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Loblaw goes global with Joe Fresh stores

Grocery giant Loblaw Companies Ltd. (TSX:L) is bringing its Joe Fresh discount clothing line overseas in a major expansion that will target fashionistas in key growth markets like the Middle East and North Africa.

The company said Thursday that the rollout includes the addition of up to 141 Joe Fresh stores in 23 countries, including South Korea and eastern Europe over the next four years.

"This is representative of what has been a long-standing belief on our part that there is an international level of opportunity for the Joe Fresh brand," said Galen G. Weston, the company's executive chairman.

Currently, Loblaw sells the apparel brand at more than 300 locations inside its Canadian supermarkets, and in 12 stand-alone and studio stores. It also has six locations in New York and New Jersey.

The clothing line is already available in J.C. Penney stores in the U.S., but Weston said the deal hasn't gone according to plan due to restructuring and leadership changes at the struggling U.S. retailer.

"It obviously hasn't gone like we hoped that it would," he said. "But we are comfortable they are committed to some lower volumes but to a sustained relationship with Joe Fresh so we continue to be optimistic about that."

Last year, tragedy overshadowed the clothing brand after a factory in Dhaka, Bangladesh, that produced Joe Fresh clothing collapsed, killing 1,100 people. Loblaw responded to the accident by providing financial compensation for workers and dependents of the company who made the clothing.

Meanwhile, Loblaw president Vicente Trius said Loblaw will also be expanding its e-commerce platform this year by running a test pilot on a "click-and-collect" option for groceries at three of its Toronto locations.

This online strategy, which has been gaining popularity in the U.K., will allow customers to purchase food online and pick up their order at the store.

On Thursday, shares in Loblaw rose nearly five per cent, or $2.01, to close at $44.29 on the Toronto Stock Exchange after it reported better fourth-quarter financial results than analysts were expecting.

The company had $183 million or 65 cents per share of adjusted net earnings in the quarter, down 1.1 per cent from a year earlier but 10 cents above the general estimate. Revenue was up 2.3 per cent to $7.64 billion, also better than expected.

Same-store sales, an important measure in the retail industry, edged up 0.6 per cent compared with a year earlier.

Trius said it was important to note that same-store sales, from locations open at least a year, benefited from the timing of the Thanksgiving holiday but were hurt by an ice storm in Eastern Canada and a strike in Alberta.

Analysts had estimated 55 cents of adjusted earnings and less than $7.6 billion of revenue in the fourth quarter, according to Thomson Reuters.

Among the fastest growing sources of revenue for Loblaw was its Presidents Choice financial services segment, which contributed $204 million in the quarter, up 15.9 per cent from a year earlier. Since launching its PC Plus program In November, the company said it has signed up more than four million users.

"Customers appear to value the targeted promotions, and PC Plus customers shop with more frequency, purchase greater volumes and deliver higher margins," observed Irene Nattel, an analyst with RBC Dominion Securities Inc. in a note.

Meanwhile, Loblaw's newly spun off Choice Properties real estate trust (TSX:CHP) contributed $165 million of revenue to the parent company in the fourth quarter.

The main retail segment, which operates under several grocery banners and Joe Fresh, had $7.41 billion of sales, up 1.8 per cent or $130 million from $7.29 billion.

The grocery retailer's net income — which isn't as closely tracked by analysts — was $127 million or 45 cents per share, down 8.6 per cent from $139 million a year earlier, primarily because of higher interest expenses and other financing charges.

Like other Canadian retailers, Loblaw is facing intense competition from its domestic and foreign rivals — including Sobeys, Metro (TSX:MRU), Walmart and the newcomer Target, which entered the market about a year ago.

Trius said Loblaw expects the environment will remain intense throughout 2014, with some easing in the second half of the year. To stay competitive, it plans on continuing to expand its "fresh" foods offering through assortment, merchandising and sourcing in efforts to drive customer traffic.

The fresh category — green, organic and mostly produce — generates higher margins than other food categories.

But the grocer also warned that a high U.S. dollar this year may soon mean higher prices on items sourced south of the border, including produce and meat.

Meanwhile, Loblaw said it will also bring a new addition to its supermarkets: fresh juice bars. It said 100 of its supermarkets in Ontario, Atlantic Canada and Quebec will have these stations beginning in the spring.

The fruit bars, which will offer more than 30 different menu options, will fit in with the grocer's fresh food push, and also be a cost-effective way for it to use fruit from its markets, said Trius.

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