Loblaw continues to improve its earnings since acquiring Shoppers Drug Mart in 2014. That’s partly because it combined purchasing and marketing for the two companies but also because it is closing 52 less-profitable stores this year.
LOBLAW COMPANIES LTD. (Toronto symbol L; www.loblaw.ca) purchased the Shoppers Drug Mart chain in March 2014 for $12.3 billion in cash and shares. The company now operates over 1,100 supermarkets and 1,300 drug stores across Canada.
Thanks to its purchase of Shoppers, Loblaw’s sales have jumped 45.3%, from $31.3 billion in 2011 to $45.4 billion in 2015.
Earnings fell 13.9%, from $2.88 a share (or a total of $811 million) in 2011 to $2.48 a share (or $696 million) in 2013. With the addition of Shoppers, earnings rose to $3.06 a share (or $1.2 billion) in 2014 and $3.46 a share (or $1.4 billion) in 2015.
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A big part of Loblaw’s improved earnings comes from eliminating overlapping activities with Shoppers, such as purchasing and marketing.
In 2015, these savings cut the company’s annual expenses by $242 million. Loblaw expects to save $300 million annually by the end of 2016.
Separately, Loblaw recently closed 33 less profitable stores, and plans to shut down 19 more in the next few months. The closures should add $35 million to $40 million onto its annual gross profits.
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These savings give Loblaw more cash to pay down the funds it borrowed to buy Shoppers. At the end of 2015, the company’s long-term debt was $10.0 billion (or 34% of its market cap). That’s down 9.3% from $11.0 billion a year earlier.
The company also holds cash of $1.1 billion. That will support its plan to buy back more of its shares—it spent $280 million on share repurchases in 2015. It expects to buy back as much as $1 billion of its shares in 2016.
Loblaw has also raised its dividend each year since 2011, and will likely do so again in 2016. The current annual rate of $1.00 a share yields 1.4%.
In addition to cutting costs, Loblaw aims to spur its long-term growth with several new initiatives. For example, Shoppers is building a call centre that will employ doctors to contact patients who do not renew their prescriptions. Shoppers will also expand the availability of fresh foods at some of its stores in urban areas.
In addition, Loblaw is expanding its click-and-collect program after a successful trial. This service lets customers order groceries online and pick them up at a nearby store.
The stock has gained over 50% since the Shoppers purchase. It now trades at 18.2 times the $3.91 a share that Loblaw will probably earn in 2016. That’s a reasonable multiple in light of its high market share and strong brands.
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