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CN Rail hits record second-quarter revenues, waves off recession worries

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MONTREAL — Despite recession hurdles on the horizon, Canadian National Railway Co. says the tracks are clear for a smooth year after reporting record second-quarter revenues alongside profits that surged past expectations due largely to a spike in crude oil and container sales.

Net income jumped 28 per cent or $289 million to $1.33 billion in the quarter ended June 30 versus the same period last year, the Montreal-based company said Tuesday. Revenues rose 21 per cent or $746 million to $4.34 billion last quarter compared with a year earlier.

The country’s largest rail operator said the windfall stemmed from higher fuel surcharge and freight rates as well as larger coal and U.S. grain volumes.

But the latter spike did not fully offset the 40 per cent drop in shipments of Canadian grain — usually CN’s top-selling commodity, but far outpaced last quarter by oil and chemicals — which led to a decline in grain and fertilizer carloads.

“U.S. grain and coal continues to remain strong due to the unfortunate war in Ukraine and the sanctions on Russia,” CN chief marketing officer Doug MacDonald told analysts on a conference call. The coming crop year looks “normalized,” added chief operating officer Rob Reilly.

Meanwhile, revenue from petroleum and chemicals shot up 21 per cent to $829 million year over year amid soaring oil prices, while container shipment sales leaped 28 per cent to $1.32 billion — CN’s biggest earner by far. Oil and coal were the only commodities to see volume go up, however, even as revenue rose nearly across the board.

“We’ve seen over the years a lot of growth in the western corridor,” said CEO Tracy Robinson, who took the top spot on Feb. 28.

“But we’re also going to lean in to more fully utilizing the other parts of the network, densifying the eastern region and the southern regions. This will strengthen our business, our resilience. It’s going to drive stronger returns.”

CN pointed to Halifax as a port that can “replicate the success of the Prince Rupert model.” The company’s main rival, Canadian Pacific Railway Ltd., does not serve the East Coast transport hub.

MacDonald cited “significant opportunities” to shore up business there in the coming years, noting the port operates at only half its capacity for containers. That makes it well-positioned to take in more products from Southeast Asia amid a ramp-up in manufacturing there and severe congestion at ports on the west coast of the United States, he said.

Some analysts remain skeptical about CN’s buoyant view.

“We think little or no volume growth could be here to stay for CN, as rampant inflation and rising interest rates seem likely to dampen global goods demand over the next year,” CFRA Research analyst Colin Scarola told investors in a note.

Supply chain snarls remain a thorn in CN’s side, as warehouse bottlenecks caused by a lack of storage facilities and truckers slow the flow of import containers bound for Montreal and Toronto.

“The boxes would arrive in Montreal and Toronto and no one would pick them up because there wasn’t any place to take them,” MacDonald said.

“That has been backing up the terminals, which then backs up the ports, which backs up ships at the harbour.”

However, he said traffic flow has “dramatically improved” after CN set up new storage locations in Canada’s two biggest cities and worked to speed up processing times from shipping and short-haul delivery companies.

Robinson also waved off any suggestion that the federal government’s climate plan, which aims to reduce nitrous oxide emissions from fertilizers, would hurt CN’s income.

“We’ve got some pretty strong forecasts for fertilizers and grain as we look forward. It’s one of the unique benefits of the Canadian economy,” she said.

CN affirmed its earnings forecast of between 15 per cent and 20 per cent growth in adjusted diluted earnings per share for 2022, after lowering its outlook from a target of 20 per cent three months ago.

The company continues to target an operating ratio — a measure of the railway’s efficiency that divides operating expenses by net sales — of just under 60 per cent, compared to its more ambitious January goal of 57 per cent.

“We are not modelling any major service disruptions in the second half of the year, and our outlook does not assume an economic recession,” said chief financial officer Ghislaine Houle.

“That being said, we have a strong bulk franchise including grain, potash and coal that is less impacted by economic fluctuations, and a current backlog of lumber traffic.”

On an adjusted basis, diluted earnings shot up by 30 per cent to $1.93 per share from $1.49 per share in the second quarter of 2021. The figure topped analyst expectations of $1.75 per share, according to financial data firm Refinitiv.

This report by The Canadian Press was first published July 26, 2022.

Companies in this story: (TSX:CNR)

Christopher Reynolds, The Canadian Press

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The return of Zellers: Hudson’s Bay to resurrect Canadian discount retail chain

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Canadian department store Zellers hopes to make a comeback next year, a decade after the discount chain shuttered most of its locations.

Hudson’s Bay Co. said Zellers will debut a new e-commerce website and expand its brick-and-mortar footprint within select Hudson’s Bay department stores across the country in early 2023.

The company said the relaunched Zellers will offer “a digital-first shopping journey that taps into the nostalgia of the brand.”

The return of Zellers comes as soaring inflation drives consumers to discount retailers in search of lower prices and fierce competition from existing stores like Walmart and Dollarama.

It also comes amid an ongoing lawsuit over a Quebec family’s use of the Zellers brand.

The Moniz family is behind various recent trademark applications and corporate registries, including Zellers Inc., Zellers Convenience Store Inc. and Zellers Restaurant Inc.

In a statement of claim filed last fall, HBC accused the Moniz family of trademark infringement, depreciation of goodwill and so-called passing off — the deceptive marketing or misrepresentation of goods.

The Zellers department store was founded in 1931 and acquired by HBC in 1978.

It operated as the discount division of its flagship Hudson’s Bay department stores, with the slogan “Where the lowest price is the law.”

The store hit its peak of about 350 locations in the late 1990s before losing ground to big box competitors such as Walmart.

In 2011, HBC announced plans to sell the majority of its remaining Zellers leases to Target Corp., closing most stores by 2013.

The retailer kept a handful of Zellers locations open as liquidation outlets until 2020.

The company recently launched pop-up Zellers shops inside Hudson’s Bay department stores in Burlington, Ont., and in Anjou, Que.

This report by The Canadian Press was first published Aug. 17, 2022.

Brett Bundale, The Canadian Press

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Inflation “slows” to 7.6 per cent in July, Statistics Canada says

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Ottawa – Canada’s year-over-year inflation rate slowed to 7.6 per cent in July, with the deceleration largely driven by a decline in gas prices.

The inflation rate hit a nearly 40-year-high of 8.1 per cent in June, but economists were widely expecting inflation to have since slowed.

In its latest consumer price index report, Statistics Canada said the rise in prices in July was the smallest monthly gains since December 2021.

It also marks the first decline in year-over-year inflation since June 2020.

The federal agency said gas prices rose 35.6 per cent year-over-year in July, compared with 54.6 per cent in June.

“Ongoing concerns related to a slowing global economy, as well as increased COVID-19 pandemic public health restrictions in China and slowing demand for gasoline in the United States led to lower worldwide demand for crude oil, putting downward pressure on prices at the pump,” the report said.

But while gas prices declined, food prices at grocery stores rose at the fastest pace since August 1981, with prices up by 9.9 per cent on a year-over-year basis compared with 9.4 per cent the previous month.

Bakery goods are up 13.6 per cent since last year amid higher input costs as the Russian invasion of Ukraine continues to put upward pressure on wheat prices. The prices of other food products also rose faster, including eggs, which are up 15.8 per cent, and fresh fruit, up 11.7 per cent since last year.

As mortgage costs increase with higher interest rates, the report notes rent prices are accelerating, rising faster in July than the previous month.

With more Canadians travelling during the busy summer season, airfares rose by around 25 per cent in July compared with the previous month. Traveller accommodation prices rose by nearly 50 per cent since a year ago, with the largest price increases in Ontario.

As countries around the world struggle with skyrocketing prices, there are some signs inflation is beginning to ease, with the U.S. seeing its inflation rate decline in July as well.

Still, inflation is well above the Bank of Canada’s two per cent target.

The central bank is watching the latest reading of inflation as it gears up to make its next key interest rate on Sept. 7, when it’s expected to raise borrowing rates again.

This report by The Canadian Press was first published Aug. 16, 2022.

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