This company recently transferred its majority stake in Canada’s leading REIT to its parent company. As a result of that reorganization, it can now focus exclusively on expanding profits for its main retailing operations.
For example, the company recently launched a new enhanced delivery program modelled after the highly successful Amazon Prime service. It also continues to do a good job of attracting customers to the company’s customer rewards program.
Those moves should help maintain its high market share. What’s more, the stock is attractive in relation to the company’s overall earnings.
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LOBLAW COMPANIES LTD. $62(Toronto symbol L; www.loblaw.ca) is Canada’s largest food retailer with 1,082 supermarkets. Those stores operate under a variety of banners, including Loblaws, Zehrs, Provigo, Real Canadian Superstore and No Frills.
In March 2014, the company purchased the Shoppers Drug Mart chain for $12.3 billion in cash and shares. Shoppers now operates 1,335 drug stores across Canada.
Thanks to that purchase, Loblaw’s overall sales rose 44.3%, from $32.4 billion in 2013 to $46.7 billion in 2017.
If you exclude costs to integrate Shoppers and other unusual items, earnings soared 158.5%, from $696 million in 2013 to $1.8 billion in 2017. Due to the additional shares outstanding as a result of the Shoppers purchase, per-share earnings rose at a slower rate of 82.7%, from $2.48 to $4.53.
In the three months ended October 6, 2018, Loblaw earned $562 million. That’s up 2.4% from $549 million a year earlier. Due to fewer shares outstanding, per-share earnings gained 7.2%, to $1.49 from $1.39. Sales in the quarter rose 1.8%, to $14.45 billion from $14.19 billion.
Same-store sales for the company’s supermarkets rose 0.9% on slightly higher food volumes and prices. Same-store sales for Shoppers Drug Mart rose 2.5%. The gain reflects a 0.5% rise in prescription drug sales and a 4.3% increase in the sale of other merchandise.
Single loyalty plan is easier to administer
The company also continues to realize the benefits of merging its Loblaw loyalty rewards plan with Shoppers’ program.
Called PC Optimum, the combined plan now has 16 million members. By studying shopping habits, Loblaw can customize special offers to encourage repeat visits and higher spending per visit.
PC Optimum is part of Loblaw’s financial services business. It also issues credit cards, and sells insurance, Guaranteed Investment Certificates (GICs) and wireless telecommunication services.
In the third quarter, this division supplied just 2% of Loblaw’s total revenue, but 15% of its gross earnings. However, those earnings fell 17.3% in the quarter. That’s mainly because in the third quarter of 2017, the company ended its partnership with Canadian Imperial Bank of Commerce to provide savings and chequing accounts under the PC Financial brand.
Loblaw also aims to spur sales by expanding its PC Express program, which lets shoppers select grocery items online and pick them up at local stores. The company now offers that service at 513 locations, including 19 Shoppers stores in Ontario.
Following a successful test, Loblaw now plans to launch an enhanced delivery plan called PC Insiders.
For $9.99 a month (or $99 a year), participants receive free click-and-collect grocery shopping, plus free shipping from Shoppers Drug Mart and Joe Fresh clothing stores. They also earn higher reward points on purchases of certain items such as baby and beauty products. So far, the new program has attracted over 25,000 customers.
Inner Circle: Recent spinout should unlock value from core operations
A new move to simplify Loblaw’s holdings should also help draw investor attention to the improving prospects of its main retail operations.
In November 2018, Loblaw transferred its stake in Choice Properties REIT (Toronto symbol CHP.UN) to parent company George Weston Ltd. (Toronto symbol WN) through what it calls a “spin-out.”
Under the terms of the deal, Loblaw shareholders received 0.135 of a Weston common share for each L share they held. They will only pay capital gains taxes on their new Weston shares when they sell them.
Following the transfer, Weston owns 65.4% of the REIT, and Loblaw shareholders hold 16.8% of Weston shares.
Loblaw plans to maintain its current annual dividend rate of $1.18 a share (which yields 1.9%). In addition, Weston will raise its quarterly dividend by 5% to $0.515 a share. The new annual rate of $2.06 yields 2.2%.
If you combine those two payments, the total of $1.46 a share represents a 23.7% increase over Loblaw’s current dividend.
Choice Properties spinout also cuts Loblaw’s debt
The company’s balance sheet remains sound. As of October 6, 2018, its long-term debt was $12.3 billion. However, Loblaw’s debt included $5.7 billion of Choice Properties’ mortgages and other loans. With that liability removed, Loblaw’s debt falls to $6.6 billion. That’s a manageable 28% of its market cap. The company also held cash of $1.4 billion, or $3.80 a share.
Now that it no longer owns Choice Properties, the company’s projected earnings will probably dip from $4.60 a share in 2018 to $4.38 in 2019. The stock trades at just 14.2 times the 2019 estimate.
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