George Weston to focus on growing gluten-free sector, reports Q2 loss of $208M

W. Galen Weston, Executive Chairman of grocery giant George Weston Ltd., speaks during the company's annual general meeting in Toronto on Thursday, May 9, 2013. (Nathan Denette / THE CANADIAN PRESS)

TORONTO -- George Weston Ltd. is placing its bets on gluten-free baked goods as a way to lure in more customers in a heated Canadian grocery market, amid a second-quarter loss that was impacted by the acquisition of Shoppers Drug Mart by its subsidiary, Loblaws Companies Ltd. (TSX:L).

Pavi Binning, the head of the country's largest food processor and distributor, said the company knows it needs to quickly adapt to changing customer preferences if it wants to succeed.

"Innovation is critical in this business," he told a call with financial analysts on Tuesday after the release of the company's latest earnings.

"As you've heard me say in the past, the old tools that we used to drive value -- pricing and productivity -- are now much harder to achieve. Growth is critical. We are investing in the business, both in terms of marketing, in terms of capability and in terms of innovation," Binning said.

Increasing its gluten-free products would appeal to those who are sensitive to gluten, a protein composite found in wheat, barley and rye. The company also wants to increase its focus on its Ace Bakery breads, along with cakes, doughnuts and pies as it competes with Sobey's (TSX:EMP.A), Metro Inc. (TSX:MRU) and Costco as well as U.S. banners Wal-Mart and Target for consumers' loyalty.

George Weston (TSX:WN) said the quarterly loss included the results of Shoppers Drug Mart Corp, which was acquired by Loblaws Companies Ltd. earlier this year for $12.4 billion, for the full quarter and related accounting adjustments.

Other factors impacting the company were increased competition, higher commodities and lower volumes from its fresh baked goods business. It was also hurt by higher-than-expected startup costs at a recently-opened baking facility it opened in Toronto, which required the hiring of new staff and the installation of equipment.

Binning said the latest results were "disappointing and more challenging" than the company had previously forecasted.

George Weston (TSX:WN) said the loss amounted to $208 million, or $1.71 per share, for the three-month period ended June 14, compared with a profit of $97 million, or 68 cents per share, in the same quarter last year. The company said its adjusted earnings per share were $1.26 compared with $1.08 year-over-year.

Irene Nattel, an analyst with RBC Dominion Securities Inc., said despite the challenging environment, George Weston is on track to restoring profits.

"In our view, the key take-away from the WN conference call is that notwithstanding the challenging environment, WN Foods remains focused on restoring growth," she wrote in a note.

"Looking ahead, management made it very clear that Q3 will be another challenging quarter for WN Foods, but we should see improving trends in Q4 and into 2015 as comps and commodity prices ease, and as start-up losses at the new Toronto bakery moderate."

Total sales were $10.59 billion compared with $7.52 billion year-over-year. Loblaw sales were up 37.1 per cent to $10.307 billion from $7.52 billion in the same quarter last year and included $2.609 billion related to Shoppers Drug Mart. Excluding Shoppers, retail sales increased by 1.6 per cent and same-store sales growth was 1.8 per cent. Weston Food sales were $431 million, up 4.4 per cent from $413 million year-over-year.

The merging of Loblaw, Canada's largest grocery chain, with the country's largest drugstore chain, is an example of the type of innovation the company wants to see, said executive chairman W. Galen Weston.

"The increased scale and competitive positioning of the company within the Canadian market as well as the opportunities to realize significant synergies position us extremely well to meet both the changing needs of Canadian consumers and to create long term value for shareholders," he said in a statement.

In addition to a 46 per cent stake in Loblaw, the company, majority owned by the Weston family, operates a number of fresh and frozen baked goods banners including Wonder Bread, Country Harvest and D'Italiano brands, along with Girl Scout cookies in the U.S.