Every Tuesday we bring you “Best Canadian Stocks” from one of our three newsletters featuring Canadian stocks—The Successful Investor, Stock Pickers Digest and Canadian Wealth Advisor. Today we look at how the takeover of Shoppers Drug Mart has boosted earnings and revenue and increased the appeal of Loblaw’s stock.
LOBLAW COMPANIES LTD. (Toronto symbol L; www.loblaw.ca ) is Canada’s largest food retailer, with 1,140 stores. Its banners include Loblaws, Provigo, Fortinos, Real Canadian Superstore and No Frills. George Weston Ltd. (Toronto symbol WN) owns 46% of Loblaw.
In March 2014, the company acquired the 1,250-store Shoppers Drug Mart chain for $12.3 billion in cash and shares. Thanks largely to this purchase, Loblaw’s sales jumped 38.2%, from $30.8 billion in 2010 to $42.6 billion in 2014.
Earnings rose 13.9%, from $675 million in 2010 to $769 million in 2011. Per-share profits rose at a slower rate of 12.3%, from $2.43 to $2.73, on more shares outstanding. Loblaw’s earnings then fell to $2.25 a share (or a total of $634 million) in 2012 and to $2.23 a share (or $627 million) in 2013. That’s because of costs related to a major plan to streamline the company’s supply chains.
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If you exclude costs to integrate Shoppers, earnings improved to $3.22 a share (or $1.2 billion) in 2014. Loblaw feels that combining its marketing and distribution functions with those of Shoppers should cut $300 million from its yearly expenses by March 2017.
Loblaws stock yielding 1.6% on its $1.00 dividend
So far, savings from the merger have helped the company repay $1.0 billion of the loans it needed to buy Shoppers. Loblaw prefers to focus on its adjusted debt (short- and long-term debt less certain items), which was $10.0 billion as of March 28, 2015. It expects to pay down a further $500 million of these loans by the first quarter of 2016.
At the same time, Loblaw continues to invest in its current outlets. In 2015, it plans to build 50 new stores and renovate 100 others. That will help it compete with Wal-Mart, which continues to add to its grocery offerings.
In addition, Loblaw keeps expanding its e-commerce operations. In all, it expects to spend $1.2 billion on these projects. Meanwhile, the company continues to enter new markets. For example, its Joe Fresh casual clothing business recently formed an alliance with fashion retailer ALDO Group.
Under the deal, ALDO will help design and make men’s, women’s and children’s shoes for Joe Fresh. As well, Loblaw plans to renovate its in-store Joe Fresh shops to promote these new products. It expects to begin selling ALDO-designed shoes in early 2016.
The company’s 2015 earnings should improve by 9.9%, to $3.54 a share, and the stock trades at 18.1 times that estimate. However, earnings could reach $4.07 a share in 2016, and the stock trades at a more reasonable 15.7 times that forecast. The $1.00-a-share dividend yields 1.6%.
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