Loblaws – Not consistent enough for my portfolio

L -Loblaws

Loblaw Companies is a leading food and pharmacy company in Canada. It is an omnichannel retailer with a growing online presence.

The company operates through a network of corporate and independent stores across the country. It offers a wide variety of grocery, health, and beauty products and operates more than 1,750 pharmacies across Canada. The company has become a leading household name in the country, which can be gauged from the fact that one billion visits are made each year to Loblaw stores. Loblaw operates through Market, Discount, PC Financial, Joe Fresh, and Shoppers Drug Mart divisions. 

Post the spin-out of Choice Properties, Loblaw has two operating segments namely Retail accounting for 97% of revenues, (consisting of retail food and drug stores, in-store pharmacies, and other health and beauty products, apparel and general merchandise) and Financial Services. Food retail is the larger business accounting for more than 70% of total retail revenues while drug retail constitutes the remaining 30%. Its brands such as President’s Choice, Life Brand, and No Name are three of Canada’s top 10 consumer brands.

Investment Data

Revenue Growth & Market Exposure

Loblaw Companies is a core retailer with strong competitive strengths. The company is conveniently located to reach out to Canadians easily. More than 2500 of its stores are located within 10 km of 90% Canadians. Its suite of products is also wide covering the entire value spectrum from discount to specialty. Over the years, the company has built a solid reputation, earned customer trust, and has developed deep customer relationships. It enjoys No.1 market share in prestige, derm, and mass beauty categories with 400+ beauty boutiques. As Canada’s largest food retailer by revenue, there are plenty of opportunities for Loblaw to diversify in its food segment and cross-sell its products. 

Loblaw is targeting growth through a focus on core retail, healthcare, and digital. The company launched the Everyday Digital Retail strategy and delivered over $1 billion dollars in revenue in 2019 – almost double that of the previous year through digital platforms. Loblaw also launched its first standalone online grocery pick-up location in the Greater Toronto Area. It saw progress in its Connected Healthcare strategy in 2019, through Medeo virtual care technology and  Accuro EMR platform. The company is favorably placed to leverage its position as a leading Canadian retailer since grocery stores and pharmacy businesses are both highly defensive in nature. 

 Loblaw’s sales were positively impacted towards the end of the quarter by COVID-19 given an increase in the purchase of essentials. The grocery stores saw a rise in traffic with sales growth of ~44%. Pharmacy sales also increased by 26% in the final two weeks. The demand for frozen and meat products skyrocketed while e-commerce traffic tripled. The company estimates that COVID-19 generated an incremental $751 million in revenue in the quarter. Online sales in apparel, beauty and pharmacy businesses also saw an uptick as customers chose to shop online. Loblaw benefitted from scaling its online capacity by enhancing technology. The company will continue to optimize store operations and e-commerce, and advance business strategies for future growth and keeping in mind social distancing and other safety control norms.

 Potential reductions in some discretionary spending categories like beauty and increased provisions for the potential credit losses might adversely affect future revenues. The company withdrew its FY2020 outlook.

Dividends

Loblaw Companies is a Canadian Dividend Aristocrat and last raised its dividend by 6.8%. The company sports a dividend yield of 1.9% and has compounded its dividend growth at 4.9% CAGR over the last five years. Moreover, a reasonable payout ratio of 41% grants room for future expansion. The company repurchased 2.8 million common shares at a total cost of $188 million in the quarter. The company had transferred its 62% interest in Choice Properties REIT to its parent company (George Weston Limited) through a reorganization. As a result, Loblaw shareholders who hold distributed George Weston shares are also entitled to a total 24% dividend increase. 

Loblaw has delivered strong EPS growth consistently and maintained stable growth in both retail and earnings margins. The company is strengthening its foothold in its core retail segment through strong investments and divestitures in this direction.

Loblaw is growing its online presence through various digital initiatives, as consumers become more tech-savvy today. The company is favorably placed to adapt in a dynamic and rapidly changing environment. Investment in digital platforms integrates Loblaw’s network of stores to offer a more convenient shopping experience in apparel, pharmacy, and healthcare. Loblaw Companies also has payments and rewards offering for its customers. Growing demand for food and medicines should act as a tailwind for this Dividend Aristocrat. A strong balance sheet and the ability to generate significant cash flow from operations should support future dividend growth.

Competition

Loblaw Companies is facing competition not only from the traditional brick and mortar stores but also from online players. Competition is also rising from e-commerce giants like Amazon.com getting into grocery delivery services. On the conventional front, Loblaw competes with Metro and Sobeys which are leading grocery and food retailers in Canada. A large Canadian footprint, a network of retail stores, a huge customer base and a large suite of products make Loblaw Companies the undisputed retail king in the Canadian market.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:ATD.BATD.BAlimentation Couche-Tard Inc.Consumer DefensiveGrocery Stores0.6245.8337.9616.3320.162.810.00610.610.099640.280.162385Consumable - NecessitiesYESYESYESNOCanada1
TSE:LLLoblawConsumer DefensiveGrocery Stores0.5169.1324.7325.2720.162.740.01821.820.459941.260.057946Consumable - NecessitiesNONOYESNOCanada1
TSE:WNWNGeorge Weston LimitedConsumer DefensiveGrocery Stores0.57103.4715.9012.6320.168.190.02032.030.256442.100.057847Consumable - NecessitiesNONOYESNOCanada1
TSE:MRUMRUMetroConsumer DefensiveGrocery Stores0.6058.3614.7220.2720.162.880.01541.540.312540.900.157775Consumable - NecessitiesYESYESYESNOCanada1
TSE:DOLDOLDollarama IncConsumer DefensiveDiscount Stores0.5047.2914.6827.3420.161.730.00370.370.101740.180.102374Consumable - DiscretionaryNONOYESNOCanada1
TSE:EMP.AEMP.AEmpire Co Ltd A NvtgConsumer DefensiveGrocery Stores0.5234.759.3516.1620.162.150.01501.500.241940.520.047247Consumable - NecessitiesNOYESYESNOCanada1
TSE:NWCNWCThe North West Company Inc.Consumer DefensiveGrocery Stores0.4429.811.4721.3720.161.390.04434.430.949641.320.044346Consumable - NecessitiesNONOYESNOCanada1

Bottom Line

Loblaws estimates continued volatility in its business as shopping behaviors and demand for different types of products and services continue to evolve. It also expects a drag on certain in-store categories, like beauty. Strength in Shoppers Drug Mart and share growth in grocery businesses act as tailwinds for the company. Diversified offerings in grocery, pharmacy, health and beauty, apparel, and general merchandise have made Loblaw the undisputed leader in the retail business. It is one of the strongest consumer defensive stocks and should hold good during times of uncertainty.

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DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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