METRO INC. $53(Toronto symbol MRU; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 98.9 million; Market cap: $5.2 billion; Price-to-sales ratio: 0.5; Dividend yield: 1.6%; TSINetwork Rating: Average; www.metro.ca) is Canada’s third-largest supermarket operator, after Loblaw and Sobeys. The company has about 600 supermarkets in Quebec and Ontario. It also operates 260 drugstores under the Brunet, The Pharmacy and Drug Basics banners.
Metro’s sales rose 7.4%, from $10.6 billion in 2007 to $11.4 billion in 2011 (fiscal years end September 30). Earnings fell 5.0%, from $295.6 million in 2007 to $280.8 million in 2008. Metro is an aggressive buyer of its own shares. Because of fewer shares outstanding, per-share earnings fell 2.4%, from $2.54 to $2.48.
However, earnings turned around in 2009, rising 27.8%, to $359.0 million, or $3.23 share. That’s mainly because the company lowered its advertising costs by converting its various banners in Ontario to the Metro brand. Earnings continued to rise, and reached $400.6 million, or $3.87 a share, in 2011.
In its fiscal 2012 second quarter, which ended March 12, 2012, Metro’s sales rose 3.7%, to $2.65 billion from $2.56 billion a year earlier. Same-store sales rose 1.0%.
Metro’s October 2011 purchase of a 55% stake in Marché Adonis was the main reason for the higher overall sales. Marché Adonis sells Mediterraneanstyle foods through five stores in Quebec. It also distributes foods to other retailers through warehouses in Montreal and Toronto. This purchase added $59 million to Metro’s sales in the latest quarter.
Earnings rose 12.1%, to $96.1 million from $85.7 million. Earnings per share rose 14.6%, to $0.94 from $0.82, on fewer shares outstanding.
Metro plans to open two more Marché Adonis stores, mainly in Montreal and Toronto, each year for the next four years or so. It also plans to start selling some of this retailer’s products in its main supermarkets.
The company is using other strategies besides acquisitions to boost its sales. For example, it is expanding the produce section in many of its stores. This has encouraged repeat visits and resulted in higher sales per visit.
Loyalty cards provide valuable data
Metro is also seeing strong results from its new loyalty card program in Quebec, which now has 1.1 million members. (Metro’s Ontario stores use the popular Air Miles reward program, but a rival supermarket chain holds the exclusive rights to Air Miles in Quebec.)
Through a partnership with U.K.-based marketing firm dunnhumby, Metro is using the data gathered from these loyalty cards to create more effective special offers and promotions.
Even if the slow economy prompts more consumers to switch to discount stores, Metro will continue to benefit. That’s because it already operates roughly 200 discount-priced supermarkets. It is also continuing to expand its line of less expensive private-label products. Metro typically earns higher profit margins on its private labels than it does on national brands.
As well, Metro continues to improve its efficiency. That’s helping it absorb rising prices for food.
For example, in July 2012 the company started building a new, $50-million warehouse in Laval, Quebec, that will greatly improve the distribution of fresh produce and dairy products to its stores. It will also let Metro carry a wider variety of products. This facility should start operating in March 2013.
At the same time, the company continues to open new stores. In the first half of fiscal 2012, it spent $134.1 million to build four new stores and renovate six others.
Balance sheet will support growth
Metro can easily afford to keep expanding. Its long-term debt of $663.4 million is a low 13% of its market cap. It also holds cash of $54.9 million, or $0.56 a share.
The Ontario government recently postponed its plan to cut corporate income tax rates while it cuts is growing budget deficit. As a result, Metro’s tax bill will probably increase more than it expected in fiscal 2012. But even so, the company’s earnings should still rise to $4.46 a share during the year. The stock trades at 11.9 times that estimate. Metro also has a long history of raising its dividend. The current rate of $0.86 a share yields 1.6%.
The company recently converted its class A subordinate-voting shares (one vote per share) and class B multiple-voting shares (16 votes per share) into a single class of common shares (one vote per share). Some pension plans and other institutions avoid companies with two share classes, so this move should make Metro more appealing to these investors.
Metro has a hidden asset
Metro’s 23% stake in convenience-store operator Alimentation Couche-Tard Inc. (Toronto symbol ATD.B) is an overlooked asset. (Couche-Tard is this year’s #1 buy for Stock Pickers Digest, our newsletter that focuses on aggressive investing.) Based on current prices, this investment is worth $2.0 billion, or 38% of Metro’s market cap.
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