Loblaw Companies Ltd

Loblaw Companies Ltd (TSX: L), is one of Canada's largest grocery, pharmacy, and general merchandise retailers. It operates the most expansive store footprint in Ontario and maintains sizable presences in provinces like Quebec and British Columbia. In addition to its retail operations, Loblaw oversees a financial-services business, which provides credit card services and guaranteed investment certificates, and operates its PC Optimum loyalty program.

Key highlights

• Strategic growth initiatives:In September, the Company made two important announcements in its strategic growth areas of Payments and Rewards and Connected Health. The Company launched the PC Money Account, a simple no-fee way to do everyday banking, turning the act of paying bills and shopping into a way to receive PC Optimum rewards. The Company also announced an investment in Maple Corporation and the launch of a PC Health app. Together, these two initiatives form part of the Company's next-generation digital health platform that will provide Canadians with a new, personalized healthcare experience.

• Reaping benefits from digital investments:The Company's investments in its Everyday Digital platforms enable it to offer Canadians a choice of shopping in-store or online with either home delivery or convenient pickup locations. The Company's e-commerce sales grew by 175% in the third quarter, across the Company's grocery, pharmacy, and apparel e-commerce platforms.

• Ample liquidity:At the end of the third quarter, the Company's consolidated cash and short-term investments balance was CAD 1.8 billion. The aggregate available liquidity was approximately CAD 3.8 billion, including undrawn amounts under committed credit facilities. The current liquidity level seems sufficient enough to meet the group’s near-term requirement. 

Financial overview of Q3 2020

Source: Company

• In Q3 2020, the company posted revenue of CAD 15.67 billion, increased by 6.9% as compared to CAD 14.65 billion in the previous corresponding period. The increase in revenue was mainly due to positive momentum from same-store sales growth and a net increase in retail square footage.
• Adjusted EBITDA stood at CAD 1.52 billion in Q3 2020, increased by 2.1% as compared to CAD 1.49 billion in Q3 2019. On the other side, the adjusted EBITDA margin fell to 9.7%, as compared to 10.2%. The fall in margin was due to an increase in COGS and higher SG&A expenses.
• The company’s net earnings attributable to shareholders in Q3 2020, increased by 3.3% to CAD 342 million, as compared to CAD 331 million in the previous corresponding period.

Risk associated with investment

Lower consumer spending, coupled with a decline in the traffic, might act as a drag for the company, which would dampen the overall performance of the company.

Valuation Methodology (Illustrative): EV to Sales

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company caters to the retail consumers, and the demand is likely to remain strong due to the demand dynamics within the retail segment, this would support the future income. The group continued to make investments to enhance the overall value proposition for consumers, maintaining its promotional intensity through the pandemic to retain its share gains in conventional banners and further improve its positioning in discount banners. Therefore, based on the above rationales and valuation done using the above methodology, we have given a “Buy” rating at the closing price of CAD 65.49 on December 11, 2020. We have considered Metro Inc, Alimentation Couche-Tard Inc, Empire Company Ltd, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

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