Discount stores drive Loblaw sales

Canada’s Big Three grocers are having another strong year even as their inflation-weary customers feel the pinch and spend more at discount stores.

While the rate of inflation is down, the cumulative effect of price increases is giving shoppers pause. They are spending less at full service stores, stocking up on specials and substituting private label products for name brands. But in a boost for the grocers, shoppers are spending more overall, as they dine out less.

Loblaw Co. Ltd., (TSX: L), Metro Ltd. (TSX: MRU), and Empire Ltd. (TSX: EMP.A) account for about 60% of Canadian grocery sales. To meet demand, they are opening more discount stores, with Loblaw having the most and Empire the least. They are improving logistics and using loyalty programs to entice more spending.

Shares of Loblaw, the largest and most diversified grocer, are up 47% in the last 12 months. Metro, third by size with a heavy concentration in Quebec and Ontario, has seen a 31% share price rise in the same period. Shares of Empire, the second largest chain, are up 11%, all as of Nov. 20.

While all three companies offer opportunity, analysts favour Loblaw as the most likely to outperform in the coming year.

Here’s a closer look:

Loblaw Cos. Ltd. (TSX-L) Closed Tuesday at $178.36.

Background: Loblaw is Canada’s largest grocer with $61 billion in annual sales and brands that include No Frills, Provigo, Valu-Mart, Fortino’s, and Real Canadian. It acquired the Shoppers Drug Mart chain in 2014. Loblaw is 53% owned by George Weston Ltd.

Performance: The shares are up 39% year-to-date.

Recent developments: Loblaw reported 1.5% revenue growth in the third quarter to $18.5 billion. Net earnings of $777 million or $2.53 per share were 25% higher than the previous year. No Frills and Maxi discount stores led the way in the quarter, outperforming full-service stores. Loblaw opened 25 discount stores in the quarter with another 20 planned in the fourth quarter.

Kathleen Wong, an analyst at Veritas Research in Toronto, points to the potential of Loblaw’s T&T Supermarket chain, which caters to Asian and immigrant communities. The stores have bakeries, sell hot food, and have dim sum counters. The chain was acquired in 2009 and has 33 stores with a strong presence in western Canada.

Ms. Wong estimates T&T generates roughly 5% of Loblaw’s food sales, or about $3 billion annually. It is opening its first US store in Bellevue, Washington this year and there are plans for a 30,000 sq. ft. store in downtown Toronto at Yonge & Dundas Streets.

Ms. Wong has increased her 12-month target for Loblaw to $200 per share. In a research note, RBC Capital Markets analyst Irene Nattel gives Loblaw a $205 target, noting its industry-leading private label penetration, loyalty program, and momentum at  Shoppers.

Dividend: Loblaws increased its dividend in July to $0.51 quarterly, its 12th consecutive annual increase. It yields 1.14%.

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