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.

The company would acquire a minority stake amounting CAD 75 million in Maple Corporation, the leading virtual care provider in Canada.

Recently, the Company announced the reopening of the historic West Block building which was developed in 1928 and is formerly housed the first Loblaws Groceterias warehouse. The new development offers the company’s century-long story, combining convenient bricks-and-mortar store locations along with the availability of the new digital hub, loyalty and financial services teams.

Q2FY20 Financial Statement Highlights: Loblaw declared its second-quarter results wherein revenue stood at CAD 11,957 million, against CAD 11,133 million in the previous corresponding period (pcp). The increase was underpinned by a 7.9% y-o-y growth from the retail segments due to a 10% growth in Food retail partially offset by a 1.1% slump in the drug retail segment. Operating income fell to CAD 404 million as compared to CAD 588 million in pcp. Adjusted EBITDA stood at CAD 1,016 million, lower than CAD 1,175 million in Q2FY19, due to higher SG&A expenses, partially offset by an increase in adjusted gross profit. Adjusted EBITDA margin took a hit and came lower at 8.5%, against 10.6% in pcp. The company reported net income of CAD 172 million, against CAD 289 million in the previous corresponding period (pcp). During the second quarter of FY20, the company invested CAD 199 million in capital expenditures and generated CAD 334 million of free cash flow.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The quarter incurred higher costs related to additional expenses due to COVID 19 pandemic, and higher compensation costs which have hindered the company’s margin. We believe, the same trend is likely to continue for a while due to additional measures as imposed by the State Governments.

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Stock Recommendation: The group's investment in Maple is an important step as the industry is witnessing growing traction from patients, who are connecting online with a variety of healthcare professionals, including general practitioners, specialists and allied health professionals and we believe the momentum would likely to sustain in the coming days too. The ongoing pandemic has changed certain consumer behaviors, which has accelerated the strategic growth areas of Everyday Digital, Connected Healthcare, and Payment & Rewards. The company's made investments across the Everyday Digital platforms, which allows online and offline shopping as per consumer's need along with convenient pickup locations, which is a key positive and is expected to drive the company's sales volume. During the quarter, the e-commerce segment accelerated sharply, grew 280% on y-o-y, which is encouraging. The company expects the momentum to continue in its e-commerce segment and is likely to invest in expanding capacity and enhancing its same-day service offering. The group has decent liquidity of CAD 4.6 billion, which include CAD 2.6 billion in cash and cash equivalent. We have valued the stock using the P/E based relative valuation method and have arrived at a lower double-digit upside (in percentage terms). We have considered Metro Inc, Empire Company Ltd, and Alimentation Couche-Tard Inc etc., as a peer group for comparison purpose. Hence, considering the above-mentioned facts, current price levels, we recommend a 'Buy' rating on the stock at the closing market price of CAD 69.44 on October 7, 2020.

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

Disclaimer

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