The 2018 acquisition of a drug store chain seems likely to pay off for this Canadian supermarket giant.
While an acquisition of this size carries risk, a similar deal has worked well for the company’s rival, Loblaw, with its takeover of Shoppers Drug Mart. And drug store operations helped boost this company’s revenue and earnings in the most recent quarter. In the meantime, it is taking steps to defend its profit margins against rising labour costs, including the expansion of e-commerce operations. It also increased its dividend this year.
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METRO INC. (Toronto symbol MRU; www.metro.ca) operates over 600 grocery stores and 650 drugstores, mainly in Quebec and Ontario.
On May 11, 2018, the company completed its acquisition of Jean Coutu Group. It operates 418 franchised drugstores in Quebec, New Brunswick and Ontario. Metro paid $4.5 billion (75% in cash, 25% in shares).
If you exclude costs related to that acquisition and other unusual items, Metro earned $183.4 million in its fiscal 2018 third quarter, ended July 7, 2018. That’s up 11.1% from $165.1 million a year earlier. Due to the additional shares outstanding, earnings per share gained just 7.1%, to $0.75 from $0.70. That matches the consensus estimate.
Overall sales rose 13.8%, to $4.63 billion from $4.07 billion. The new Jean Coutu operations contributed $476.0 million to the latest total. If you disregard the new operations, sales rose 2.4%.
Food same-store sales improved 2.0%. Higher prices accounted for a quarter of that gain. Same-store sales at the pharmacies rose 1.8%, reflecting a 0.4% increase in sales of prescription drugs and 3.8% improvement in sales of other merchandise.
Metro ended the quarter with long-term debt of $2.9 billion, up from $1.4 billion as of September 30, 2017. Even so, that’s still a reasonable 31% of its $9.4 billion market cap. The company also held cash of $119.7 million.
Blue Chip Stocks: Company takes steps to defend profit margins against rising labour costs
Rising minimum wages in Ontario and Quebec, as well as strong competition from U.S.-based chains, such as Walmart and Costco, could squeeze Metro’s profit margins.
However, the company plans to offset higher labour costs by cutting back store hours and installing more self-checkout kiosks.
Metro also continues to expand its e-commerce operations. In 2017 it paid an undisclosed sum for 70% of Montreal-based MissFresh Inc. That private firm lets customers buy ready-to-cook meal kits through its website. It then delivers them to their homes. Customers can also pick up their orders at 34 Metro stores in the Montreal area.
With the March 2018 payment, Metro raised its quarterly dividend by 10.8%. Investors now receive $0.18 a share instead of $0.1625. The new annual rate of $0.72 yields 1.8%. The company’s dividend has grown an average of 16.7% annually over the last 5 years.
Including Jean Coutu, Metro will probably earn $2.91 a share for all of fiscal 2018. The stock trades at 13.8 times that estimate.
Recommendation in The Successful Investor: Metro is a buy.
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Jean Coutu is one of the parties being sued in the OxyContin issue. How does this impact Metro?
Shashi
Thanks for your question. We’ll take a look at the issue you raise in our next update for subscribers on Metro Inc.