see it go faster.”
Kenric Tyghe, an analyst with Raymond James Securities told Bloomberg news he viewed the move positively.
“With their new systems capabilities, certain HR requirements are now redundant and hence the job cuts,” he said.
Vicente Trius, president, Loblaw Companies Ltd., broke the news to employees this morning, according to Loblaw spokesperson Julija Hunter.
The changes will take effect starting Tuesday and should be complete within three weeks. The company expects to take a one-time estimated $60 million charge in the fourth quarter as a result.
“We feel really confident in our direction,” Hunter said, adding that the job reductions will make the company more competitive, eliminate duplications and allow the firm to focus more on the customer experience.
“We’re managing costs where it makes sense.”
The transition will not be fully in place until the end of 2014.
Loblaw is a subsidiary of George Weston Ltd., which is sitting on $3.6-billion in cash. A spokesman for George Weston Ltd. said in September that the cash will be used in part to refresh its North American bakeries and Canadian Loblaw stores.
It’s also looking to make acquisitions.
Loblaw saw its profit drop 22 per cent in the first quarter of 2012. Second quarter net earnings per common share were 57 cents, down almost 19 per cent compared to the same period in 2011.
