TORONTO - Foreign exchanges losses and other charges led to a 97 per cent drop in second-quarter profit for food producer George Weston Ltd. (TSX:WN), despite a slight uptick in sales thanks to its stake in grocery chain Loblaw Co.

The Toronto-based baked goods maker and parent company of Loblaw (TSX:L) reported Friday a profit of $4 million for the quarter ended June 30, a sharp drop from net earnings of $118 million in the same period a year ago.

However, that translated to a loss of five cents per share, reversing a year-earlier profit of 84 per share, after deducting earnings attributable to preferred shareholders.

Four analysts polled by Thomson Reuters had expected, on average, earnings per share of 93 cents, with individual estimates ranging between 77 cents and $1.18.

While Loblaws continued to do well in the first half of the year, that likely won't be the case for the remainder of 2009, warned chairman and president Galen Weston.

"A concerning trend, however, for the second half of '09 for both segments is the softening volumes and the reversing inflation impact," he said in a conference call with analysts.

"These headwinds will reward the low-cost operators and we must be ever vigilant on cost management and continuous improvement."

"Unfavourable" economic conditions are expected to put pressure on both volume and margins for the rest of the year, the company said.

Second-quarter sales rose 2.2 per cent to $7.5 billion from year-earlier levels of $7.3 billion, buoyed by $7.2 billion in sales from Loblaw. That offset a 21.2 per cent drop in revenue to $395 million at Weston Foods, which makes fresh and frozen baked goods.

Last year's sale of the Neilson dairy business to cheese maker Saputo (TSX:SAP) for $465 million depressed sales in its foods division by 27.4 per cent, the company said.

While it hasn't seen any significant changes in consumption across its product lines, recession-rattled customers are switching to cheaper, private label products rather than choosing more expensive brands, it noted.

That trend could continue even as the economy improves, said Bob Gibson, head of equity research at Octagon Capital in Toronto.

"A lot of it depends on the product and how much the consumer perceives a differential between private label and branded," he said.

Quarterly earnings took a $90 million hit due to foreign exchanges losses related to the company's U.S.-denominated cash and short-term investments.

The company said it will continue to look at how it might use the cash and short-term investments generated from the sale of the dairy business in 2008 and its U.S. fresh bakery business last January.

But management isn't "feeling any pressure to rush off" and spend the cash on acquisitions at this time, said chief financial officer Bob Vaux.

However, it does want to build the company's U.S. business in the short term, Galen Weston added.

"There's lots of opportunities," he said. "It's a huge country, obviously, unlike the Canadian thing, there's always going to be things that we can do there that are complimentary to what we have already."

The company has $5 billion, but it may be "quite some time" before it makes any acquisitions, he said.

It's looking at businesses that it can improve at a reasonable price, Weston added.

"I think we've got a lot of feelers out there now ... (but) I think it's going to be perhaps quite some time," he said.

"There might be a couple of smaller ones or there might be something a little larger. But it's unlikely that we're going to blow our wad -- the $5 billion -- on anything from the standpoint of my sense of what's out there and what opportunities present themselves."

Last week, Loblaw announced it was wading into the ethnic food business with a $225-million acquisition of Asian food retailer T&T Supermarket Inc., which operates 17 stores in British Columbia, Alberta and Ontario.

Loblaw reported a 38 per cent increase in second-quarter profits, which amounted to $193 million or 70 cents per share.

But it warned that its earnings were largely cost and gross margin driven, a trend that likely won't continue given that inflation is expected to drop off, market volumes are in decline, competition is intensifying and the company was going to ramp up its store-improvement plan.

Shares in George Weston fell a penny Friday to $58.92 on the Toronto Stock Exchange.