Weston profit slips as stores snub its frozen dough

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George Weston Ltd. has a fresh problem. The stores that buy its frozen dough to make bread are increasingly reheating partly baked or frozen bread, skipping the baking process and hitting the Toronto-based company's profits at the same time.

George Weston's adjusted net profit fell by 6 per cent to $1.38 a share in the third quarter, a decline president Pavi Binning blamed on the accelerating drop in sales of frozen dough at its Weston Foods division.

The company's Ace Bakery brand posted a double-digit sales increase in partly baked and frozen bread, but the gains weren't enough to offset the drop in frozen dough sales.

"We have a gradual trend with our retail customers focusing more on thaw-and-sell and par-baked products and less on frozen dough," Mr. Binning said on a conference call on Tuesday. "This trend is consistent with an in-store bakery market decline that is down 4 per cent on a year-to-date basis."

Tim Hortons and Starbucks are among the bigger food sellers serving so-called par-baked treats, which arrive flash-frozen after being fully or 80-per-cent baked before being finished off in the shops' ovens and sold.

George Weston does not reveal sales for the Ace Bakery or frozen dough lines, but spokesman Geoffrey Wilson said they are "significant" businesses.

Also weighing on the results were startup costs at Ace Bakery's South Carolina plants, the switch to gluten-free lines and a new bakery in Ontario.

The company said adjusted operating income fell by 4 per cent to $489-million for the three months ending Oct. 5. Sales rose by 2 per cent to $10.4-million.

The Weston Foods division, which makes Wonder and Country Harvest bread as well as D'Italiano buns, posted a 3-per-cent rise in sales to $562-million. Operating income fell by $28-million.

Looking ahead to the fourth quarter, George Weston said sales at the food division are expected grow moderately. Weston Foods' adjusted operating margins, however, are forecast to be about 15 per cent, compared with 17 per cent in the year-earlier fourth quarter.

George Weston owns 63 per cent of grocer Loblaw Cos. Ltd., which is buying Shoppers Drug Mart Corp. After that transaction, George Weston's Loblaw stake will fall to 46 per cent.

Loblaw last week said its quarterly profit fell by 29 per cent as it cut grocery prices amid competition from such U.S. retailers as Wal-Mart Stores Inc. and Target Corp.

"The third quarter of 2013 marked the completion of important milestones: the initial public offering of Choice Properties REIT, Shoppers Drug Mart shareholders voted in favour of the arrangement agreement and the financing required to close the acquisition was successfully completed," W. Galen Weston, executive chairman, said in a news release.

BMO Nesbitt Burns analyst Peter Sklar, who rates the company "market perform," recently cut his 12-month share-price target to $90, pointing to a lower forecast for Loblaw.

Credit Suisse analyst David Hartley rates George Weston shares "outperform," and says Weston Foods is a steady cash generator with little debt. He expects a turnaround at Loblaw and likes the Shoppers deal.