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 2,400 stores across Canada. Its supply chain includes 26 distribution centers across Canada.
The grocer 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.
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 (credit card services, insurance brokerage services, guaranteed investment certificates, and wireless mobile products and 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. Loblaw also has more than 18 million PC Optimum members and 3 million PC Financial Mastercard cardholders.
Key Investment Data
- Opportunity Score: 48
- Ticker: TSE:L
- Sector: Consumer Defensive
- Industry: Grocery Stores
- Market Cap: 28.93B
- P/E: 21.52
- Dividend Yield: 1.73%
- Payout Ratio (TTM): 33.30%
- Canadian Dividend Aristocrat: YES
- Chowder Score: Members Only
- Revenue Growth: Members Only
- Dividend Growth: Members Only
- Dividend Growth Fit: 5/10
- Dividend Income Fit: 6/10
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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 90% of Canadians live within 10 km of one of Loblaw’s locations. 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 the 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.
The company is targeting growth through a focus on core retail, healthcare, and digital. The company is benefiting from the Everyday Digital Retail strategy and is seeing progress in its Connected Healthcare strategy. In 2020, the company launched the PC Health app, a health and wellness app, designed to provide convenient access to healthcare resources and support to Canadians.
Loblaw also launched its first standalone online grocery pick-up location in the Greater Toronto Area. 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 by the COVID-19 pandemic in the latest quarter given an increase in the purchase of essentials. However, costs remained high. The grocery stores witnessed sales growth momentum in conventional, drug, and beauty market share over the course of the pandemic while higher-margin categories were negatively impacted. The retail segment sales increased by 7.5% YoY, entailing growth both in food retail and Shoppers’ Drug Mart.
The company’s e-commerce sales also increased by 160%. 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.
Dividends
Loblaw Companies is a Canadian Dividend Aristocrat paying quarterly dividends for the last five decades. It last raised its dividend by more than 6%. The company sports a dividend yield of more than 2% and has compounded its dividend growth at 6%+ CAGR over the last three years. Its earnings have also grown at ~7% CAGR over the three-year period. Moreover, a reasonable payout ratio of ~44% grants room for future expansion. Loblaw repurchased 5.5 million shares at a total cost of $350 million in the quarter. It invested $418 million in capital expenditures and generated $606 million of free cash flow.
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 also benefits from a strong parentage of the Weston Group.
Loblaw is growing its online presence through various digital initiatives, as consumers become more tech-savvy today. The company is favorably placed to adapt to 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 a payments and rewards offering for its customers. The 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.
| TickerKey | Ticker | Company | Sector | Industry | Score | Quote | Market Cap | P/E | FPE | EPS | Yield Raw | Yield | PayoutRatio | Payments | Dividend | Chowder | GrowthRating | IncomeRating | Tollbooth | Ambassador | Achiever | Aristocrat | King | Country | Graph |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| TSE:ATD.B | ATD.B | Alimentation Couche-Tard Inc. | Consumer Defensive | Grocery Stores | 0.71 | 50.29 | 54.04 | 16.50 | 16.50 | 3.12 | 0.0070 | 0.70 | 0.0990 | 4 | 0.35 | 0.2797 | 10 | 6 | Consumable - Necessities | YES | YES | YES | NO | Canada | 1 |
| TSE:L | L | Loblaw | Consumer Defensive | Grocery Stores | 0.48 | 84.40 | 28.93 | 21.52 | 21.52 | 5.04 | 0.0173 | 1.73 | 0.3330 | 4 | 1.46 | 0.0603 | 5 | 6 | Consumable - Necessities | NO | NO | YES | NO | Canada | 1 |
| TSE:WN | WN | George Weston Limited | Consumer Defensive | Grocery Stores | 0.34 | 129.38 | 19.66 | 73.06 | 73.06 | 7.75 | 0.0170 | 1.70 | 1.1930 | 4 | 2.20 | 0.0569 | 4 | 4 | Consumable - Necessities | NO | NO | YES | NO | Canada | 1 |
| TSE:DOL | DOL | Dollarama Inc | Consumer Defensive | Discount Stores | 0.46 | 58.75 | 17.90 | 30.99 | 30.99 | 1.90 | 0.0034 | 0.34 | 0.0960 | 4 | 0.20 | 0.0661 | 6 | 6 | Consumable - Discretionary | YES | YES | YES | NO | Canada | 1 |
| TSE:MRU | MRU | Metro | Consumer Defensive | Grocery Stores | 0.64 | 64.70 | 15.82 | 19.59 | 19.59 | 3.42 | 0.0155 | 1.55 | 0.2790 | 4 | 1.00 | 0.1432 | 8 | 6 | Consumable - Necessities | YES | YES | YES | NO | Canada | 1 |
| TSE:EMP.A | EMP.A | Empire Co Ltd A Nvtg | Consumer Defensive | Grocery Stores | 0.51 | 40.97 | 10.96 | 15.73 | 15.73 | 2.61 | 0.0146 | 1.46 | 0.1990 | 4 | 0.60 | 0.0686 | 5 | 6 | Consumable - Necessities | NO | YES | YES | NO | Canada | 1 |
| TSE:NWC | NWC | The North West Company Inc. | Consumer Defensive | Grocery Stores | 0.51 | 36.36 | 1.76 | 10.70 | 10.70 | 3.28 | 0.0396 | 3.96 | 0.4080 | 4 | 1.44 | 0.0396 | 4 | 7 | Consumable - Necessities | NO | NO | YES | NO | Canada | 1 |
Bottom Line
Loblaw 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. The company is working towards strengthening strategic growth areas of Everyday Digital Retail, Connected Healthcare Network, and Payments and Rewards.
Diversified offerings in grocery, pharmacy, health and beauty, apparel, and general merchandise have made Loblaw the undisputed leader in the retail business. The company has worked, over the last three years, to strengthen its customer proposition with an emphasis on fresh product quality and assortment, and competitive value. Loblaw has proved itself to be a market crash-proof investment so far.
