LOBLAW COMPANIES LTD. $35 (Toronto symbol L; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 281.4 million; Market cap: $9.8 billion; Price-to-sales ratio: 0.3; Dividend yield: 2.4%; TSINetwork Rating: Above Average; www.loblaw.ca) is Canada’s largest food retailer. George Weston Ltd. (Toronto symbol WN) owns 64% of the company’s shares.
Loblaw continues to make progress with its multi-year plan to streamline its supply chain and avoid product shortages. These actions mainly included closing 11 distribution centres and opening eight new ones, and installing new computer systems. The company claims that about 99% of its products are now in stock at its 1,000 supermarkets across Canada.
Big restructuring starting to pay off
In all, Loblaw has spent $1.4 billion on this restructuring since 2007. Partly because of these changes, sales crept up by 6.4%, from $29.4 billion in 2007 to $31.3 billion in 2011.
Earnings rose 128.9%, from $336 million in 2007 to $769 million in 2011. Earnings per share rose at a slower pace of 122.0%, from $1.23 to $2.73, on more shares outstanding. Without unusual items, Loblaw’s per-share earnings would have risen 14.6%, from $2.54 in 2010 to $2.91 in 2011.
Loblaw is also working on new ways to spur its long-term growth. For example, it continues to expand its Joe Fresh apparel line, which is now sold in 300 of Loblaw’s stores, up from 40 five years earlier.
The company has also opened 12 stand-alone Joe Fresh stores in Canada and five in the U.S. In 2012, Loblaw plans to open 13 more Joe Fresh stores (eight in Canada plus five in the U.S.) These new stores will help Loblaw compete with U.S.-based discount retailer Target, which plans to expand to Canada in 2013.
New loyalty plan should spur traffic
Loblaw also aims to improve its current loyalty program, which gives users of its President’s Choice MasterCard a discount on their groceries. Even though applications for new cards rose 50% in 2011, financial services account for just 2% of Loblaw’s overall revenue.
A better loyalty program would also give Loblaw more insight into its customers’ spending habits. The company could use this information to offer better rewards, which would encourage customers to spend more.
Sound balance sheet a plus
Loblaw’s strong balance sheet will let it continue to invest in its stores and warehouses. Its long-term debt of $5.5 billion is a high, but manageable, 56% of its market cap. It also holds cash of $1.7 billion, or $6.11 a share.
Investments in new computers and stores will probably limit Loblaw’s 2012 earnings to $2.68 a share. The stock trades at 13.1 times that figure. That’s a low p/e ratio in light of Loblaw’s market share and strong brands like President’s Choice.
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