Loblaw Companies Limited (TSX: L) is one of Canada’s biggest retailers. With more than 1,050 grocery stores, the company is also a leading food retailer. Besides, Loblaw also sells general merchandise under different banners. Also, Loblaw operates full-service pharmacies.

Q1FY20 Financial Highlights: Loblaw impresses with its first quarter results, wherein the company posted revenue of CAD 11.80 million, depicting a growth of 10.7% y-o-y basis, primarily driven by higher retail segment sales. Food retail sales recorded an annual growth of 9.6%; while drug retail sales grew by 10.7%.  Operating income surged by 20% to CAD 541 million over Q1FY19. The Group reported annual growth of 12.4% in adjusted EBITDA to CAD 1,169 million along with a 10-bps improvement in adjusted EBITDA margin to 9.9%. The improvement was due to higher retail sales, coupled with a favorable impact from the consolidation of franchises. Net earnings of the company stood higher at CAD 276 million, as compared to CAD 206 million in the previous corresponding quarter. At the end of the quarter, Loblaw reported Cash and cash equivalents of CAD 2,184 million, while total assets stood at CAD 36,071 million. The Group reported cash flow from operating activities at CAD 1.81 million, as compared to CAD 0.96 million in pcp, aided by higher cash earnings and a temporary decrease in inventory balances, coupled with a favourable change in credit card receivables and a slide in income taxes paid.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risk: 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: P/E Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock has remained resilient and witnessed appreciated 0.2% so far this year, amidst a sharp price correction across the global equity markets. The stock caters to the retail consumption segment and is immune to the economic cycle, which ensures stable income and cash flow for the company, despite a tepid macro scenario. The company is looking to enhance its presence through modern and efficient expansion through the Cornwall distribution centre which would cater to the food and drug retail businesses across Ontario and Quebec, which is a key positive for top-line growth. Further, the company is enhancing its online distribution capabilities, which is likely to support the increasing demand. While we expect the demand to sustain, the pace of growth could decelerate a bit from the first quarter. The company has ample liquidity amounting to ~CAD 3.9 billion, including undrawn amounts under committed credit facilities. We believe, the company is likely to support its near-term working capital from its cash flow, and if needed, it can access the funds from credit facilities. We have valued the stock using Price/Earnings based relative valuation approach. We have taken peers like Metro Inc, Alimentation Couche-Tard Inc., Walmart Inc, etc., and arrived at a target price offering double-digit upside potential (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 67.15 as on June 19, 2020.

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

Empire Company Limited

Empire Company Limited (TSX: EMP.A) is a Canada-based company, which operates in food retailing and related real estate. The group has a food retailing division via Sobeys Inc., which serves the food shopping needs of several millions of Canadians. The food retailing segment has more than 1,500 retail stores across all ten provinces with brands like Safeway, Foodland, Thrifty Foods, Lawtons Drugs, Sobeys, IGA, FreshCo, and Farm Boy etc. During the fourth quarter of FY20, the Company opened 28 new stores in the Canada region.

FY20 Financial Highlights: For the period ended May 02, 2020, Empire Company announced its full-year results, wherein the company’s sales were reported at CAD 26,588.2 million, up from CAD 25,142.0 million in pcp, primarily driven by the improved performance from each of the segments except fuel, followed by  expansion of FreshCo in Western Canada and effect from inflation. However, the positives were partially offset by temporary closures of the store in Western Canada pending their conversion to FreshCo. The business reported its operating income CAD 1,111.8 million, significantly higher from CAD 652.3 million in the previous financial year. The increase in the operating income was driven by a higher income primarily from Food retailing segment, while an increase in the selling and administrative expenses, cost of sales remained as a drag. The group reported net earnings of CAD 612.8 million, as compared to CAD 416.4 million in pcp. At the end of the period, the Company reported cash and cash equivalents of CAD 1.0 Billion, while total assets stood at CAD 14.63 Billion. Total Capital expenditure stood at CAD 574.8 million, which includes renovations, construction of new stores, construction of an e-commerce fulfillment centre and construction of FreshCo locations in Western Canada. 

FY20 Income Statement Highlights (Source: Company Reports)

Risk: Extended closure of stores due to the ongoing restrictions can impact the top-line and the cash flow of the company in a negative manner.

Valuation Methodology: P/E Based Relative Valuation (Illustrative)

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

Stock recommendation: The stock of EMP.A stood resilient in the recent past and reported a gain of ~22% and ~10% in the last three-months and six-months, respectively, due to constant demand of consumer products. The Business is immune to the economic cycle as these products are regarded as ‘essentials. To cater a larger audience, the company has enhanced its store presence and also marked its presence within the e-commerce segment, which is a key positive. During the month of April, the group launched its online grocery home delivery service across the Greater Toronto Area and witnessed a heavy traffic, which is likely to support the top-line and cash flow growth. We have valued the stock using Price/Earnings based relative valuation approach. Notably, the stock closed above its 200-day simple moving average (SMA) of CAD 32.22, indicating a long-term bullish pattern. We have taken peers like Metro Inc, Saputo Inc., Dollarama Inc etc., and arrived at a target price offering single-digit upside potential (in % terms). Hence, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 33.73 as on June 19, 2020.

EMP.A Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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