Loblaw Companies Limited

Loblaw Companies Limited (TSX: L) is one of Canada’s biggest retailers and has more than 1,050 grocery stores. The company is also a leading food retailer and is also engaged in selling general merchandise under different banners and also operates full-service pharmacies.

Q1FY20 Income Statement highlight: For the period ended March 21, 2020, the company reported revenue of CAD 11,800 million, reflecting a growth of 10.7% on y-o-y basis. The increase was driven by solid same-store-growth in food-retail segments. Adjusted EBITDA stood at CAD 1,169 million, grew 12.4% from the previous corresponding quarter. Adjusted EBITDA margin stood at 9.9%, slightly higher than 9.8% in the previous corresponding period (pcp). Operating income, during the quarter, stood at CAD 541 million, up 20% over Q1FY20. The company reported net earnings of CAD 243 million, reflecting a growth of 20.9% on y-o-y basis. During the first quarter of FY20, the company invested CAD 211 million as capital expenditures and generated CAD 1,186 million of free cash flow.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company is likely to face headwinds from higher operating cost due to more in-store cleaning, increased hygiene and sanity spending and in-store security, etc., on account of COVI-19 pandemic. A second wave of the novel virus, if arises might result in temporary closures of facilities, labor shortages, disruptions in supply chains and distribution channels, temporary or long-term restrictions on cross-border commerce and travel. Any such scenario is likely to hamper the company’s performance adversely. 

Valuation Methodology: Price to Earnings based Relative Valuation (illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Amidst the recent free-fall in the equity market, the stock stood resilient and appreciated ~1% so far this year and outperformed the benchmark index by 9%. The group is operating in the food distribution industry, which is immune to the economic cycle and ensures stable income and cash flows, which is a key positive. The Company took prudent steps and enhanced customer convenience by expanding online capabilities, which is encouraging. We expect the online segment is likely to cater a higher customer base which would eventually lead to improved business prospects. The Company is benefitted by higher same-store growth across food retail as it witnessed unprecedented demand in March. The demand is expected to slowdown from March level but expected to remain stable going forward. The Company has ample liquidity of ~CAD 3.9 billion under committed credit facilities which seems enough to meet the near-term requirements. We have valued the stock using the Price to Earnings based relative valuation approach and arrived at a target price offering lower double-digit upside potential (in % terms). For the said purpose, we have considered industry (consumer non-cyclicals) median on NTM basis. Hence, we recommend a 'Buy' rating on the stock at the closing market price of CAD 67.43 as on July 10, 2020.

L Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.