Grocery stores were deemed an essential service during the pandemic, so they were one of the few places you could shop in person. This unusual state of affairs super charged the sales and profits of a traditionally slow growth, low margin business. It also amply rewarded shareholders over the past three years.
Between June, 2020, when the lockdowns were on in earnest, and the time of writing Loblaw Co. Ltd., (TSX: L), Empire Co. Ltd., (TSX: EMP), and Metro Inc. (TSX: MRU) have been behaving as anything but their dull, stodgy old selves. Together they account for about 60% of Canadian grocery sales.
Loblaw, Canada’s largest grocer, has seen its shares rise 72% in the three years to its current $116 level. It has also delivered four dividend increases, the latest a 10% hike payable July 1. Its main brands are Loblaw’s, No Frills, Provigo, Valu-Mart, Fortino’s, and Real Canadian Superstores. It also owns the Shoppers Drug Mart chain.
Metro’s shares have gained 25% to the current $71.50 and it has also raised its dividend four times, the latest a 10% hike in April. Metro operates in Quebec and Ontario, with 71% of its grocery stores in Quebec and the remaining 29% in Ontario. Its main brands are Metro, Metro Plus, Super C, and Food Basics. It also has 650 drugstores, primarily under the Jean Coutu, Brunet, Metro Pharmacy, and Food Basics Pharmacy banners.
Empire, the laggard, trades at $31 as it works through operational issues and is up 13% also with four dividend hikes. The latest is a 10.6% increase announced Thursday.
It operates through Sobey’s and owns the Longo’s, Fresh Co., Safeway, IGA, and Farm Boy chains.
The question for investors is whether the pandemic was a one-time energizer or do these companies continue to offer a safe haven and good value as the economy weakens.
On one hand, their shares are modestly lower year-to-date as they consolidate after a strong run. Metro is off the most, down 4.5%, with Loblaw and Empire each down 3%.
But with a recession on the horizon, the sector has a new appeal. The companies are a consumer staple and as inflation rises they have two advantages. One is that they can pass through price increases, which they are all doing. Another is that as the weekly shop becomes more expensive, they are attracting more customers to their discount banners.
In Loblaw’s most recent quarter, revenue grew 6% to nearly $13 billion and adjusted net income was up 10% to $418 million.
CEO Galen Weston said in a conference call that its No Name brands are on average 25% cheaper than national brands and are performing strongly. About half of its stores are discount banners, generating about 60% of all Loblaws sales. He said more discount outlets will open this year.
Metro also turned in strong quarterly results. Revenue rose 6.6% to $4.5 billion and net income by 10% to $218 million, beating expectations. About 24% of Metro’s stores are discount banners under Food Basics in Ontario and Super C in Quebec.
Empire operates through Sobey’s with its FreshCo brand bringing in about 10% of sales. It released fourth quarter 2023 earnings Thursday. Sales were down $432 million compared to the same quarter in fiscal 2022. But adjusted net earnings of $184.9 million ($0.72 per diluted share), were slightly ahead of the previous year.
For the full fiscal year, earnings were down as the company worked through operational issues and funded expansion in Western Canada. Net earnings for the 52-week period to May 1 were $727.7 million, compared to $811.3 million a year earlier. Note that the year ago period covered 53 weeks. The company is also recovering from a costly cyberattack that shut down its pharmacy services and hampered self-checkout machines, gift card use, and the redemption of loyalty points.
In addition to the dividend increase to $0.1825 quarterly ($0.73 a year), the company plans to repurchase $400 million worth of its Class A shares in fiscal 2024.
Kathleen Wong, a partner and research analyst at Veritas Research Corp. in Toronto, likes both Metro and Loblaws. In a recent research note Ms. Wong said she believes Loblaw is best positioned among the Big Three with its high percentage of discount stores. She also noted that in its recent quarter same store sales at Shoppers were up 5% with strong performance from so-called front-of-store sales, such as health and beauty products. She sees the Loblaw’s PC Optimum loyalty program with 16 million members continuing to drive traffic to the stores.
Ms. Wong also says Metro has been very effective with its exclusive partnership with UK-based Dunnhumby, a data analytics company, targeting weekly specials strategically to drive traffic.
RBC Capital Markets retail analyst Irene Nattel is also high on the two grocers. In a recent research note, she sees Loblaw’s offering the right mix of assets for long term growth. Its strong discount presence dominates the sector and its e-grocery investments continue to grow.
Ms. Nattel sees the high cost of eating out and weak economy benefiting all grocers and Metro’s focus on cost containment coupled with the integration of the Jean Coutu pharmacy chain adding more benefit. Metro bought Jean Coutu in 2018.
Each offers different strengths, but all provide safety, income, and long-term growth.
This article appeared in the Internet Wealth Builder on June 26, 2023. For information on how to reprint this article please view this page.
Adam Mayers 
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