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Andrew Willis: Grocery prices are high and so is Loblaw (L) stock. And if investors attribute the massive gains over the past two years to food inflation, they should see the profit levels at grocery stores…
We’re talking about operating margins of only 5-7% at the likes of Loblaws, where improvement can come from investment in private labels, like President’s Choice and No Name. But those brands have already needed hefty investment and should continue to need it. All the while food and labour costs continue to rise.
Offsetting the rising costs, we do like the formidable ecosystem at Loblaw that feeds into revenue outside of groceries from Shoppers Drug Mart to PC Mastercard. And then there’s PC Optimum, with much of Canada’s population at 15.5 million members – pretty impressive… as long as we keep earning our points.
For Morningstar, I’m Andrew Willis.
Bulls Say
- Being Canada’s largest grocery retailer, scale benefits accrue to Loblaw, which include advantageous procurement and more control over its distribution apparatus.
- Shoppers Drug Mart gives the firm exposure to favorable urban population dynamics and adjacent opportunities, such as pharmacist-led health clinics.
- With the PC Optimum Loyalty Program, PC Financial Mastercard, and PC Health app, the firm is building a formidable digital ecosystem that should facilitate deeper customer engagement, as well as analytical insights to reinforce its positioning.
Bears Say
- We believe Loblaw’s private-label program has required material investment, which should continue to be the case as it continues to strive for differentiation.
- With a predominantly unionized labor force, risks of increased wage pressure will likely remain ubiquitous across the firm’s territories.
- Despite being less exposed than peers, Loblaw's further push into the pharmaceutical space raises greater regulatory risks.
