Upgrading its stores and opening new ones helped Metro Inc. increase its earnings in the latest quarter, despite lower food prices.
METRO INC. (Toronto symbol MRU; www.metro.ca) operates 600 grocery stores and 250 drugstores, in Quebec and Ontario.
The company faces strong competition from bigger grocery chains like Loblaw and Sobeys, as well as Wal-Mart, which is expanding its Canadian food operations. In response, Metro has invested heavily in new stores and renovating existing locations. It has also focused on improving customer service and the quality of its private label products.
In addition, Metro is using acquisitions to boost its market share. These include its 2014 purchase of a 75% stake in bakery Première Moisson. That firm has 24 stores and three plants in Quebec. The company paid $101.6 million for this stake.
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Metro’s sales rose 5.5%, from $11.1 billion in 2011 to $11.7 billion in 2012 (fiscal years end September 30). Sales then fell to $11.4 billion in 2013, but rebounded to $11.6 billion in 2014 and to $12.2 billion in 2015.
Earnings jumped 31.3%, from $398.8 million in 2011 to $523.6 million in 2015. Due to fewer shares outstanding, earnings per share rose at a faster rate of 58.6%, from $1.28 to $2.03.
In the three months ended July 2, 2016, Metro’s sales rose 4.5%, to $4.0 billion from $3.8 billion a year earlier. Same-store sales improved 3.9%. Higher volumes helped offset lower food prices.
Earnings in the quarter rose 8.0%, to $176.5 million from $163.5 million; per-share earnings gained 12.5%, to $0.72 from $0.64, on fewer shares outstanding.
Metro also continues to benefit from its 5.7% stake in Alimentation Couche-Tard (Toronto symbol ATD.B). In the latest quarter, earnings from this investment jumped 78.2%, to $15.5 million from $8.7 million a year ago. (Couche-Tard, which operates convenience stores in North America and Europe, is a recommendation of Stock Pickers Digest, our newsletter that focuses on aggressive investing.)
Metro should generate cash flow of $730 million in fiscal 2016. That easily covers the $200 million it will likely spend on new stores and upgrades. The company will also have plenty of cash left over for share repurchases (about $350 million) and dividends ($125 million). The current annual dividend of $0.56 a share yields 1.3%.
The stock has gained 25% in the past year. It now trades at 18.1 times the $2.37 a share that Metro should earn for all of fiscal 2016. That’s a reasonable p/e in light of its steady earnings and potential to expand in other parts of Canada. Recommendation in The Successful Investor: BUY
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I liked shopping in the stores, so I bought the stock a few years back. Still a good pick at current prices.
I’m thinking about paring back to just one grocer stock in my portfolio in order to maintain a sector balance. This helps. Loblaws is my alternative.